The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act was signed into law on December 20, 2019. The SECURE Act (the “Act”) is intended to incentivize employers to offer retirement plans, promote additional retirement savings, and enhance retiree financial security. While some of the provisions of the Act will become effective for plan years beginning after December 31, 2019, mandatory plan amendments to cover SECURE Act changes will not be required until the 2022 plan year for most plans (with government and collectively bargained plans having until 2024). The most notable changes are summarized below.
Expand Coverage and Encourage Employer-Provided Plans
Pooled Employer Plans (PEPs): The Act allows employers of all sizes and types of businesses to join together to create a new type of Multiple Employer Plan (“MEP”) referred to as a Pooled Employer Plan (“PEP”). A PEP permits unrelated employers to pool their resources and participate in a PEP, which will still be treated as a single plan under ERISA. This is a fairly dramatic change from current law where a plan sponsored by a group of employers that are not under common control may be treated as multiple plans for ERISA purposes unless the employers can prove they have certain “commonality” of interests. This change should make retirement plans more accessible. This plan type will not become effective until plan years beginning after December 31, 2020. Additional guidance by the IRS and DOL is expected to be forthcoming.
Employer Tax Credits: The Act increases tax credits for small employers (i.e. employers with less than 100 employees in the preceding tax year) who start new retirement plans from $500 per year to as much as $5,000 per year for three years. Moreover, small employers who add an automatic enrollment feature to their plan may be eligible for an additional $500 tax credit per year for three years. These changes are effective for taxable years beginning after December 31, 2019.
Part-Time Employee Eligibility for 401(k) Plans: The Act provides that plan sponsors of 401(k) plans will be required to allow employees who work at least 500 hours during each of three consecutive 12-month periods to make elective contributions. Employer contributions will not be required until the employee has satisfied the plan’s normal eligibility requirements. Notably, the Act provides pretty significant nondiscrimination testing relief with respect to this group. Although this change is effective for plan years beginning after December 31, 2020, 12-month periods of service before January 1, 2021 need not be counted, which will delay the date by which a part-timer might first be required to enter a plan.
Ease Burdens for Employers
Elimination of So-Called “Stretch IRA”: Non-spouse beneficiaries of inherited IRAs (as well as certain qualified plans and 403(b) plans) will be required to take their benefits on an accelerated basis rather than being permitted to stretch the required minimum distributions over the beneficiary’s life expectancy. The payout period for non-spouse beneficiaries will be reduced to 10 years after the participant’s death, with a handful of exceptions. These new distribution rules will apply generally with respect to participants who die after December 31, 2019, but government plans and collectively bargained plans will apply the new rules for participants dying after December 31, 2021.
Adoption and Administration of Nonelective 401(k) Safe Harbor Plans: Effective in plan years beginning after December 31, 2019, the Act (i) eliminates the annual safe harbor notice requirement with respect to nonelective 401(k) safe harbor plans (i.e. plans that avoid nondiscrimination testing by providing a minimum three percent nonelective contribution to participants); and (ii) permits a plan to be amended to become a nonelective 401(k) safe harbor plan at any date before the 30th day before the close of the plan year (with such amendments permitted even after the 30th day before the close of the plan year if the amendment provides for a nonelective contribution of at least four percent for all eligible employees). The elimination of the annual safe harbor notice requirement does not apply to other types of safe harbor plans such as matching safe harbor plans, and all safe harbor plans must continue to provide the other notices that are required for all 401(k) plans.
Other Provisions Expected to Ease Burdens on Employers: The Act eases some of the burdens for employers associated with sponsoring a retirement plan by (i) offering consolidated Form 5500 filing for a “group of plans” using the same fiduciaries and investments for certain defined contribution plans effective for plan years beginning after December 31, 2021; (ii) permitting employers to adopt a qualified retirement plan after the close of a taxable year so long as it is adopted before the deadline for filing the employer’s tax return for the taxable year; (iii) simplifying termination of 403(b) custodial plans by permitting distributions in kind to individual custodial accounts; and (iv) clarifying that employees of nonqualified church-controlled organizations may be covered under a Code Section 403(b) plan that consists of a retirement income account.
