SECURE Act: Summary of Key Changes for Plan SponsorsJanuary 1, 2020 – Articles
On May 23, 2019, by a vote of 417-3, the United States House of Representatives passed the Setting Every Community Up for Retirement (SECURE) Act. Notwithstanding broad bipartisan support, the bill stalled in the United States Senate until Dec. 19, 2019, when it passed a budget reconciliation bill (H.R. 1865, the Further Consolidated Appropriations Act of 2020 [the “Act”]), which contains the provisions from the SECURE Act. The president signed the Act on Dec. 20.
The SECURE Act has been highly anticipated and is viewed by the retirement plan industry as the most substantial legislation since the Pension Protection Act of 2006. It includes nearly 30 provisions aimed at encouraging the adoption of employer-sponsored plans and lifetime income options, altering plan distribution rules, easing administrative requirements, and improving certain types of defined benefit plans (in addition to several other employee benefits and tax-related provisions).
A summary of the Act’s key changes affecting retirement plans follows. Some of these changes are effective as of Jan. 1, 2020, while others have delayed effective dates. Effective dates are highlighted in italics below.
Encouraging Adoption of Employer-Provided Retirement Plans
- Pooled Employer Plans.The SECURE Act permits unrelated employers (i.e., employers not part of a “bona fide group or association”) to participate in a new type of “multiple employer plan” (MEP) that can be treated as a single plan under the Employee Retirement Income Security Act of 1974 (“ERISA”). This new type of MEP is referred to as a Pooled Employer Plan, which can be adopted effective for plan years beginning after Dec. 31, 2020. Under current law, MEPs with unrelated participating employers are regarded as “open-MEPs” not treated as a single plan.
Effective for plan years beginning after Dec. 31, 2020, the Act also eliminates the so-called “bad apple rule,” which states a disqualifying defect by anyone adopting employer in a MEP disqualifies the entire MEP.
By allowing several unrelated plans to pool their investments, MEPs should permit a reduction in the overall cost of maintaining a small retirement plan.
- Increase to Small Employer Plan Start-Up Credit. Eligible employers with 100 or fewer employees may receive a nonrefundable income tax credit for qualified start-up costs of adopting a new qualified retirement plan. Effective for taxable years beginning after Dec. 31, 2019, the Act increases the amount of the credit (up to $5,000 for three years) and provides for an additional nonrefundable credit (up to $500 per year for three years) for small employers that establish plans that include automatic enrollment or add automatic enrollment as a feature to an existing plan.
- Plan Adoption Date. Under current law, employers generally must adopt a qualified retirement plan before the close of the taxable year if they want to obtain the benefits of qualification for such year. Effective for plans adopted after Dec. 31, 2019, the Act allows an employer to adopt a qualified retirement plan after the close of a taxable year if it is adopted before the deadline for filing the employer’s tax return for the taxable year.
Lifetime Income Provisions
- Lifetime Income Disclosure. The SECURE Act will require defined contribution plan participants to receive annual “lifetime income disclosures” that show an amount of monthly income the participant could receive if their plan account were converted to an annuity. This requirement will apply even if the plan does not offer an annuity form of distribution. The lifetime income disclosure must be included on participants’ annual benefit statements. Annuities actually available to defined contribution plan participants outside of their plans will vary depending on the products available from insurers (which will vary depending on investment returns and premium rates). The Act directs the DOL to issue model lifetime income disclosures and prescribe assumptions that may be used in converting participant account balances to lifetime income stream equivalents. Employers and plan fiduciaries will not have fiduciary responsibility for providing estimates in accordance with DOL assumptions and guidance. The new lifetime income disclosure requirement is effective for benefit statements furnished more than 12 months after the DOL’s publication of an interim final rule, model disclosures, and prescribed assumptions.
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider. Effective upon enactment, the SECURE Act creates a fiduciary safe harbor with respect to the selection of an insurer for employers who opt to include a lifetime income investment option in their defined contribution plans. A fiduciary is deemed to have satisfied its fiduciary requirements with respect to the financial capability of the insurer if the fiduciary receives certain written representations from the insurer as to its status under and satisfaction of state insurance laws.
