Legal Alert: What You Need to Know About the SECURE Act
Touted as the most comprehensive retirement legislation in over a decade, the “Setting Every Community Up for Retirement Enhancement Act of 2019” (“SECURE Act”), is paving the way for retirement plan changes across private and public sectors, impacting plans of all sizes. Below is a high-level review of certain key changes for retirement plans:
Withdrawals and Distributions
- RMD Age Increased From Age 70 ½ to Age 72
Brief Summary: Individuals who attain age 70 ½ after 12/31/2019 are not required to take their minimum distribution until age 72.
Effective Date: This new rule applies to distributions required to be made after 12/31/2019 for persons who attain age 70 ½ after 12/31/2019.
Action Steps: This change is required and will involve administrative changes, as well as revisions to participant communications and plan documents.
- RMD Rules for Designated Beneficiaries
Brief Summary: The distribution of the entire benefit to a designated beneficiary must be within 10 years following the participant’s death. There are certain exceptions to this 10-year rule when the beneficiary is the spouse, a disabled beneficiary or a minor child.
Effective Date: This new rule is effective for employees who die after 12/31/2019.
Action Steps: This change is required and will involve administrative changes, as well as revisions to participant communications and plan documents.
- Distributions for Qualified Birth or Adoption
Brief Summary: The SECURE Act provides a new exception to the 10% early withdrawal penalty for a distribution up to $5,000 for a qualified birth or adoption if the distribution is taken within 12 months of the birth or adoption. In addition, the amounts withdrawn may be recontributed to the plan subject to certain requirements.
Effective Date: This relief from the 10% penalty is effective for distributions after 12/31/2019.
Action Steps: This is an optional change, but a plan that wants to take advantage of this change will need to be amended to add this type of distribution. It is unclear at this point what type of documentation will be required to qualify for the distribution, how the repayment will work, or how the distribution will be reported. Additional guidance is needed from the IRS.
- Qualified Disaster Distributions
Brief Summary: Distributions (up to an aggregate limit of $100,000) are permitted without the 10% early distribution penalty if the distribution is for certain federally declared disasters, and repayment is allowed in some situations. In addition, plan loans in some situations will be permitted up to $100,000.
Effective Date: Qualified disaster distributions are permitted if the distribution is made on or after the first day of the incident and within 180 days of 12/20/2019.
Action Steps: These changes are optional, and would only be relevant for plan sponsors with employees who experience losses in federally declared disaster areas. Additional guidance from the IRS is needed.
- 401(k) Loans
Brief Summary: Prior to the SECURE Act, 401(k) plans could permit participant access to a 401(k) loan through the use of a credit card or similar arrangement.
Effective Date: The SECURE Act treats plan loans made in this way as a deemed distribution for any loans made after 12/20/2019.
Action Steps: If your plan permitted loans to be made in this manner, immediate action is required.
Safe Harbor Plans
- Automatic Enrollment
Brief Summary: The safe harbor automatic escalation cap on elective deferrals increases to 15% after the first plan year of participation. The maximum for the first year may not exceed 10%.
Effective Date: This change is effective for plan years beginning after 12/31/2019.
Action Steps: This change is optional, but, if elected, will involve administrative changes, as well as revisions to participant communications and plan documents.
- Nonelective Safe Harbor Plans
Brief Summary:
1. The safe harbor notice requirements no longer apply to nonelective 401(k) safe harbor plans – they are only required for a matching contribution safe harbor plan.
2. A 401(k) plan may become a nonelective 401(k) safe harbor plan if amended more than 30 days before the end of the plan year.
3. A 401(k) plan may become a nonelective 401(k) safe harbor plan if amended to provide for a nonelective contribution of at least 4%, and the amendment is made by the last day for distribution of excess contributions for the plan year.
Effective Date: This change is effective for plan years beginning after 12/31/2019.
Action Steps: These changes are optional, but they may provide some additional planning opportunities for a plan that is failing the ADP test. If these changes are elected, they will involve administrative changes, as well as revisions to participant communications and plan documents.
401(k) Plan Eligibility
- Long-term/Part-time Employee Eligibility
Brief Summary: Employees with at least 500 hours per year for three consecutive years that reach age 21 by the end of the 3rd year will be eligible to make 401(k) deferrals. Note: they may be excluded from nondiscrimination, coverage and top heavy rules. Such employees are not required to be eligible for matching contributions or other employer nonelective contributions. However, for vesting purposes, each 12 month period in which the employee has at least 500 hours of service will count as a year of service. An exception exists for employees under collectively bargained plans.
