SECURE Act Becomes Law with Significant Impact on Retirement Savings
Published February 20, 2020
On December 20, 2019, The Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”) was signed into law becoming the most sweeping legislation affecting retirement savings since the Pension Protection Act of 2006. Many of the law changes are effective immediately while others do not become effective until later dates. Generally, plan sponsors have two years to adopt amendments to update their plan document for required changes; however, for optional changes to be implemented, the plan must be amended prior to the end of the plan year in which the optional changes became effective.
Following is a summary of the SECURE Act’s major changes affecting retirement plans and their effective dates.
- Required participation of long- term, part-time employees: The Act requires plans to cover long-term part-time employees who have not satisfied the plan’s eligibility requirements if the employee has completed three consecutive 12-month periods of employment and was credited with at least 500 hours of service in each of those periods. No employer contribution (including top-heavy minimum contributions) would be required until the employee has satisfied the plan’s normal eligibility requirements. 12-month periods of service before Jan. 1, 2021 need not be counted, which will further delay the date by which a part-time employee would first enter the plan. Effective for plan years beginning after December 31, 2020.
- Rules related to election of safe harbor 401(k) status: The requirement to distribute a safe harbor notice 30 days before each plan year begins to eligible employees is removed if the plan relies on a 3% non-elective contribution (i.e. no matching contributions). The Act also permits plan sponsors to adopt safe harbor status for the 3% non-elective option at any time prior to the 30th day before the close of the plan year (this option is not available for safe harbor matching contribution plans). Amendments after that date would be allowed if a non-elective contribution of at least 4% of compensation is contributed for eligible employees for the plan year and the plan is amended no later than the last day of the following plan year. This flexibility would give employers the option to correct a failed actual deferral percentage (ADP) and/or actual contribution percentage (ACP) test, as well as the top-heavy test by making a 4% safe harbor non-elective contribution after the fact. Effective for plan years beginning after December 31, 2019.
- Increase in 10% cap for automatic enrollment QACA safe harbor plan after first plan year: the Act increases the automatic enrollment safe harbor elective deferral limit cap from 10% of pay to 15% (first year of participation limit cannot exceed 10%). The minimum thresholds of 3% to 6% are unchanged. This provision, if adopted by employers, will require their documents to outline the higher cap in the plan document. Effective for plan years beginning after December 31, 2019.
- Repeal of maximum age for traditional IRA contributions: The Act eliminates the restriction on contributions to a traditional IRA by an individual who has attained age 70 1/2. This provision puts traditional IRAs on par with Roth IRAs, which do not have an age limitation. Effective for tax years after December 31, 2019.
- Penalty-free withdrawals for individuals in case of birth or adoption: The Act provides a new exemption from the 10% early withdrawal penalty for retirement plan distributions taken prior to age 59 1/2 to cover the cost of childbirth or adoption expenses up to $5,000 if made during the first year period beginning on the date on which a child of the individual is born or on which the legal adoption is finalized. The Act also allows the repayment of such expenses to the retirement account. Effective for plan years beginning after December 31, 2019.
- Increase in age for Required Minimum Distributions (RMDs): Due to an increase in life expectancy, the Act adjusts the required minimum distribution age from 70 1/2 to 72. This provision applies only to individuals who attain age 70 1/2 after Dec. 31. Thus, individuals who have reached age 70 1/2 during 2019 or in a prior year do not benefit from this change. Effective for distributions made after December 31, 2019.
- Decrease in age to receive in-service distributions from pension and governmental (457(b)) plans: The Act reduces the age required to obtain in-service distributions from age 62 to age 59 1/2. Effective for plan years beginning after December 31, 2019.
ADMINISTRATIVE AND OTHER CHANGES:
- Increased start-up credit for small employer plans: The maximum credit for start-up expenses paid or incurred in connection with establishing or administering a new eligible retirement plan for employers with 100 or fewer employees increased from $500 to $5,000 for three years (maximum total credit of $15,000). An additional $500 credit would apply to eligible employer plans with an automatic enrollment feature (maximum credit of $1,500). Effective for plan years beginning after December 31, 2019.
- Plan adopted by filing due date for year may be treated as in effect as of close of year: The Act allows plan sponsors to adopt a qualified retirement plan after the close of a taxable year as long as the plan is adopted before the plan sponsor’s tax return filing deadline. Effective for tax years beginning after December 31, 2019.
- Fiduciary safe harbor for selection of lifetime income provider: To encourage plan sponsors to provide lifetime income options, the Act creates a new fiduciary safe harbor for plan sponsors that include a lifetime income investment option. A fiduciary is deemed to have satisfied its fiduciary duties with respect to the selection of insurers for a guaranteed retirement income contract if the fiduciary receives certain written representations from the insurer. It also provides for portability of annuity or lifetime income options via a direct trustee- to-trustee transfer to another employer-sponsored retirement plan or IRA if a lifetime income investment is no longer authorized to be held as an investment option under the plan. Effective date of December 20, 2019.
- Multiple Employer Plans/Pooled Employer Plans: The Act allows two or more unrelated employers to join a pooled employer plan (PEP). This is a brand-new multiple employer plan (MEP) that has been promoted as a way smaller employers can pool together to participate in a single plan to save administrative costs. The Act also eliminates the notorious “one bad apple rule,” a rule under which a failure by one employer (or the plan itself) to satisfy an applicable plan requirement will result in the disqualification of the MEP for all employers maintaining the plan. Effective for plan years beginning after December 31, 2020.
- Combined annual report for group of plans: The Act directs the IRS and DOL to provide for filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, fiduciary, (or named fiduciaries), and plan administrator, using the identical plan year and investments (or investment options) to participants and beneficiaries. Effective for plan years beginning after December 31, 2021.
- Increased penalties for failure to file retirement plan returns: The Act significantly increases the failure to file penalties for retirement plan returns. The Form 5500 penalty would be modified from $25 per day to $250 per day, not to exceed from $15,000 to $150,000. Failure to file a registration statement would incur a penalty of $10 per participant per day, not to exceed $50,000. Failure to file a required notification of change would incur a penalty of $10 per day, not to exceed $10,000 for any failure. Failure to provide a required withholding notice incurs a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. Effective for returns, statements, notices required to be filed or provided after December 31, 2019.
If you have questions or would like additional information regarding the impact of these or other provisions of the SECURE Act, please contact Patti Smith or any member of your MCM service team.