The SECURE Act and Its Impact on Retirement Plans
On December 20, 2019, after months of uncertainty, the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act finally became law. The SECURE Act makes numerous changes to both the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act (ERISA) that will impact retirement plan administration and documents. While sponsors have plenty of time to amend their plan documents to comply with the SECURE Act, many provisions need to be addressed sooner rather than later as they will involve changes in plan administration and participant communication.
Below are some key provisions in the SECURE Act affecting employer retirement plans and their respective effective date.
- Increases the age for required minimum distributions for retirement plans from age 70½ to age 72. This change applies only to those individuals who turn 70½ after December 31, 2019.
- Allows for a penalty-free (i.e., no 10% excise tax) distribution up to $5,000 from a defined contribution plan during the one-year period after the birth or adoption of a child. This change is effective for distributions after December 31, 2019.
- Provides a fiduciary safe harbor for 401(k) plan fiduciaries to select an annuity provider. The safe harbor is designed to encourage plan sponsors to offer an annuity option under their 401(k) plans, and is effective as of December 20, 2019.
- Requires plan sponsors to provide lifetime income disclosures to participants annually as part of their benefit statements. This requirement will be effective a year following the release of Department of Labor final rules.
- Makes two changes to safe harbor 401(k) plans, both effective for plan years beginning after December 31, 2019.
- Nonelective safe harbor 401(k) plans are no longer required to provide an annual notice and a plan sponsor may retroactively amend its 401(k) plan to become a nonelective safe harbor plan.
- Increases the maximum automatic deferral rate for qualified automatic contribution arrangements from 10% to 15% of compensation following the first year of participation.
- Obligates 401(k) plans to allow part-time employees who work at least 500 hours during three consecutive 12-month periods to make deferral contributions, provided such part-time employees may still be excluded from eligibility for matching or nonelective contributions. This requirement is effective for plan years beginning after December 31, 2020.
- Eliminates the so-called “stretch” distributions following the death of a participant in a defined contribution plan. Subject to certain exceptions (e.g., surviving spouse), such distributions must occur over 10 years, effective for distributions after December 31, 2019.
- Allows defined benefit plans to reduce the age required to receive a pension plan in-service distribution from 62 to 59½. This provision is effective for plan years beginning after December 31, 2019.
- Modifies existing rules relating to non-discrimination testing relief for frozen defined benefit pension plans. This was effective as of December 20, 2019.
- Increases the penalties for failing to timely file a Form 5500 to $250 a day up to $150,000. This increase is effective for Form 5500s due after December 31, 2019.
We recommend a review of all qualified retirement plans to determine if amendments are necessary. The SECURE Act generally provides plan sponsors have until the end of 2022 to amend their plans. Plan sponsors should discuss with their third-party administrators and counsel any administrative changes to be implemented due to the SECURE Act and ensure participants receive adequate notice of any changes.