- Portability of Lifetime Income Options. Some plans offer investment options with lifetime income features. Effective for plan years beginning after Dec. 31, 2019, if lifetime income options are removed from a plan’s investment lineup, the SECURE Act permits participants to make direct trustee-to-trustee transfers (or transfer annuity contracts) to an eligible employer plan or IRA, without regard to restrictions on in-service distributions.
Plan Distribution Rules
- Post-Death Required Minimum Distribution (RMD) Rules for IRAs and Defined Contribution Plans. The SECURE Act changes the post-death RMD rules for defined contribution plans to require that all post-death distributions (regardless of whether the participant dies before or after their required beginning date) must be made by the end of the 10th calendar year following the year of death. This 10-year distribution requirement generally does not apply if the designated beneficiary is, as of the date of death, a surviving spouse, a disabled or chronically ill individual, not more than 10 years younger than the participant, or is a minor child of the participant. These post-death RMD changes are generally effective for distributions by reason of a participant’s death after Dec. 31, 2019 (Dec. 31, 2021 for governmental plans and collectively bargained plans).
- Increase in Age for Required Beginning Date. The RMD rules, which apply both to qualified retirement plans and IRAs, provide that distributions must begin by the “required beginning date.” Under previous law, the required beginning date generally was April 1 of the year following the year in which the participant (or IRA owner) attains age 70 ½. Effective for individuals turning 70 ½ after Dec. 31, 2019, the SECURE Act increases the age used to determine one’s required beginning date from 70 ½ to 72.
- Child Birth or Adoption Withdrawals. Effective after Dec. 31, 2019, the SECURE Act permits individuals to take penalty-free withdrawals of up to $5,000 (or $5,000 per spouse if married) from their elective deferral accounts for expenses related to the birth or adoption of a child within one year after the birth or adoption. Further, these distributions may be repaid to certain qualified plans.
- Elimination of Loans through Credit Cards. Effective for plan loans made after enactment, the SECURE Act prohibits loans made through the use of a credit card.
- Reduced Minimum Age for In-Service Distributions. Effective for plan years beginning after Dec. 31, 2019, the SECURE Act allows in-service distributions under a pension plan or governmental 457(b) plan at age 59 ½. Under previous law, the minimum age for in-service distributions from pension plans was 62, and the minimum age for in-service distributions from governmental 457(b) plans was 70 ½.
- Disaster Relief. The Act allows certain qualified retirement plan participants affected by certain disasters to, among other things, take temporary withdrawals or loans of up to $100,000 without penalty, with such withdrawals being treated as tax-free rollovers if repaid within three years, and extend by a year the due dates of repayments of plan loans outstanding as of a disaster incident. Most of the disaster-relief provisions are effective as of the date of enactment.
Changes Affecting 401(k) Plan Design
- Expansion of Part-Time Employee Eligibility. Under current law, a 401(k) plan may exclude part-time employees from participation if they do not complete at least 1,000 hours of service in a year. Effective generally for plan years beginning after Dec. 31, 2020, the SECURE Act will require 401(k) plans to allow employees who complete at least 500 hours per year in three consecutive 12-month periods to participate (i.e., “long-term, part-time employees”). Plans will still be able to limit participation to employees age 21 and older. Further, nondiscrimination and top-heavy testing relief will be available for long-term, part-time employees.
- Nonelective 401(k) Safe Harbor Plans. Under current law, employers that sponsor 401(k) safe harbor plans (i.e., plans exempt from certain annual nondiscrimination tests) must provide an annual safe harbor notice to eligible employees that describes the safe harbor contributions and other features of the plan. Effective for plan years beginning after Dec. 31, 2019, the SECURE Act eliminates the notice requirement for plans that use a nonelective contribution (i.e., instead of a matching contribution formula) to meet the safe harbor requirements. Also, the SECURE Act allows a plan to be amended retroactively to be a nonelective safe harbor plan for a plan year any time before the 30th day before the end of the plan year. Under current law, such a retroactive amendment would not be permitted unless the employer provided a contingent notice at the end of the prior year (among other requirements). Further, under the SECURE Act, the new retroactive amendment to be a nonelective safe harbor plan can be as late the end of the following plan year, provided the nonelective contribution is at least 4 percent (note that the minimum safe harbor nonelective contribution percentage is 3 percent).
