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New Legislation Provides Agents with Financial Planning Opportunities.

With all the business challenges that the pandemic unleashed in 2020, many independent agency principals and their clients are not aware of the three important pieces of legislation enacted over the past 15 months.
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retirement and tax planning

With all of the personal and business challenges that the pandemic unleashed in 2020, it's understandable that many independent agency principals and their clients are not aware of the three important pieces of legislation enacted over the past 15 months. With one exception—elimination of the “stretch IRA"— the provisions present new opportunities for agents.

Also, due to the impact of the pandemic, a number of provisions eliminate some of the penalties and provide tax-planning opportunities for affected people if they had to withdraw money from a 401(k) plan or IRA to meet living expenses.

With change in the White House and the composition of the U.S. Senate, there will no doubt be further legislative proposals related to income taxes and saving for retirement. Meanwhile, it's important to be aware of the current retirement landscape to comply with the new rules and to take advantage of them.

The Big Picture

Even before the pandemic wreaked havoc, there was considerable concern regarding the adequacy of retirement savings among Americans. Unfortunately, the estimated median savings for people in their 60s is $172,000, according to Transamerica.

The long-held rule of thumb for people planning on a 30-year retirement was that they should not exceed 4% in annual retirement withdrawals. That means the average retirement withdrawal would not even be $8,000 annually. But due to the low interest rate environment coupled with longer longevity rates for people age 65 and up, retirement experts believe that the new rule of thumb is more like 3%.

But what about Social Security? The average monthly payment for a retired worker in 2021 is $1,543 per month. The system is facing its own challenges and unless changes are made to funding and benefits, a 21% across-the-board reduction would be required in a little over a decade.

The Biden administration has slated several changes to Social Security, mostly on the funding side, involving increasing the amount of income that is taxed and which benefits are taxed. This would primarily target people with incomes in excess of $400,000 annually. The current wage base—the amount of income that is taxed for Social Security purposes—is $142,800 for 2021. If enacted as stated, the change would create a corridor between $142,800 and $400,000.

Another Biden administration proposal would limit tax deductions to around 28%, rather than the full amount of a person's marginal tax bracket.

Regardless of the ultimate retirement plan legislation, it's clear that agency principals should review the new planning opportunities to take advantage of them for as long as they are available.

“There are a variety of retirement plan options—from 401(k) plans to SIMPLE IRAs and SEPs—that agency owners should consider, as the best approach is unique to each agency's workforce and budget," says Christine Muñoz, vice president, Big “I" Retirement Services. “The recent retirement plan legislation provides new tools for agencies to use and most agency owners can't keep up with the nuances, so we're happy to have a conversation to discuss their needs."

What About Taxes?

One other legislative consideration that could impact agency owners is the possibility of having the capital gains tax rate increase back to the 28% threshold. Since many agency owners consider their ownership as a source of retirement income, they need to factor in that possibility.

However, what is often overlooked is that projecting retirement income means projecting and coordinating the after-tax proceeds of retirement assets. Essentially, the after-tax retirement value is one minus your marginal tax rate. For example, if someone believes they'll be in the 22% federal and 6% state income tax bracket when they withdraw taxable assets, they'll ultimately have 72 cents on the dollar.

This type of forecasting can be extremely important because many agency owners receive their buyouts in installments. Coordinating before-tax retirement withdrawals—which are subject to ordinary income—can seem daunting.

To complicate matters further, Medicare Part B and D premiums are based on income and have absolute tiers, not marginal ones. Translated, that means that having an income of just $1 over the tax threshold means a large jump in the premium cost and should be avoided whenever possible.

The most significant piece of retirement legislation is the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was enacted in December 2019. The SECURE Act created two tax traps. First, the age for required minimum distributions was raised from age 70-and-a-half to 72. Second, IRA non-spousal beneficiaries will now have only 10 years to withdraw the funds from inherited IRAs versus the previous flexibility they had.

Since inheritances involve unknown event dates, this adds to the need for careful retirement planning if someone is a beneficiary of a large retirement account or plans to name someone other than a spouse as their IRA beneficiary. 

SECURE Act Provisions for Qualified Retirement Plans

Starting with the provisions for qualified retirement plans, such as 401(k) plans and pension plans, the most relevant aspects of the SECURE Act are as follows:

Eligibility for part-time employees. Effective for retirement plan years beginning after Dec. 31, 2020, qualified retirement plans must allow 401(k) plan participation by long-term, part-time employees. An employee qualifies if they either completed 1,000 hours of service in the previous 12 months or completed at least 500 hours of service in each of the previous three years. For employees qualifying under the latter, employers are not required to make nonelective or matching contributions.

Penalty-free withdrawals for birth or adoption-related expenses. Penalty-free withdrawals from qualified plans may be made for birth or adoption expenses, up to $5,000 per child. The distribution must be taken within the one-year period beginning on the date of birth or the date on which a legal adoption is finalized. The withdrawal can be repaid to the plan.

