The SECURE Act represents the most significant reform of the retirement system since the Pension Protection Act of 2006.
On December 19, 2019, the Senate passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, which contains provisions that significantly reform many of the existing retirement plan rules and regulations. The SECURE Act encourages the adoption of employer-sponsored plans, alters plan distribution rules, eases administrative requirements and makes many other changes to existing or newly established retirement plans. In addition, the Senate eliminated a number of excise taxes under the Patient Protection and Affordable Care Act (ACA), including the controversial “Cadillac Tax,” a 40 percent tax on high-cost employer plans. This Alert will outline the key provisions of the SECURE Act and when those provisions first become effective.
Encouraging Employer-Sponsored Plans
Pooled Employer Plans
The SECURE Act permits unrelated employers to pool their resources by participating in a new type of multiple employer plan. These new “pooled employer plans” will be treated as a single plan, and a procedure will be established to ensure that one employer’s qualification issues do not lead to the disqualification of an entire pooled employer plan. Pooled employer plans will be available for plan years beginning after December 31, 2020.
Increase to Small Employer Plan Startup Credit
The SECURE Act increases the nonrefundable income tax credit for qualified startup costs of adopting a new qualified retirement plan that is available to an eligible employer with 100 or fewer employees to $5,000 for three years. An additional nonrefundable credit (up to $500 for three years) is also available for small employers that establish plans that include automatic enrollment or add automatic enrollment as a feature to an existing plan. Effective for taxable years beginning after December 31, 2019.
Plan Adoption Date
Historically, employers were required to adopt a qualified retirement plan by the final day of their taxable year (i.e., December 31 for a calendar year employer). The SECURE Act allows an employer to adopt a qualified retirement plan after the close of a taxable year, as long as it is adopted before the deadline for filing the employer’s tax return for the taxable year. Effective for plans adopted for taxable years beginning after December 31, 2019.
Lifetime Income Disclosure and Fiduciary Safe Harbor
Lifetime Income Disclosure
The SECURE Act requires employers to provide defined contribution plan participants with an estimate of the amount of monthly annuity income the participant’s balance could produce in retirement. The new lifetime income disclosure must be included on participants’ annual benefit statements. The SECURE Act directs the DOL to issue model lifetime income disclosures and prescribe assumptions that may be used in converting participant account balances to lifetime income stream equivalents. Effective for benefit statements furnished more than 12 months after the latest of the DOL’s publication of (a) an interim final rule or (b) model disclosure or assumptions.
Fiduciary Safe Harbor for Selection of Lifetime Income Provider
The SECURE Act creates a fiduciary safe harbor for employers who opt to include a lifetime income investment option in their defined contribution plan. A fiduciary will be deemed to have satisfied its fiduciary requirements with respect to the financial capability of the insurer if the fiduciary receives certain written representations from the insurer on its status and satisfaction of state insurance laws. Effective immediately upon the SECURE Act’s enactment.
Post-Death Distribution Rules
The SECURE Act changes the post-death required minimum distribution (RMD) rules for nondefined benefit plans to generally require that all distributions after death be made by the end of the 10th calendar year following the year of death. The 10-year distribution requirement generally does not apply if the designated beneficiary is an eligible beneficiary, which is defined as any beneficiary who is a surviving spouse, disabled, chronically ill, not more than 10 years younger than the employee, or a child of the employee who has not reached the age of majority. It is generally effective for distributions by reason of a participant’s death after December 31, 2019 (December 31, 2021, for governmental plans and certain collectively bargained plans).
Increased Required Beginning Date
The SECURE Act increases the age at which RMDs must begin from 70½ to 72. Effective for individuals turning 70½ after December 31, 2019.
Child Birth or Adoption Withdrawals
The SECURE Act permits individuals to take penalty-free withdrawals of up to $5,000 from their qualified defined contribution, 403(b) and governmental 457(b) plans and IRAs for expenses related to the birth or adoption of a child for up to one year following the birth or legal adoption. Effective for distributions after December 31, 2019.
Limits on Loans Through Credit Cards
The SECURE Act prohibits plan loans made through credit cards. Effective immediately upon the SECURE Act’s enactment.
Reduced Minimum Age for In-Service Distributions
The SECURE Act allows in-service distributions under a pension plan or governmental section 457(b) plan at age 59½ (rather than age 62 that was permitted for pension plans or age 70½ that was permitted for 457(b) plans). Effective for plan years beginning after December 31, 2019.
