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SECURE Act crosses finish line

Health and Benefits|Retirement
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By Precious Abraham , Ann Marie Breheny , Stephen Douglas , Bill Kalten and Maria Sarli | December 30, 2019

The SECURE Act brings significant changes for retirement plans as it aims to expand plan sponsorship and increase retirement savings.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act and other retirement provisions were included as part of the Further Consolidated Appropriations Act, 2020, a tax and appropriations legislative package enacted at the end of 2019. The new law includes significant changes for retirement plans, offering employers new plan sponsorship options and opportunities to help their employees save for retirement, as well as changes that require quick attention to determine needed compliance actions.  

SECURE Act provisions

The SECURE Act is a broad retirement security bill with provisions intended to expand plan sponsorship, increase retirement savings and ease some plan administration burdens. The House approved the legislation in May 2019 by a vote of 417 to 3. Following is a brief summary of the provisions.

Authorize open MEPs and address the “one-bad-apple” rule. The SECURE Act authorizes “open” multiple employer plans (MEPs). Beginning in 2021, unrelated employers may offer defined contribution (DC) plans to their employees using a pooled plan provider. The SECURE Act provides broader open MEP authority than the guidance issued by the Department of Labor earlier this year. In addition, the SECURE Act will provide relief from the one-bad-apple rule so that the entire MEP would not be disqualified if one employer fails to comply with the qualification requirements.

Lifetime income provisions. Several provisions are intended to encourage lifetime income in DC plans. The act provides a fiduciary safe harbor for selecting an annuity provider, establishes procedures to allow portability of lifetime income investment options and requires plan sponsors to disclose the lifetime income stream participants would receive from their retirement savings. 

Retirement plan access for long-term, part-time employees. Long-term, part-time employees will have access to their employer’s 401(k) retirement saving plans. Employees who work at least 500 hours per year for three consecutive years would be eligible to make contributions. Employers would not be required to make matching contributions, and contributions made by eligible part-time employees would not need to be taken into account for purposes of top-heavy or nondiscrimination testing. The requirement does not apply to collectively bargained plans. The provision would apply for plan years beginning after December 31, 2020; however, 12-month periods before January 1, 2021, do not count in determining whether an employee has met the requirement to work 500 hours for three consecutive years.

Age increase for minimum required distributions. The act will increase the age for minimum required distributions to 72 for individuals who are younger than 70½ on December 31, 2019, and take distributions in 2020 or later. This change will not apply for anyone who reaches age 70½ before January 1, 2020. The act does not modify the requirement for DB plans to actuarially adjust the accrued benefit of employees who retire in calendar years that begin after they reach age 70½.

Deferral limit under automatic enrollment arrangements. The deferral limit for those enrolled under an automatic enrollment safe harbor 401(k) plan will increase to 15% after the individual’s first year of participation. The current 10% limitation will continue to apply during the first year the individual is enrolled in the plan.

Nonelective safe harbor 401(k) plans. Employers that sponsor nonelective contribution safe harbor 401(k) plans will no longer have to provide the required annual notice. Also, a plan may be amended to become a nonelective safe harbor plan at any time before the 30th day before the end of the plan year, or, alternatively, after the 30th day before the close of the plan year but before the date on which excess contributions must be distributed if the plan provides a 4% nonelective contribution.

Nondiscrimination testing and minimum participation relief for closed or frozen DB plans. The SECURE Act provides nondiscrimination testing relief for closed defined benefit (DB) plans that meet certain requirements. In general, plans eligible for the relief would have more flexibility to aggregate with DC plans to test on a benefits basis and generally be treated as meeting the benefits, rights and features test. The provisions also provide relief from the minimum participation rule for closed and frozen DB plans. The provisions take effect upon enactment, and plan sponsors have the option to apply the relief for plan years beginning after December 31, 2013.

Other provisions in the SECURE Act will:

  • Reduce Pension Benefit Guaranty Corporation premiums for cooperative and small employer charity plans
  • Require amounts inherited from individual retirement accounts (IRAs) and DC plans to be paid out within 10 years, unless the beneficiary meets certain criteria
  • Extend the time for employers to adopt a plan for the year 
  • Allow penalty-free, repayable distributions upon the birth or adoption of a child 
  • Treat certain “difficulty of care” foster care payments as taxable income for purposes of retirement plan or IRA contributions
  • Increase maximum age for contributing to a traditional IRA, and treat taxable stipend, fellowship or similar payments as IRA-eligible income 
  • Increase the penalties for failure to file retirement plan returns and tax returns
  • Clarify the treatment of 403(b) custodial accounts following termination of the plan
  • Clarify the retirement income account rules for church-controlled organizations
  • Provide funding relief for qualifying community newspapers

The SECURE Act expands section 529 educational savings plans, including a provision that allows repayment of student loans. It also addresses the tax treatment of certain benefits provided to volunteer firefighters and emergency medical responders. 

Other retirement provisions included

The retirement provisions in the Further Consolidated Appropriations Act are not limited to the SECURE Act. The appropriations act also reduces the age for in-service distributions from DB plans and governmental 457(b) plans to 59½ for plan years beginning after December 31, 2019. 

The legislation also provides tax relief for individuals affected by qualifying natural disasters. Among other provisions, the disaster relief increases the plan loan limit. Also, individuals affected by qualifying disasters could take penalty-free withdrawals from their retirement savings plans, spread the income inclusion from such distributions over three years and repay the distributions within three years. 

Going forward

Effective dates in the SECURE Act vary, with several provisions applying on a retroactive basis and some provisions taking effect upon enactment or in 2020. Plan sponsors should review the effective dates and determine whether any immediate action is needed. A remedial amendment period is included in the SECURE Act, so employers will have a transition period until the end of the 2022 plan year to adopt any necessary plan amendments.

Authors

Precious Abraham

Ann Marie Breheny
Senior Legislative Advisor

Senior Director, Retirement and Executive Compensation

Bill Kalten
Senior Director, Retirement and Executive Compensation

U.S. Retirement Resource Actuary

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