The Setting Every Community Up for Retirement Enhancement (SECURE) Act
After spending most of 2019 on hold in Congress, the SECURE Act was passed and signed into law on December 20. This is the largest retirement reform act since the Pension Protection Act in 2006 and has a broad focus on improving both the reach and quality of retirement plans, as well as updating several individual tax rules.
While most changes require no immediate action, it’s important for plan sponsors to be aware of changes that may soon impact them. Here is a chart with the most significant changes:
| Topic | Summary | Considerations | Effective Date |
|---|---|---|---|
| Multiple employer plans (MEPs); Pooled employer plans | Perhaps the most significant portion of the bill provides an updated structure to facilitate open multiple employer plan arrangements, or “pooled employer plans” for unrelated employers. The Act also provides relief from plan disqualification by eliminating the “one bad apple” rule, which held all employers in a MEP liable for the plan failures of one co-sponsor. | MEP arrangements can be advantageous for smaller companies that would otherwise struggle to afford the fixed cost of sponsoring a plan independently. The Act promises additional guidance and model plan language to assist interested sponsors and pooled plan providers. | Plan years beginning after Dec. 31, 2020 |
| Increase in 10% cap for automatic enrollment safe harbor after first plan year | Certain safe harbor automatic enrollment plan designs involve the automatic escalation of savings rates to 10%. This changes the maximum to 15%. | While few participants follow the full escalation schedule before terminating employment or making their own independent savings election, this change reflects the reality that 10% is too low for someone relying on automation to help them save enough for retirement. | Plan years beginning after Dec. 31, 2019 |
| Rules relating to election of safe harbor 401(k) status | Plan sponsors have significantly more time to enact a non-elective safe harbor plan design for a given plan year. In general, sponsors can do so as late as 12 months following the plan year; however, a larger contribution may be required. The non-elective notice requirement no longer applies. | Safe harbor plan designs mandate certain minimum benefits to non-highly compensated employees, thereby exempting plan sponsors from non-discrimination tests and enabling highly compensated employees to save more. With less rigid timing rules, sponsors are afforded more flexibility to designate a safe harbor plan design for a particular plan year, (potentially after “preliminary” non-discrimination tests have been completed for the year). | Plan years beginning after Dec. 31, 2019 |
| Treatment of custodial accounts on termination of Section 403(b) plans | Upon plan termination, the in-kind distribution of 403(b)(7) custodial accounts can be directed by the plan sponsor. | It can be challenging for sponsors during a plan termination to distribute all assets from the plan. This change helps sponsors move accounts that typically require an active election by the individual account holders. | Pending guidance |
| Qualified cash or deferred arrangements must allow long-term employees working more than 500 but less than 1,000 hours per year to participate | The statutory minimum eligibility requirements are updated to allow more part-timers to save in a qualified plan. Specifically, workers who have at least 500 hours in three consecutive years must now be allowed to defer to the plan. This new rule does not apply to employee eligibility for employer contributions. | This change follows the pattern of other SECURE Act changes by expanding the reach of retirement plan coverage. Sponsors will need to accommodate the administration of more eligible participants, but, where applicable, are able to exclude this newly eligible group from nondiscrimination testing. | Plan years beginning after Dec. 31, 2020 |
| Plan adopted by filing due date for year may be treated as in effect as of close of year | Sponsors can adopt a plan by the tax filing due date (including extension), instead of the last day of the first plan year. | Employers are often faced with competing priorities and unpredictable cash flows. This provision makes it easier for employers to formally offer a plan, even if after the end of the first plan year. | Tax years after Dec. 31, 2019 |
| Disclosure regarding lifetime income | At least annually, benefit statements provided to participants must include a “lifetime income disclosure” describing the participant's accrued benefit under the plan as an equivalent lifetime income stream. | Many defined contribution plan record keepers who provide benefit statements for their plan sponsor clients are already doing this as an added-value. Promised guidance will help set a standard for actuarial equivalency assumptions. Sponsors may need help with lifetime income calculations to ensure they are following regulations correctly. In the end, this should help participants better understand the value of their lump sum defined contribution plan benefits. | 12 months after final DOL rules are issued |
