The SECURE Act – Important Changes to Retirement Plans: What to Know
On December 20, the President signed into law the long-awaited Setting Every Community Up for Retirement Enhancement (“SECURE”) Act as part of the 2020 Federal budget (Fiscal Year 2020 Consolidated Domestic and International Assistance Package (H.R. 1865)). The next steps will now be interpretation and implementation by the IRS and Department of Labor, and while the act itself already contains deadlines, employers need to prepare for amending plan documents in a timely manner to provide for the changes. And it will be important for employers to quickly be aware of the changes, as most of the SECURE Act provisions are effective for plan years beginning after December 31, 2019.
Here are some of the highlights that affect plan sponsors:
1. 401(k) safe harbor plans.
There are two adjustments to 401(k) safe harbor plans:
- Notice requirement for nonelective 401(k) safe harbor plans. Certain notice requirements for nonelective 401(k) safe harbor plans are eliminated. Previously, an employer with a nonelective 401(k) safe harbor plan was required to provide eligible employees with notices outlining the safe harbor provisions. Now, if an employer makes a nonelective contribution of at least 3% of the employee’s compensation (rather than elective employee contributions), the employer is not required to provide notices regarding the safe harbor provisions to the employee. There is also now an opportunity for the employer to retroactively elect to convert to nonelective safe harbor status. Provided the employer’s nonelective contribution is at least 4% of the employee’s compensation, the retroactive election must be made by the last day for distributing excess contributions for the plan year (i.e., generally by the close of the following plan year).
- Increase to cap on default rate for automatic enrollment 401(k) safe harbor plans. Previously, the cap on the default rate for contributions under a qualified automatic contribution arrangement (“QACA”) was 10% of the employee’s compensation. That cap is increased to 15% for years after the default contributions have started.
2. New fiduciary safe harbor for selecting annuity providers.
Where an employer has selected a lifetime income provider, it may be protected from claims for breach of fiduciary duty if it satisfies the new safe harbor requirements:
- The fiduciary must engage in an objective, thorough, and analytical search for providers;
- The fiduciary must consider the financial capability of a provider to satisfy obligations under the contract and perform a cost-benefit analysis of the contract in relation to the benefit and services to be provided (the fiduciary will be deemed to have met this requirement if it obtains certain written representations from the provider and meets other requirements); and
- Based on the previous two requirements, the fiduciary concludes that, at the time of the selection, the provider is financially capable of satisfying its obligations under the contract and that the cost-benefit analysis results are reasonable.
3. Portability for lifetime income investment options.
Some current retirement plans allow investment options that provide for lifetime income to the participant. Under the SECURE Act, if those investment options are removed from the plan, the participant may take a distribution from the plan without worrying about the in-service distribution restrictions. The distribution may be either directly to the individual or a rollover to an IRA or another retirement plan.
4. Defined contribution plan lifetime income disclosures.
Employers will be required to provide defined contribution plan participants with annual “lifetime income disclosures.” The disclosure must show the amount of monthly income the participant could receive if their plan account were paid as an annuity. This applies even if an annuity distribution is not offered as an option by the underlying plan or if the actual annuity is dependent on variables such as investment performance and premium rates. However, the good news for employers is that if the employer utilizes the safe harbor actuarial assumptions and model language provided by the Department of Labor, it is relieved of any potential fiduciary liability related to that disclosure. Because employers will be waiting on the Department of Labor, they will have more time to comply with this requirement.
5. Credit card arrangements for plan loans are prohibited.
Currently, some qualified plans allow participants to access plan loans through credit cards. Such arrangements are now prohibited.
6. Expansion of part-time employee eligibility.
A new class of employee has been introduced for participation purposes, that of “long-term part-time employee.” These are employees who work at least 500 hours per year in three consecutive years and do not reach the old 1,000-hour plan participation threshold. Previously, a 401(k) plan could not exclude part-time employees from participation if they do not complete at least 1,000 hours of service in a year. Now, long-term part-time employees now also cannot be excluded. Note that this does not limit a plan’s ability to exclude employees for other reasons – subject to passing nondiscrimination coverage testing – and does not apply to collectively-bargained plans.
7. “Qualified birth or adoption distributions”.
There is a new class of distribution: the “qualified birth or adoption distribution”. That is, employees may make in-service withdrawals from elective deferral contribution accounts of up to $5,000 per spouse within one year after birth or adoption of a qualifying child. They can also “repay” those distributions to certain qualified plans.
Minimum required distributions age change. Previously, participants in retirement plans and IRAs had to begin receiving required minimum distributions at age 70½. That is raised to 72. The increase in age also results in permitting individuals over age 70½ to make non-rollover contributions to traditional IRAs.
This will be effective for distributions required to be made after December 31, 2019, for individuals who reach 70½ after that date.
9. Finally, a whistle-stop tour of further provisions in the SECURE Act include:
- An increase in tax credits for small employers starting retirement plans and additional tax credits for small employers that include automatic enrollment features in a retirement plan;
- Stretch IRAs are eliminated;
- An increase in the availability of open multiple employer plans (which may take some time for development and implementation);
- Increased penalties for a failure to file Form 5500 or other notices (annual registration, notification of change of status, and withholding notices); and
- The IRS and Department of Labor are directed to develop a consolidated Form 5500 for defined contribution plans with the same trustee, named fiduciary, administrator, plan year, and investment lineup.
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