Congress Looks to Secure Your Retirement Under the SECURE Act
In late December, Congress passed and President Donald Trump signed into law the Setting Every Community Up for Retirement Enhancement (SECURE) Act, the most sweeping retirement legislation since the Pension Protection Act of 2006. The Act, whose enabling legislation was included as part of a large government funding bill, contains many significant changes affecting employers and participants. Several provisions are effective immediately or retroactively, and others go into effect beginning in 2021.
Open Multiple Employer Plans (MEPs)
The Act will allow employers to participate in “pooled” or open multiple employer plans (MEPs) for plan years beginning after December 31, 2020. The employers do not need to share a common interest. These plans are required to be administered by a pooled plan provider (PPP) as the named fiduciary. PPPs will be subject to audit and examination by the Internal Revenue Service and Department of Labor (DOL). Notably, MEPs will be able to file a single annual Form 5500 listing all participating employers.
The Act removes a significant practical barrier that has discouraged employers from forming MEPs up to this point: the “one bad apple” rule. This rule meant that a compliance issue such as an operational error with a participating employer would disqualify the entire MEP. The Act provides relief from this rule for new pooled plans, and requires that assets of any disqualifying participating employers be quarantined from the MEP by being transferred to a separate plan. The Act also makes disqualifying employers responsible for the liabilities of their employees in the plan.
Automatic Enrollment Increased Cap
Prior to the SECURE Act, plan sponsors with qualified automatic contribution arrangements (QACAs) could automatically enroll or escalate employee contributions to a maximum of 10 percent of compensation. The Act retains the 10 percent maximum for employees’ first year of participation, and raises the maximum to 15 percent for subsequent years. This provision takes effect for plan years beginning after December 31, 2019.
Safe Harbor Non-Elective 401(k) Plan Changes
401(k) plans currently have two safe harbors, one for matching contributions and one for non-elective contributions, to obtain relief from having to perform nondiscrimination testing. Employers are required to give employees notice of their rights and obligations prior to the start of the plan year. The Act makes two significant changes to the rules covering safe harbor non-elective 401(k) plans. First, the Act eliminates the employee notice requirement for the non-elective contribution safe harbor. Second, it allows plan sponsors to amend plans on a retroactive basis to include the non-elective safe harbor provided they meet certain requirements. These changes are effective for plan years beginning after December 31, 2019.
Plan Participation of Long-Term Part-Time Employees
The Act amends 401(k) eligibility rules for long-term part-time employees. Generally, plans that have a vesting schedule can currently require otherwise-eligible employees to earn a year of service to be eligible for benefits. Employers must credit employees with a year of service when they complete 1,000 hours in a year. Under the Act, employers must also grant service eligibility to employees who have completed three consecutive years with at least 500 hours of service in each year. Plans also must credit employees with a year of service for each 500 hours worked each year for purposes of vesting. Employers can elect to exclude these newly eligible employees from nondiscrimination and coverage testing and from rules applying to top-heavy plans. This rule will not apply to matching and non-elective contribution eligibility. These provisions are effective for plan years beginning after December 31, 2020, with eligibility period rules effective beginning January 1, 2021 (i.e., the 12-month period before January 1, 2021, will not be taken into account).
Annuity Provider Selection Safe Harbor
The Act expands regulatory safe harbor provisions for the selection of annuity providers, allowing plan fiduciaries to rely on written representations from annuity providers upon contracting and annually thereafter, and allowing fiduciaries to consider more than the cost of the contract.
Nondiscrimination Testing Relief for Closed Defined Benefit Plans
Defined benefit plans with a soft freeze (i.e., a plan where current participants continue to accrue benefits but the plan is closed to new hires) often run into nondiscrimination issues that lead to a hard freeze (ceasing all benefit accruals) or termination of the plan. The Act provides some relief by allowing plan sponsors to test closed defined benefit plans on an aggregated basis with one or more defined contribution plans. This relief is granted to plans that closed before April 5, 2017, or that were in effect for at least five years before closing without any substantial benefit increases to the closed class during the five years prior to closing. The Act provides similar relief for nondiscrimination testing of benefits rights and features for the closed class.
In-Service Distributions From Pension Governmental 457(b) Plans
For plan years beginning after December 31, 2019, the Act permits pension plans and governmental 457(b) plans to allow for in-service distributions at age 59½.
403(b) Plan Guidance
The Act directs the Secretary of the Treasury within six months after December 20, 2019, to issue guidance on the ability to terminate a 403(b) custodial account by distributing a custodial account in-kind to a participant or beneficiary. This will be retroactively effective back to tax years beginning on or after January 1, 2009.
Increase of Required Minimum Distribution Age
The Act also raised the required minimum distribution (RMD) age from 70½ to 72 years of age. This provision is effective for distributions made after December 31, 2019, for individuals who turn 70½ after that date.
Extended Deadline to Adopt a New Plan
Employers can now adopt plans by their tax return due date, rather than by the last day of the employer’s taxable year under pre-SECURE Act law. This provision is effective for plans adopted for taxable years beginning after December 31, 2019.
The Act raised the penalty for failure to file a Form 5500 from $25 to $250 per day of the failure, and increased the maximum from $15,000 to $150,000. The Act also increased penalties for failures relating to annual deferred vested participant registration statements, change of status notifications, and withholding notices. The penalty increases apply to returns and notices due after December 31, 2019.
Miscellaneous Plan Distribution Changes
The Act contains several provisions affecting distributions to employees. These include the following:
Plan loans to employees through a credit card or similar arrangement are essentially prohibited. If made, the loans will be treated as a taxable distribution, effective immediately for loans made after enactment of the Act.
Employees may take a distribution from their 401(k) account for birth or adoption without an early distribution penalty or rollover withholding. Distributions up to $5,000 qualify for this treatment within one year of a birth or adoption. Birth or adoption distribution rules take effect for distributions made after December 31, 2019.
The large government funding bill that was signed into law also included two disaster-relief provisions for the use of retirement funds not found in the SECURE Act:
The legislation provided plan loan relief to employees whose primary residence was located in a disaster area, by increasing the loan maximum to $100,000 and extending the repayment timeline by one year. The increased loan limits are available for the 180 days following the December 20, 2019, enactment.
Natural disaster relief was provided to affected employees including allowing in-service distributions without an early distribution penalty or rollover withholding and allowing repayments of such distributions for home purchases. The natural disaster relief provisions apply to distributions made as early as January 1, 2018, and ending 180 days after the December 20, 2019, enactment date.
The SECURE Act, as well as the disaster relief provisions for plan loans elsewhere in the funding legislation, provides a number of significant changes to retirement plans that plan sponsors must know and understand. Therefore, plan sponsors need to review how these changes affect their plans both from plan document and plan operation/administration perspectives.