| Fiduciary safe harbor for selection of lifetime income provider | The Act provides a safe harbor for plan fiduciaries who select a guaranteed retirement income contract (annuity contract) for a fixed term or providing for guaranteed annual or more frequent payments. | Annuities may not be appropriate for all plans, but now interested plan fiduciaries have a safe harbor if they wish to consider including them. Here's a link to the roadmap. | Immediate |
| Portability of discontinued lifetime income options | The SECURE Act allows plan participants to elect direct trustee-to-trustee transfers or distributions of lifetime income options that are eliminated as options within a plan. | Compared to defined benefit plans, a disadvantage of defined contribution plans has been their limited ability to offer longevity protection to participants. To the extent a DC plan has a lifetime income option in the plan, this new regulation makes it easier for participants to preserve their investment if no longer offered in the plan, by transferring it to another plan or IRA or by commencing annuity payments. | Plan years beginning after Dec. 31, 2019 |
| Modification of nondiscrimination rules to protect older, longer service participants | Sponsors who recently froze defined benefit accruals can avoid certain nondiscrimination rules that may otherwise inhibit “make-up” benefits to these employees in a defined contribution plan. | While this relief comes after decades of plan sponsors freezing defined benefit accruals, it's certainly welcome to those trying to design retirement benefits for affected long-service employees. | Immediate |
| Increased penalties for failure to file retirement plan returns | IRS penalties have been increased for late filings of Form 5500 and Form 8955-SSA and for late issuances of income tax withholding notices. | With penalties increasing by a multiple of 10, the IRS is getting strict on timeliness. Plan sponsors must work with their vendors to ensure timely completion. | Filings and issuances required after Dec. 31, 2019 |
| Modification of required distribution rules for designated beneficiaries | Most non-spouse beneficiaries of DC plan participants or IRA account holders must take full distribution of payments no later than 10 years after the death of the account holder. | In general, the tax revenue expected from these accelerated distributions will buttress many of the other changes in this Act that encourage participants to save for retirement. This all but eliminates stretch IRAs. | Distributions to beneficiaries for account holders who pass away after Dec. 31, 2019 |
| Increase in age for required beginning date for mandatory distributions | The age to start required minimum distributions increases from 70 ½ to 72. | While the participants and account holders are the ones required to commence RMD payments from qualified plans and IRAs, sponsors of qualified plans often play an important role to help facilitate these distributions each year to older participants. Those turning 70 ½ after 2019 get to defer their savings longer. | Distributions after Dec. 31, 2019 to those attaining age 70 ½ after Dec. 31, 2019 |
| Repeal of maximum age for traditional IRA contributions | Individuals can now contribute to traditional IRAs after age 70 ½ | While this doesn't affect employer plans, IRAs are popular and it's important for plan sponsors to know about this change in the rule affecting their older workers. | Tax years after Dec. 31, 2019 |
| Penalty-free withdrawals from retirement plans for individuals in case of birth of child or adoption | Plans can allow qualified birth or adoption distributions up to $5,000 per parent, and, when distributed, they are exempt from the 10% excise tax that often applies to early withdrawals. Distributions must be made within one year following the birth or adoption. | This creates a new distributable event under retirement plans and one that will be welcomed by new parents. Amounts can be repaid back to the plan in certain circumstances. As with other distributable events, sponsors must ensure a prudent administrative process, particularly when the sponsor is part of a controlled group. | Distributions after Dec. 31, 2019 |
The Act defines a remedial amendment period through the 2022 plan year for certain related plan document changes (or 2024 for governmental plans).
In addition to items in the chart above, the Act offers tax credits for companies starting a new retirement plan or adding an automatic enrollment feature, allows 529 accounts to cover costs of student loan repayments and apprenticeship programs and includes a number of other individual and plan-level provisions.
Alongside the SECURE Act, the Bipartisan American Miners Act was also signed into law, which includes a provision allowing in-service distributions from pension plans and governmental 457(b) plans at age 59 ½, a decrease from age 62 (pension plans) and 70 ½ (governmental plans).
A PDF of the full SECURE Act is available online. The Act promises more guidance in several areas. In the meantime, for more information on the impact of this Act, please contact HANYS Benefit Services by email or by calling (800) 388-1963.