Promote and Preserve Retirement Savings
Delay of Required Minimum Distribution Age: The Act delays the required minimum distribution age from 70 ½ to age 72, which will allow for additional tax-deferred growth. This change applies to distributions required to be made after December 31, 2019 for individuals who attain age 70 ½ after such date.
In-Service Distributions under Pension Plans: The Act permits defined benefit and money purchase pension plans to offer in-service distributions beginning at age 59 ½ rather than at age 62, effective for plan year beginning after December 31, 2019.
Lifetime Income Disclosure: The Act amends ERISA to require defined contribution plans to provide participants with a benefit statement which includes an estimate of the monthly income a participant could receive in retirement if an annuity were purchased. Additional guidance and a model disclosure is expected to be forthcoming, and this requirement applies to benefit statements furnished more than 12 months after the latest to occur of the DOL issuing (i) interim final rules, (ii) the model disclosure, or (iii) the assumptions that may be used in the disclosure.
Changes Regarding Lifetime Income Options: The Act provides for the following changes in order to encourage the use of annuity options in defined contributions plans. First, the Act permits participants in defined contribution plans to make direct trustee-to-trustee transfers (or transfer annuity contracts) to an eligible employer plan or IRA of “lifetime income investments” that are no longer authorized to be held as investment options. This change is effective for plan years beginning after December 31, 2019 and is intended to preserve a participant’s annuity investments. Second, the Act creates a fiduciary safe harbor for the selection of an insurer for providing lifetime income options to participants, effective on December 20, 2019.
Increase of Automatic Deferral Cap for QACA Safe Harbors: The Act increases the deferral cap for plans that rely on the automatic enrollment safe harbor model (known as the “Qualified Automatic Contribution Arrangement” or “QACA” safe harbor) from 10% to 15%, effective for plan years beginning after December 31, 2019.
Penalty-Free Withdrawals for Childbirth and Adoption: The Act permits penalty-free (but not income tax-free) retirement plan withdrawals for expenses associated with a birth or adoption, with repayment permitted. This change applies to distributions after December 31, 2019.
Prohibition of Plan Loans Made Through Credit Cards: The Act prohibits defined contribution plans from extending loans to participants using credit cards or a similar arrangement, applying to loans made after December 20, 2019.
Allowable Expenses for 529 College Savings Plans: The Act permits tax-free distributions from 529 plans for certain apprenticeship program expenses and qualified student loan repayments of up to $10,000 per individual, effective for distributions made after December 31, 2018.
Additional Changes Affecting Defined Benefit Plans
PBGC Premiums for CSEC Plans: The Act reduces PBGC premiums for cooperative and small-employer charity (“CSEC”) plans for plan years beginning after December 31, 2018.
Nondiscrimination Relief for (Some) Frozen Plans: The Act provides nondiscrimination, minimum coverage, and minimum participation relief with respect to benefit accruals and benefits, rights, and features for a closed class of participants under a defined benefit plan that has been closed for new hires, provided certain requirements are met. This change is effective generally on December 20, 2019.
Additional Changes Affecting IRAs
Repeal of Maximum Age for Traditional IRA Contributions: The Act repeals the prohibitions on contributions (and deductions) to a traditional IRA for individuals who have attained age 70 ½ by the end of a year, effective for contributions made for taxable years beginning after December 31, 2019.
Stipends Treated as Compensation: The Act allows graduate students to count stipends and non-tuition fellowship payments as compensation for IRA contribution purposes.
Increase of Penalties
Penalties for Failure to File: The Act increases penalties for plan sponsors who fail to file retirement plan returns, required notifications of changes, and required withholding notices and for individuals who fail to file tax returns. These changes are effective for returns due after December 31, 2019.