On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act” or “Act”), which is primarily intended to help Americans save for retirement. In a previous article, we discussed some of the items in the proposed legislation which passed the House in May. Now that the SECURE Act has been enacted, we wish to summarize some of its key provisions and what they mean for retirement plan sponsors and participants.
Changes affecting most plans
Expanding part-time employee inclusion in 401(k) plans. Effective for plan years beginning after December 31, 2020, the SECURE Act requires inclusion of long-term part-time employees (those who work 500 or more hours in at least 3 consecutive years) in the elective deferral feature of the plan. The three consecutive year period does not begin until January 1, 2021, so employers will not have to permit employee deferrals until 2024. The rule will not apply to employees covered by a collectively bargained plan.
Participant statements must contain lifetime income disclosure. The SECURE Act will require sponsors to provide participants annual estimates of the amount of monthly annuity income the participant’s account balance could produce in retirement. These disclosures will not be required until after the Department of Labor provides model disclosures, issues guidance, and outlines required assumptions.
Increasing the age for required minimum distributions. Effective for individuals turning 70½ after December 31, 2019, the SECURE Act raises the age at which required minimum distributions must commence from 70½ to 72.
Increased late filing penalties. Effective for notices required to be filed or provided after December 31, 2020, IRS penalties for late filings of Forms 5500 will increase to $250 per day from the previous $25 penalty, with the maximum penalty increased from $15,000 to $150,000. The 8955-SSA penalties are also increasing from $1 per day per unreported participant to $10, jumping from a $5,000 to a $50,000 maximum. And the penalty for Form 8822-B (used to notify the service of a change in plan administrator and/or change in address) will increase from $1 per day to $10, with the maximum increasing from $1,000 to $10,000.
Changes affecting safe harbor 401(k) plans
Increased limit on certain automatic contributions. Effective for plan years beginning after December 31, 2019, safe harbor 401(k) plans that use automatic enrollment to satisfy the nondiscrimination testing safe harbors (qualified automatic contribution arrangements or QACAs) will be permitted to increase the cap that applies to automatic deferral percentages from 10% to 15% for plan years after a participant’s first plan year.
Greater flexibility for nonelective safe harbor plans. Effective for plan years beginning after December 31, 2019, safe harbor 401(k) plans that use nonelective contributions to satisfy the nondiscrimination testing safe harbors will no longer need to provide annual safe harbor notices to participants. In addition, employers will be allowed to amend their plans to become nonelective safe harbor 401(k) plans any time before the 30th day prior to the end of a plan year (or later if at least a 4% nonelective contribution is provided).
Lifetime income and other changes affecting distributions
Fiduciary safe harbor for selection of lifetime income providers. The SECURE Act provides a fiduciary safe harbor to protect employers who choose to include guaranteed retirement income contracts in their retirement plans as long as they follow certain procedures in selecting the contracts.
Portability of lifetime income options. Effective for plan years beginning after December 31, 2019, plans may allow a participant to transfer certain “lifetime income investments” that are no longer authorized to be held as an investment option under the plan to another retirement plan or to an IRA without regard to the plan’s general restrictions on in-service distributions.
Changes to required minimum distributions after death. For participants who die after December 31, 2019, the SECURE Act generally requires that all distributions after the death of the participant be made by the end of the 10th calendar year following the year of the participant’s death (instead of five years or the life expectancy of the beneficiary). This requirement does not generally apply to distributions to surviving spouses, certain disabled beneficiaries, and minor children of the participant.
Permitting penalty-free distributions upon birth or adoption. Effective for distributions after December 31, 2019, the SECURE Act creates a new permissible qualified distribution event: the birth or adoption of a child. Parents who give birth to or adopt a child may receive a distribution of up to $5,000 without incurring an early withdrawal penalty, provided the withdrawal is within one year of date of birth or date the adoption is finalized. These distributions are also allowed to be repaid to the plan.
Miscellaneous changes
Introducing a new tax credit for automatic enrollment. Effective for taxable years beginning after December 31, 2019, the SECURE Act provides a new annual tax credit of up to $500 to certain small employers who adopt a new plan or amend an existing plan to provide for automatic enrollment.
Multiple employer plans. Effective for plan years beginning after December 31, 2020, employers will have more flexibility to join with unrelated employers in a single retirement plan thanks to a new type of open multiple employer plan called a “pooled employer plan.” In addition, effective for plan years beginning after December 31, 2020, errors by one employer participating in a multiple employer retirement plan will not jeopardize the entire plan.
Testing relief for certain closed pension plans. Effective immediately, the SECURE Act provides nondiscrimination testing relief for closed defined benefit plans by making it easier for such plans and related defined contribution plans to use cross testing. In addition, the Act provides closed defined benefit plans with relief from certain coverage and minimum participation requirements.
Repealing the age limit for traditional IRA contributions. Effective for tax years beginning on January 1, 2020, the SECURE Act removes the 70½ age limit for contributions to traditional IRAs. If you were age 70½ or older before December 31, 2019, then you are not allowed to make a contribution for the 2019 tax year, but may resume making contributions beginning in the 2020 tax year.
The full text of the SECURE Act is available here.
Now that the SECURE Act has been enacted, plan sponsors should consider how the Act’s changes will affect their plans. In a series, we’ll discuss how the major provisions of this Act may impact plan sponsors and plan administration. On a positive note, plan amendments for the SECURE Act will not generally be required until 2023, but plan sponsors should take care to note when any optional provisions are implemented to ensure the plan is documented properly at that time.
If you have questions about the SECURE Act or any other benefit matter, contact a member of the employee benefits team.