The SECURE Act requires that 401(k) plans permit participation by long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods; however, no employer contributions are required for these employees. This is generally effective for plan years beginning after December 31, 2020, and service prior to 2021 will not be taken into consideration for any determination of eligibility.
Increased Limits on Automatic Enrollment for Qualified Automatic Contribution Arrangements (QACA) Safe Harbor Default Rate
The SECURE Act increases the automatic enrollment safe harbor from 10 percent to 15 percent for default automatic contribution rates. Effective for plan years beginning after December 31, 2019.
Nonelective 401(k) Safe Harbor Changes
A number of changes were made to the rules applicable to nonelective contribution 401(k) safe harbor plans, including: (a) elimination of the safe harbor notice requirement with respect to nonelective 401(k) safe harbor plans, (b) a plan may now be amended to become a nonelective 401(k) safe harbor plan at any date before the 30th day before the close of the plan year; and (c) a plan may now be amended to become a nonelective 401(k) safe harbor plan after the 30th day before the close of the plan year if the plan is amended to provide for a nonelective contribution of at least 4 percent of compensation for all eligible employees and the amendment is made by the last day for distributing excess contributions for the plan year (i.e., generally by the close of the following plan year). Effective for plan years beginning after December 31, 2019.
Consolidation of Form 5500 Reporting
The SECURE Act provides that all members of a “group of plans” may file a consolidated Form 5500. A group of plans will be eligible for a consolidated form if all the plans in the group: (a) are defined contribution plans; (b) have the same trustee, the same named fiduciary(ies) and the same administrator; (c) use the same plan year; and (d) provide the same investments or investment options to participants. Effective for plan years beginning after December 31, 2021.
Increased Penalties for Failure to File
The SECURE Act increases a number of the penalties under the Internal Revenue Code, including: (a) increased penalty for failing to file a Form 5500 of $250 per day, but not to exceed $150,000; (b) increased penalty for failing to provide a required withholding notice of $100 per day, but not to exceed $50,000 maximum in penalties per year; and (c) increased penalties for failing to file a registration statement for deferred vested benefits or file a notification of change, generally of $10 per day (but not to exceed $50,000 and $10,000, respectively). Effective for returns due after December 31, 2019.
Remedial Amendment Period
The SECURE Act provides a special remedial amendment period for its provisions that will expire no earlier than the end of the 2022 plan year (2024 for governmental and collectively bargained plans).
Other Provisions Affecting Specific Plans
Repeal of Maximum Age for Traditional IRA Contributions/Deductions
The SECURE Act repeals the prohibition on contributions (and deductions) to a traditional IRA for individuals who have attained age 70½ by the end of a year. Effective for contributions made for taxable years beginning after December 31, 2019.
Treatment of 403(b) Custodial Accounts upon Plan Termination
The SECURE Act provides that if an employer terminates a 403(b) plan, the account can be distributed “in kind” to a participant. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out, subject to compliance with the 403(b) rules in effect at the time that the individual custodial account is established. This is retroactively effective for plan years beginning after December 31, 2008.
Repeal of ACA Taxes
Repeal of Medical Device Excise Tax
The SECURE Act fully repeals the ACA medical device excise tax of 2.3 percent on the value of medical devices sold domestically. This tax went into effect in 2013 but was suspended by Congress twice, and was not in effect during the period beginning on January 1, 2016, through December 31, 2019. Effective for sales after 2019.
Repeal of Excise Tax on High Cost Employer-Sponsored Health Coverage
The SECURE Act repeals the controversial ACA excise tax of 40 percent on high-cost employer medical plans, commonly referred to as the “Cadillac Tax.” The Cadillac Tax was intended to curtail the preferred treatment of health plans and reduce excess health spending. Originally scheduled to become effective in 2018, the Cadillac Tax was delayed numerous times before finally being repealed entirely by the SECURE Act. Effective for taxable years beginning after 2019.
The SECURE Act represents the most significant reform of the retirement system since the Pension Protection Act of 2006 and provides employers with a number of opportunities to enhance the retirement savings of their employees. The SECURE Act will encourage employers to further consider the offering of lifetime income options within their defined contribution plans and will allow participants to continue to defer their accounts for a longer period of time following retirement. In addition, employers will need to ensure that the new disclosures rules for lifetime income payments are satisfied and that the tenure of part-time employees who are not eligible to participant in an employer’s 401(k) plan are monitored to determine if they have satisfied the SECURE Act’s rules to become eligible to defer compensation.