After being on the verge of enactment last spring but failing to pass, the SECURE Act is now law. The Setting Every Community Up for Retirement Enhancement Act of 2019 – the SECURE Act – was enacted on December 20, 2019 as part of the Further Consolidated Appropriations Act, 2020.
Although this legislation is considered major retirement plan legislation, it doesn’t have immediate impacts on most employer retirement plans. Plan sponsors need to pay attention to the following items – for the most part, the other changes (such as pooled employer plan opportunities and annuity payouts) do not require immediate action.
- Required beginning date for required minimum distributions: The required beginning date – the date that participants must begin receiving a portion of their benefits and be taxed on them – changed from age 70-1/2 to age 72. This is effective for individuals who attain age 70-1/2 after December 31, 2019. Individuals who turned age 70-1/2 before then must still take required minimum distributions (including distributions that would have to be taken for the first time on April 1, 2020).
- Update plan document and Summary Plan Description (SPD) – you have some time to make plan amendments, but you may want to update the SPD as well as other plan communications sooner
- Confirm with TPA/recordkeeper that they are administering this rule – including reporting of eligible rollover/withholding portion on tax forms (required minimum distributions are not eligible for rollover) and updating their distribution (402(f)) notices to reflect this change.
- Elimination of “stretch” beneficiary payouts: The “stretch IRA” was eliminated for the beneficiaries of participants who die after December 31, 2019. This means that payouts upon death can no longer be made to a beneficiary over the beneficiary’s lifetime; instead, the payouts would have to be made over 10 or fewer years (and still would have to commence within one year of death, as provided under the plan). The 10-year rule does not apply to the following classes of beneficiaries: the surviving spouse, a child under the age of majority, disabled or chronically ill beneficiaries, or any other person who is not more than 10 years younger than the participant.
- Update plan and SPD if necessary.
- Confirm with TPA/recordkeeper that they are administering this rule and have updated notices.
- Eligibility changes for part-time employees in 401(k) plans. If your 401(k) plan excludes part-time employees from participation until they have one year of service, you will need to start changing the way that you count the service towards eligibility. The new law will require that the plan allow them to participate once they meet either the 1,000 hour/one year of service rule or a new method of three consecutive years of service where the employee completes at least 500 hours of service. Since it will take three years to qualify for this and the counting starts in 2021, the first possible year of eligibility will be 2024. This rule only applies to elective deferrals; you can still require a year of eligibility service for employer contributions.
- If your plan has any requirements for one year of service, consider whether you want to comply with the new rule beginning in 2021 or whether you want to eliminate the requirement. For example, if your plan currently has a 1,000-hour requirement for temporary employees, you could consider allowing them to have immediately eligibility instead of having to track their hours.
- If you need to comply with the new rule, be prepared record hours beginning in 2021.
- Credit cards cannot be used for plan loans. It’s unlikely that employers are still doing this – but in case they are, they need to stop allowing plan loans to be made through the use of a credit card.
- Lifetime income disclosure on statements. The new law will require that 401(k) plan statements include a lifetime income disclosure at least once in a 12-month period. The disclosure will illustrate the amount of monthly payments the participant would receive if the benefit were used to provide lifetime income through an annuity. Fiduciaries cannot be held liable for reliance upon the disclosure, provided that the disclosure meets applicable rules (e.g., interest assumptions). The disclosure requirement won’t take effect until at least 12 months after the Department of Labor issues guidance on the rules and a model disclosure. They are supposed to do that within one year of the law’s enactment.
- There is nothing to do on this right now. Once there is guidance, the recordkeeper will need to update statements accordingly.
- No notice required for safe harbor plans with nonelective contributions. If your safe harbor plan meets the safe harbor by providing a nonelective contribution (i.e., one where the employer makes a contribution regardless of employee contribution), you will no longer have to provide the annual safe harbor notice prior to the beginning of each plan year.
- Optional provisions. There are several law changes that may be attractive for plan sponsors to add to their plans now, although they are not required. Sponsors would need to confirm that their service providers can administer these changes:
- Increase in cap on safe harbor automatic enrollment percentage. Previously, automatic enrollment plans that are also safe harbor plans were subject to a 10% cap on the automatic enrollment percentage and automatic escalation percentage. Effective January 1, 2020, the cap was increased to 15%.
- In-service withdrawal for birth or adoption expenses. This provision would allow participants to withdraw up to $5,000 for qualified birth or adoption without the 10% early withdrawal penalty. The participant would have the right to repay the distribution to the plan. There are still some questions such as whether the right to repay would have a time limit; future guidance is needed which may clarify this and other issues.
- In-service distributions at age 59-1/2 from pension plans and governmental 457(b) plans.Prior to this change, pension plans could allow in-service distributions (i.e., distributions prior to termination of employment) before age 62, and governmental 457(b) plans couldn’t allow them until age 70-1/2. The law now allows pension plans and governmental 457(b) plans to make participant in-service distributions as earlier as age 59-1/2 (the same as 401(k) plans can do now).
Plan sponsors generally have until the end of 2022 to adopt plan amendments for the required changes, but plan administration must change now as noted.