Marc Cadin Marc Cadin (Photo: AALU)

AALU wants members of Congress to know that the Setting Every Community Up for Retirement Enhancement Act bill, or Secure Act bill, includes a provision that could help Gold Star families.

Gold Star families are the immediate relatives of service members who have died in combat or in military support activities.

(Related: ACLI, IRI Have a Message for 7 Republican Senators)

Marc Cadin, chief executive officer of AALU, pointed out in a statement in support of the Secure Act bill last week that a bill provision “safeguards financial security for Gold Star families.

The provision provides a tax rule change for children who get survivor benefits as the result of the deaths of service member parents.

The TCJA Child Unearned Income Provision

As a result of a tax code change in the Tax Cuts and Jobs Act of 2017 (TCJA), the Internal Revenue Service now applies a high tax rate to any significant amount of unearned income going to children.

When the child of a fallen service member gets military survivor benefits, that now triggers the TCJA child unearned income provision. The TCJA provision may increase the  child’s effective tax rate to 37%, from 12% to 15% under the pre-TCJA tax rules, according to a summary of the final House version of the Secure Act, H.R. 1994, that was distributed by House leaders in May.

Rep. Elaine Luria, D-Va., proposed a bill, H.R. 2481, that would have reclassified military survivor benefits going to children as earned income.

The related provision now in H.R. 1994, Section 501, solves the children’s military survivor benefits tax problem by nullifying the effect of the TCJA child unearned tax provision on all unearned income going to children.

Although the current Section 501 appears to have a broad effect, most bill summaries describe the provision as a provision intended to help child survivors of service members who die in combat or combat support roles. The most recent House Rules Committee, Congressional Budget Office and Joint Committee on Taxation summaries and analyses of H.R. 1994 either leave out any mention of the provision, or simply show the provision would have modest impact on the federal budget, without discussing what the provision would do. It’s possible that congressional leaders will eventually narrow the scope of the provision to apply solely to children who receive survivor benefits, or solely to children who are eligible for the benefits that go to the dependents of service members killed in the line of duty.

H.R. 1994 in the Senate

H.R. 1994 includes many provisions of interest to life insurers and financial professionals, including a provision that would encourage employers to add annuitization options to 401(k) plans, and a provision that would let small employers joint together to offer multiple employer retirement plans.

One H.R. 1994 “pay for” provision would compensate for the bill’s effects on federal income tax revenue by changing the rules for taxpayers who pass individual retirement accounts (IRAs) on to heirs. Some families have used a “stretch IRA” mechanism to reduce the tax bills for children or others who inherit IRAs. An H.R. 1994 stretch IRA provision could require the beneficiaries who inherit an IRA to withdraw all IRA assets within 10 years after the owner’s death. Some say that could wreck many families’ estate plans.

Members of the House approved H.R. 1994 by a 417-3 vote May 23.

The Senate has not held committee hearings or markup meetings on H.R. 1994, possibly because of concerns about the stretch IRA provision or other H.R. 1994 pay-fors.

AALU has been one of the life insurance groups that has been lobbying hard for the Secure Act bill, even after the stretch IRA discussions surfaced.

“Holding back the Secure Act delays retirement security for millions of Americans,” Cadin said in his statement in support of the bill. “This bipartisan bill unlocks many tools that enhance the ability of families to secure their retirement…. The Secure Act puts our country one step closer to closing the retirement savings gap, and we urge the Senate to act now.”

Cadin praised Sen. Tim Scott, R-S.C., and six colleagues — Rob Portman of Ohio; Thom Tillis of North Carolina; Joni Ernst of Iowa; Martha McSally of Arizona; Susan Collins of Maine; and Cory Gardner of Colorado — for their leadership in support of the Secure Act bill.

Those senators recently wrote to Senate Majority Leader Mitch McConnell to ask him to move the Secure Act bill through the Senate bill consideration process.

AALU’s support for the bill may be especially significant, because AALU traditionally has represented the kinds of sophisticated life insurance advisors who have been active in estate planning.

— Read AALU Members Moved, and Shook, on ThinkAdvisor.

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