- Increase on Cap on Default Rate for QACAs. A qualified automatic contribution arrangement (QACA) is an automatic contribution arrangement that includes special safe harbor provisions exempting 401(k) plans from certain annual nondiscrimination tests. The QACA safe harbor matching contribution formula is a 100 percent match on the first 1 percent of compensation deferred and a 50 percent match on deferrals between 1 and 6 percent (3.5 percent total). Also, the plan’s default deferral rate must start at no less than 3 percent and increase at least 1 percent annually to no less than 6 percent, with a cap of 10 percent. Effective for plan years beginning after Dec. 31, 2019, the auto-escalation cap is increased from 10 to 15 percent.
- Consolidated Form 5500. The SECURE Act directs the IRS and DOL to work together to modify Form 5500 so that all members of a group of plans may file a consolidated Form 5500. To be eligible for this consolidated reporting, the group of plans would have to: (1) all be defined contribution or individual account plans; (2) have the same trustee, named fiduciary, and plan administrator; (3) have the same plan year; and (4) have the same lineup of investment options available to participants and beneficiaries. This change will be effective for plan years beginning after Dece. 31, 2021.
- Increased Penalties for Failure to File Form 5500. The SECURE Act increases the IRS penalty for failing to file a Form 5500 to $250 per day (previously $25 per day), but not to exceed $150,000 (previously $15,000). This increase is effective for filings due after Dec. 31, 2019.
- Retirement Plan Amendment Deadline. The Act provides a special remedial amendment period; i.e. an extended amendment deadline to comply with the Act, no earlier than the end of the 2022 plan year (2024 for governmental and collectively bargained plans).
- Over-Age 70 ½ Contributions to Traditional IRAs. Effective for contributions made to traditional IRAs for taxable years beginning after Dec. 31, 2019, the SECURE Act permits individuals over age 70 ½ to make non-rollover contributions to traditional IRAs.
- Termination of 403(b) Custodial Account Plans. The SECURE Act requires the Secretary of the Treasury to issue guidance that will allow an employer who terminates a 403(b) plan with custodial accounts to distribute the account in-kind to a participant or beneficiary. The new guidance would be effective retroactively for plan years beginning after Dec. 31, 2008.
- Nondiscrimination Testing And Other Relief for Frozen Defined Benefit Plans. The SECURE Act provides nondiscrimination, minimum coverage, and minimum participation relief for benefit accruals and benefits, rights, and features for frozen defined benefit plans meeting certain requirements. The relief is effective as of the date of enactment or, at the election of a plan sponsor, for plan years beginning after Dec. 31, 2013.
- Repeal of the Affordable Care Act’s “Cadillac Tax.” The Act repeals the Affordable Care Act’s excise tax on high-cost employer medical plans (aka the “Cadillac Tax”). The tax was 40 percent of the value of health benefits exceeding certain statutory thresholds (projected to be $11,200 for single coverage and $30,150 for family coverage in 2022). The Cadillac Tax was originally scheduled to become effective in 2018 but was delayed numerous times by Congress (most recently to 2022).
- Tax Credit for Paid Family and Medical Leave. The Tax Cuts and Jobs Act of 2017 (TCJA) provided a business tax credit for employer-paid family and medical leave, ranging from 12.5 to 25 percent of the amount of wages paid to qualifying employees for two to 12 weeks of family and medical leave annually (provided such wage payments are at least 50 percent of employees’ normal wages). The credit was originally available only for amounts paid in 2018 and 2019. The Act extends the credit through 2020.
- Repeal of Increase in Unrelated Business Taxable Income for Certain Fringe Benefit Expenses. The TCJA subjected tax-exempt organizations to unrelated business income tax on the value of qualified parking and transportation fringe benefits provided to employees. The Act repeals this provision of the TCJA (retroactively to the TCJA’s enactment).
This is a non-exhaustive list of the Act’s changes, and the above summaries are cursory.
We plan to distribute additional alerts soon that focus in more detail on the parts of the Act most pertinent to our retirement plan clients.
If you have any questions regarding the SECURE Act, please contact your Dinsmore attorney.