Over the past few years, the retirement plan industry has closely watched the progress and evolution of legislation designed to incentivize retirement plan creation and increase plan accessibility with the ultimate goal of helping American workers boost their chances of a secure retirement through tax-advantaged accounts.
The “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) legislation is the biggest overhaul of the industry since the Pension Protection Act of 2006, and changes will likely affect all retirees. After years of attempts to pass reforms, in late December, President Trump signed the SECURE Act into law. The goal of the new law is to make it easier for employers to help full- and part-time employees save through workplace retirement plans, ultimately helping prevent Americans from outliving their assets.
The SECURE Act was one of multiple bills in the Further Consolidated Appropriations Act, 2020 (FCAA). The passage of the Act should allow Congress to work on other important retirement issues in the coming year. Other provisions in the FCAA, though not part of the SECURE Act, will impact employer plans (for example, Division M, the Bipartisan Miners Act, lowers the age of in-service distributions to 59 ½ instead of 62). Specifically, the SECURE Act creates and modifies incentives for employers to establish retirement plans, improve plan administration, simplify rules, and even preserve retirement income. Below, please find a high-level overview of some of the SECURE Act’s significant provisions:
Significant changes for plan sponsors to consider
- Annuity selection safe harbor – to encourage plans to offer annuity options, the law provides a safe harbor to plan fiduciaries. The plan fiduciary may now offer a lifetime income distribution option under a plan and satisfy ERISA’s “prudent man rule.”
- Lifetime income portability – the law provides for the portability of lifetime income options should they be eliminated from the plan. Specifically, the SECURE Act would allow the investment to be transferred to another plan or IRA.
- Higher cap on deferrals in safe harbor 401(k) plans – the law increases the qualified automatic contribution arrangements cap from 10% to 15%.
- Lifetime income disclosure – the law requires defined contribution plans to annually provide a projection of the lifetime income stream that a participant’s accrued benefit could generate. This projection should better help participants understand their potential monthly income without generating an additional liability for the employer.
- Participation by less than full-time employees – the law requires employers to make part-time employees eligible for plan participation. The law is designed to increase the number of retirement plan participants by adding the ability for long-term, part-time employees to make deferrals by increasing the number of employees who can contribute to their employer’s retirement plan. However, the employer is not required to make matching contributions and may exclude these employees from both top-heavy and non-discrimination testing purposes.
- Higher penalties for plan reporting failures – penalties have now been increased and are designed to discourage the failure of information reporting by retirement plans.
- Delayed age for beginning RMDs – the law allows RMDs to begin in the year an individual turns 72, rather than the year they turn 70 ½.
- Birth/adoption excise tax exception – the law provides the ability to withdraw up to $5,000 from retirement accounts for eligible expenses related to the adoption and birth of a child. However, income taxes will be applied to those withdrawals.
Additional provisions impacting plans
- Multiple employer plans (MEPs) – one of the most significant parts of the legislation is the authorization of MEP arrangements, allowing employers to group together to collectively sponsor a retirement plan. The goal is to reduce costs for both employers and participants with economies of scale. Further, the SECURE Act addresses the “one-bad-apple-rule,” eliminating concerns about one employer violating the tax qualification requirement and disqualifying the entire MEP. A non-compliant employer would instead be separated into a distinct plan. This provision could take some time to unfold, but may be one of the most significant influences on the creation of new retirement accounts.
- Small employer plan startup credit – small employers may benefit from an increase to the retirement plan start-up credit, which increases the tax credit from $500 to a maximum of $5,000 per year for three years. This is designed to increase the formation of new retirement plans.
- Deadline to establish a plan – smaller employers may now be able to establish a plan as late as their business tax filing deadline, including extensions. This increases the time from the previous requirement of the last day of the business year.
- Automatic enrollment credit – the law creates a tax credit for smaller employers who implement automatic enrollment. The credit, which provides up to $500 per year for three years of the plan, is designed to help boost employee participation.
- Election of 401(k) non-elective safe harbor design – instead of matching contributions, employers that make a non-elective safe harbor contribution are permitted more time to amend plans and avoid the notice requirement.
- Shared form 5500 filing – the law permits for employer-sponsored defined contribution plans with enough similarities to file a common Form 5500.
- Credit card loan prohibition – retirement plan loans facilitated via a credit card (or similar vehicle) will be subject to taxation.
- Pension plans of cooperatives and charities – the Act provides the ability for some cooperatives and charities to reduce the PBGC insurance premiums associated with their defined benefit plans.
- More eligible expenses for 529 plans – the SECURE Act broadens the eligible expenses for 529 plans. Certain apprenticeships and repayments of loans (for yourself or a sibling) are now eligible expenses covered by 529 plans.
- Traditional IRA contributions at any age – the law provides the ability for IRA owners to make deductible contributions beyond age 70 ½.
- More rapid payouts – the Act requires that inherited retirement account balances be distributed more rapidly — generally within ten years — to non-spouse and other beneficiaries.
- Disaster relief provisions – the law provides individuals suffering from disasters to qualify for distributions up to $100,000 per disaster, with exemption from the 10% early distribution provision and normal withholding requirements. For repayment, individuals generally may repay within three years. Further, disaster victims may be able to request a loan up to $100,000 while delaying loan repayments for up to a year.
Most provisions of the SECURE Act are effective as of January 1, 2020, allowing employers to implement changes immediately. However, some changes may not need to be implemented until 2022, or even 2024 for some collectively bargained and governmental plans. Many of these provisions are significant and will need to be examined and studied to determine the extent of their effects.
Please contact your consultant if you would like to talk about how the SECURE Act may affect your plan. We expect the Department of Labor (DOL) and the Internal Revenue Service (IRS) to address concerns as employers begin to navigate and implement these changes. It may be prudent to wait to implement major changes until additional guidance is provided by both the IRS and the DOL. Additionally, due dates may ultimately change.
* This a high-level overview of the SECURE Act. Many provisions, including limitations and clarifications, may not by effective as of the date of enactment. Please confer with your consultant and/or attorney to comply with the new law.
IMPORTANT DISCLOSURES: These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—Arnerich Massena cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.