Annuity options. The act provides a safe harbor by which fiduciaries may meet Employee Retirement Income Security Act (ERISA) “prudent man" requirements for selecting annuities, thereby facilitating annuities' inclusion in 401(k) and other defined-contribution plans.

The “prudent man" standard means that plan sponsors and advisers must act in the best interests of the plan participants, rather than their own, using the skill, knowledge and diligence of a prudent person. If the plan sponsor doesn't have the expertise to oversee the plan, they must seek objective, informed assistance to carry out their duties.

Small employer auto-enrollment and startup cost credits. The act provides a general business credit of $500 to employers that establish a qualified employer plan. The plan must have an automatic enrollment feature. The credit is available for up to three years. In addition, the act increased the maximum credit for qualified startup costs of pension plans offered by small employers to $5,000.

SECURE Act IRA Provisions

Important IRA changes from the SECURE Act include:

  • The required minimum distribution age increases to 72, up from 70-and-a-half.
  • The age limit for IRA contributions has been removed.
  •  Inherited retirement account distributions must now be taken within 10 years.
  • New parents can take penalty-free withdrawals.

No More Age Limit for IRA Contributions

Workers with an IRA used to only be able to contribute up until age

70-and-a-half, but that age limit has now been removed completely. Agency staff working full or part-time can now continue contributing to their IRA at any age, which can help them accumulate more funds and “level" their marginal income tax brackets to efficiently manage their taxes in retirement.

New 10-Year Rule for Inherited Retirement Account Distributions

Previously, people who inherited an IRA could “stretch out" the withdrawals and required tax payments on each distribution over their life expectancy. Now, for retirement account owners who pass away, beneficiaries may be required to withdraw assets in an inherited IRA or 401(k) within 10 years. However, there are a variety of exceptions to the new 10-year rule for surviving spouses, minor children, disabled and chronically ill beneficiaries, and beneficiaries who are up to 10 years younger than the IRA owner.


Due to the impact of the coronavirus and the financial hardships it created, such as a job loss or reduced hours, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The act's objective was to provide financial flexibility and relief if a worker, household earner or their spouse

was affected by the pandemic and took a retirement plan distribution in 2020. The aggregate limit is $100,000 from all retirement plans and IRAs.

One of the chief benefits of the relief was that the 10% early distribution excise tax that would normally be applicable would not apply for a coronavirus-related distribution from a retirement plan or IRA.

There was also a big tax break on the timing for paying the income tax on the distribution. Instead of including all of it in a person's 2020 tax year, the distributions are generally included in the income ratable over a three-year period, starting with the year in which they receive their distribution.

But it's important to keep in mind that these provisions for the most part were not extended, so the distributions had to occur prior to Dec. 31, 2020.

The Consolidated Appropriations Act, 2021

The Consolidated Appropriations Act, 2021, known to some as Stimulus 2.0, is a $2.3 trillion spending bill that combines $900 billion in stimulus relief for the COVID-19 pandemic in the U.S. with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year.

One provision allows for distributions from retirement plans for participants “affected by disasters" other than the COVID-19 pandemic, as declared by the president. Participants in 401(k), 403(b), money purchase pension and government 457(b) plans may take up to $100,000 from whatever retirement plan accounts they own without tax penalties.

Income tax on these distributions may be spread over three years and participants may repay them into a plan that is designed to accept rollovers within three years after the distribution is taken. Participants have until 180 days after enactment of the bill to take qualified disaster distributions. For independent agents whose clients were impacted by the disaster and had unreimbursed expenses, this may help clients pay for what their insurance did not.

A unique recruiting and retention provision relates to an employer paying for an employee's student loan up to $5,250. Initially authorized by the CARES Act for 2020 only, the provision was extended through 2025. Such payments may be made directly to a lender or to the employee, who can then use the payments to pay down their student debt. Neither the employee nor the employer is liable for employment taxes on the amount, and it's tax-free to the employee.

If an agency has someone already on staff or is looking to hire someone with student loan debt, this could serve as an incentive or bonus for the agency—especially since it's totally tax-free. It's important to note that the employer must have the plan in writing, including eligibility for the employer payment.

Given the 2020 election results, there is no doubt that there will be additional legislative changes. However, that shouldn't lead to decision paralysis. Talking with your accountant, attorney and retirement plan provider will help demystify what opportunities make sense for you and your agency.

The biggest ally for adequate retirement savings is time. Don't procrastinate in taking advantage of the opportunity to create meaningful retirement income. Revisit your retirement planning objectives, and put your plan into action.

Dave Evans is senior director of Team & Total Insurance Solutions LLC and co-founder of 401ksleuth LLC, an independent financial education firm dedicated to helping companies lower their employees' financial stress by improving employees' financial literacy.

Tuesday, March 2, 2021
Perpetuation & Valuation