Effective Date: Although technically effective for plan years beginning after 12/31/2020, since you are not required to count service periods before 01/01/2021, participation for these employees will not begin until the 2024 plan year.
Action Steps: This rule is a required change and will add considerable administrative complexity. Additional guidance is needed from the IRS to ensure proper implementation.
Lifetime Income and Annuities
- Annual Lifetime Income Disclosure
Brief Summary: The SECURE Act requires the DOL to: (1) develop a model lifetime income disclosure, (2) prescribe assumptions that may be used, and (3) issue interim final rules not later than one year after 12/20/2019.
Effective Date: Defined contribution plans will be required to include lifetime income and annuity income estimates in benefit statements within 12 months of the latest of these DOL actions.
Action Steps: No action is required until the DOL provides the necessary guidance.
- Portability of Lifetime Income Investments
Brief Summary: In the past, plans that removed a lifetime income investment option that, for example, triggered a surrender charge on liquidation, created a hardship for participants. This change allows the plan to provide for a qualified distribution if the lifetime income investment option is removed from the plan.
Effective Date: This change is effective for plan years beginning after 12/31/2019.
Action Steps: This is an optional change that only applies to plans with lifetime income investment options. If elected, this change will involve administrative changes, as well as revisions to participant communications and plan documents.
- Fiduciary Safe Harbor
Brief Summary: This change provides a safe harbor for defined contribution plan fiduciaries to ensure that the fiduciary standards are met when selecting an annuity provider. Fiduciary liability concerns regarding the selection of annuity providers were perceived to limit their willingness to offer annuity options. The safe harbor is intended to alleviate those concerns.
Effective Date: This change is effective as of 12/20/2019.
Action Steps: Compliance with the new safe harbor can provide fiduciary protection for defined contribution plan sponsors choosing an annuity provider.
Small Employer Plans
- New Tax Credits for Small Employers
Brief Summary: The SECURE Act increases the tax credit available for small employers (less than 100 employees) for new plan startup costs to the greater of (1) $500, or (2) the lesser of $250 times the number of NHCEs eligible to participate, or $5,000 each year for up to three years. In addition, a small employer that adopts a plan with an auto enrollment feature, or amends an existing plan to add an auto enrollment feature, is eligible for a credit of $500 each year for up to three years.
Effective Date: This change is effective for tax years after 12/31/2019.
Action Steps: This change may encourage small employers to adopt a qualified retirement plan because it can provide a credit of up to $16,500.
- MEPs and PEPs
Brief Summary: Rules governing Multiple Employer Plan (“MEP”) formation will be relaxed – namely, unrelated employers may participate in a “pooled employer plan” (“PEP”), and there will be new procedures to protect against the “one bad apple” problem. The DOL has also been directed to issue revised rules for consolidated Form 5500 filings.
Effective Date: This change is effective for plan years after 12/31/2020.
Action Steps: PEP participation may provide better pricing alternatives for 401(k) plans of smaller employers.
Plan Adoption and Penalties
- Timing for Adoption of New Plan
Brief Summary: This change extends the time for adopting a new qualified retirement plan to the employer’s tax return due date, including extensions. The prior law required a qualified retirement plan to be adopted by the last day of the taxable year.
Effective Date: This change is effective for plans adopted for the 2020 plan year.
Action Steps: This is a significant extension for employers considering the adoption of a new plan.
- Penalties for Late Retirement Plan Filings
Brief Summary: IRS penalties for a late Form 5500 are increasing from $25 per day to $250 per day. The maximum penalty was previously $15,000 and is now $150,000. In addition, the penalty for a late Form 8955-SSA is increasing from $1 per participant per day up to a maximum of $5,000 to $10 per participant per day to a maximum of $10,000.
Effective Date: The increased penalties apply to returns filed after 12/31/2019.
Action Steps: Care should be taken to avoid late filings.
As you can see, this new legislation casts a wide net and offers many significant planning opportunities. The SECURE Act also includes many deadline-sensitive requirements that plan administrators need to address in order to ensure immediate operational compliance. However, along with generating many retirement plan changes, the SECURE Act also raises many questions. We will keep you informed through the KMK Law Employee Benefits and Executive Compensation Monthly Minute as additional guidance is released.
KMK Employee Benefits and Executive Compensation email updates are intended to bring attention to benefits and executive compensation issues and developments in the law and are not intended as legal advice for any particular client or any particular situation. Please consult with counsel of your choice regarding any specific questions you may have.
