SECURE Act is Here and Changing Retirement!
While folks were busy wrapping last-minute holiday presents, a new law passed affecting retirement plans called the SECURE Act, which stands for “Setting Every Community Up for Retirement Enhancement,” and puts into place numerous provisions intended to strengthen retirement security. This is the biggest piece of retirement legislation since the 2006 Pension Protection Act and nerds like us are excited! (You can read the bill here in Division O and see the effective dates in order here.)
We’ll dive into SECURE as the year goes on and more of the details and implications come out, but here’s an overview of ten of the big provisions:
Required Minimum Distributions (“RMDs”): The current age to take required Required Minimum Distributions is 70½. The SECURE Act extends the required beginning date for RMDs to age 72. This new rule applies for individuals who attain age 70½ after December 31, 2019.
401(k) Eligibility for Long-Term Part-time Employees: Beginning in 2021, employees who work more than 500 hours of service in any 3 consecutive plan years must be “eligible” to participate in a 401(k) plan. An employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules. This rule does not require employers to make matching or profit-sharing contributions, but primarily provides “access” to a retirement plan.
Safe Harbor 401(k) Plans: Safe harbor 401(k) plans will see the following changes beginning in 2020:
Safe Harbor Notice — Plans that satisfy the safe harbor requirements by making a 100% vested employer (non-elective) contribution of at least 3% of compensation will no longer be required to distribute a safe harbor notice before the beginning of each plan year!
Becoming a Safe Harbor Plan — A plan may become a safe harbor plan after the beginning of the plan year by adding a 100% vested safe harbor employer (non-elective) contribution. For a calendar year plan, this change may be made as late as the December 1, before the end of the plan year at the 3% level, or after year-end, as long as the plan provides a 100% vested safe harbor employer (non-elective) contribution of at least 4% of compensation (instead of the 3% level).
Automatic Contributions — Plans that use a “qualified automatic contribution arrangement” to satisfy the safe harbor contribution requirements, with 100% vesting of employer (non-elective) safe harbor contributions after 2 years of vesting service, may allow for auto-escalation of elective deferrals beginning at 3% up to 15% of compensation, rather than the current 10% cap.
Prohibited Loans Procedures: Similar to all qualified retirement plans, there is a prohibition against making 401(k) and 403(b) plan loans through credit cards and similar arrangements. (We’re definitely ok with this!)
Tax Credits for Automatic Enrollment Features: A new tax credit up to $500 per year exists for up to 3 years, for eligible employers (generally have fewer than 100 employees) that “convert” existing Section 401(k) plans to include automatic enrollment features.
Withdrawals Due to Birth or Adoption: Beginning in 2020, a participant may be allowed to withdraw up to $5,000 from a retirement plan for childbirth or adoption expenses, without being subject to the 10% penalty tax on early withdrawals.
Lifetime Income: Three provisions of the SECURE Act relate to lifetime income considerations in defined contribution plans. (Lifetime income means provisions that allow for an employee to get a stream of income from the plan, usually integrating an annuity feature, instead of just taking lump sums. Many plan sponsors have been reluctant to do this due to lack of DOL guidance, portability issues if the plan should move recordkeepers, and fiduciary responsibility in selecting and monitoring providers.)
Lifetime Income Disclosure — ERISA-covered plans must make a lifetime income disclosure to participants at least once every 12 months, illustrating the monthly payments that participants would receive if their account balances were annuitized. The DOL will provide a model disclosure. Disclosures are not required to begin until 12 months after guidance is provided.
Fiduciary Safe Harbor for Selection of Lifetime Income Provider — Fiduciaries of ERISA-covered plans are provided an optional safe harbor to satisfy their fiduciary obligations when selecting an insurer to provide a guaranteed retirement income contract for participants. The safe harbor protects fiduciaries from liability for any losses that may result due to an insurer’s insolvency or other inability to pay.
Portability — Beginning in 2020, 401(k) plans, 403(b) plans, and governmental 457(b) plans may make a direct trustee-to-trustee transfer of a lifetime income investment to another employer-sponsored retirement plan or IRA.
Adoption Date for Retirement Plan: The rule that a tax-qualified plan must be adopted by the last day of the plan year is modified to allow an employer to adopt a qualified retirement plan by the due date for the Federal tax return for the taxable year, including extensions. (We have no idea how that’s going to work with submitting a 5500 after the July deadline.)
Open Multiple Employer Plans (“MEPs”): Beginning in 2021, unrelated employers may join together in a pooled employer plan, sometimes also called an “open MEP.” Participating employers will be protected from certain qualification failures caused by other participating employer groups, mitigating concern with the existing “one bad apple” rule (meaning administrative errors by one employer impacted all the other employers).
Plan Amendments: The SECURE Act provides a remedial amendment period until at least the end of the 2022 plan year for adopting any plan amendment required under the SECURE Act. The amendment deadline may be further delayed by Treasury Department guidance.
Revenue Raisers AKA “how we’re going to fund this” through penalties: To cover the cost of the SECURE Act, penalties will increase for failure to file retirement plan returns. The Form 5500 penalty is increased from $143 to $250 per day, not to exceed $150,000. The failure to file a registration statement (Form 8955-SSA) incurs a penalty of $10 per participant, per day, not to exceed $50,000. A failure to file a required notification of certain changes in status (using Form 5500) results in a penalty of $10 per day, not to exceed $10,000 for any failure. Failure to provide a withholding notice and election in connection with a distribution is a penalty of $1,000 for each failure, not to exceed $50,000 for any failures during a plan year. The cost of the SECURE Act has also been subsidized by the elimination of what is referred to as a “stretch IRA,” which is an estate planning concept. (This last point on the stretch IRA is sad and definitely a downer, but if we had to give up something to get all the other good stuff, I guess it’s okay.)
AS WE ALL KNOW, the devil is in the details!! The provisions all sound pretty good on the surface, but there are plenty of ways the paperwork and the operations for accomplishing some of these great points could muck things up. Overall, we think it’s a win in concept!
More to follow as we digest and all the details shake out. As always, if you’re looking for guidance on how this will help or hinder your organization’s retirement plan, reach out!
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