At the end of December, 2019, the “Setting Every Community Up for Retirement Enhancement Act of 2019” or “SECURE Act” was enacted, making wide-sweeping changes to the employee benefits world. Some provisions take effect immediately; others have delayed effective dates. Some provisions are mandatory; others give employers choices. This summary is intended to briefly describe the key provisions of the SECURE Act that may affect employers and their employee benefit plans. Many provisions need additional guidance from the IRS before employers can fully understand the changes.

Effective Immediately, or January 1, 2020 – Employer Action Now

Plan loans through credit cards are prohibited

  • Qualified retirement plans making loans to participants are not allowed to make those loans using credit cards or any similar arrangement.
  • Effective – for loans made after December 20, 2019.
  • Required.

In-service plan withdrawals for birth or adoption

  • Within 1 year of a birth or adoption, a participant in a qualified retirement plan can take a withdrawal of up to $5,000 without incurring the 10% early distribution penalty.
  • Participants are able to repay the withdrawal amount to the plan and have the repayments treated as rollover contributions (but repayment terms are unknown until guidance is issued).
  • Effective – for withdrawals made on or after January 1, 2020.
  • Optional – if desired, the employer must amend the plan to permit this.

Starting age for required minimum distributions postponed to age 72

  • The age after which participants (other than non-owners who remain actively employed) must commence distributions from a qualified retirement plan is delayed from age 70-1/2 to 72.
  • Effective – for distributions on or after January 1, 2020 taken by individuals who attain age 70-1/2 on or after January 1, 2020 (birthdays on or after July 1, 1949).
  • Required. Old rules remain in effect for individuals with birthdays before July 1, 1949.

Reduced period to pay required distributions to beneficiaries

  • Upon the death of a qualified retirement plan participant, beneficiaries other than “eligible designated beneficiaries” must be paid all benefits within 5 years; the current 10-year payout still applies to a spouse, minor child, disabled person, chronically ill person or person who is not more than 10 years younger than the participant.
  • Effective - for death benefits due as a result of participants who die on or after January 1, 2020, with later effective dates for collectively bargained plans and governmental plans.
  • Required.

Effective Immediately, or January 1, 2020 – Employer Consideration

401(k) Plan – automatic enrollment safe harbor limit increased

  • Increased the maximum automatic enrollment deferral rate from 10% to 15% overall, and 10% in the first year.
  • Effective - for plan years beginning on or after January 1, 2020.
  • Optional – an employer does not have to increase its plan’s maximum percentage for automatic enrollments.
  • Note that the minimum deferral rates for auto-enrollment increases of 3%, 4%, 5% and 6% over the first 4 plan years remain unchanged.

401(k) Plan – safe harbor election can be made late in the year

  • An employer can elect to make safe harbor nonelective employer contributions up to 30 days before the end of the plan year and the plan will be a safe harbor plan for the entire year.
  • An employer can elect to make safe harbor nonelective employer contributions after the end of a plan year if the contribution is at least 4% rather than 3%.
  • Employers making safe harbor nonelective employer contributions no longer need to provide a safe harbor notice to participants.
  • Effective - for plan years beginning on or after January 1, 2020.
  • Optional – employers may choose whether to seek safe harbor status or not.

Small employer tax credits for adopting a new qualified retirement plan

  • Employers with 10 or fewer employees may qualify for a tax credit of up to $5,000 for each of their first 3 years for starting a new qualified retirement plan and an additional tax credit of up to $500 for each of their first 3 years for starting automatic enrollment.
  • Effective – for taxable years beginning on or after January 1, 2020.
  • Optional – small employers are not required to offer any qualified retirement plan or, if they do, are not required to include automatic enrollment provisions.

Retroactive effect for adoption of new plan

  • An employer that adopts a new 401(k) or other defined contribution plan by the date for filing the employer’s tax return with respect to a taxable year, can treat the plan as if it had been adopted as of the last day of that taxable year.
  • Effective – for taxable years beginning on or after January 1, 2020.
  • Optional.

Nondiscrimination rules eased on closed defined benefit plans

  • For defined benefit plans in which a class of participants was closed before April 5, 2017, there will be no violation of the benefits, rights and features nondiscrimination rules for any plan year after the close so long as the plan met those rules for the 2 years preceding the close.
  • New rules also allow closed plans to be aggregated with defined contribution plans for purposes of passing the nondiscrimination rules.
  • Effective - December 20, 2019, with some exceptions (including an employer’s ability to elect to apply the new rules to plan years after 2013).
  • Optional - as a chosen method of compliance.

Increased reporting penalties

  • Late filing of Form 5500 - penalty increases from $25/day to $250/day, capped at $150,000 for any one late return.
  • Late filing of Form 8955-SSA - penalty increases from $1/day to $10/day per unreported participant, capped at $50,000.
  • Effective - for returns or filings due after December 31, 2019.
  • Required.

Repeal of certain taxes

  • “Cadillac tax” on high cost employer-provided health plans is fully repealed immediately (this is before the 40% excise tax has ever come into effect).
  • UBIT tax for nonprofit entities on employee transportation fringe benefits, (such as employer-paid parking (part of the 2017 Tax Cuts and Jobs Act) is repealed.
  • Effective – transportation fringe benefit tax was repealed retroactively, allowing nonprofits to amend their Form 990s, if applicable.

Effective for 2021 – Employer action in the future

401(k) Plan – plans must allow participation of part-time employees

  • A 401(k) plan must allow part-time employees’ eligibility to participate if they are credited with at least 500 hours of service during each of 3 consecutive 12-month periods (referred to as long-term part-time employees).
  • The employer is not required to make matching or nonelective contributions for long-term part-time employees.
  • Long-term part-time employees are not required to be included in coverage or non-discrimination testing.
  • If the employer makes matching or nonelective contributions for long-term part-time employees, vesting must be counted where the employee has at least 500 hours in a 12-month period.
  • Effective – for plan years beginning on or after January 1, 2021 (with service crediting periods starting no earlier than January 1, 2021).
  • Required for long-term part-time participation; employer contributions for long-term part-time are optional.

New Multiple Employer Plans Permitted for Unrelated Employers

  • A “pooled plan provider” (PPP) registered with the IRS may serve as a fiduciary and aggregate unrelated employers under a single plan, with each employer treated as a plan sponsor with respect to its employees and as a fiduciary in the selection of the PPP and, in some cases, the investment options. This arrangement is generally referred to as an “Open MEP.”
  • Effective - for plan years beginning on or after January 1, 2021.
  • Optional.

Later than 2021 or Indeterminate Effective Dates

Group filing of single Form 5500 for defined contribution plans

  • Plans with common trustees, administrators, named fiduciaries, plan years and same investments or investment options may file a single Form 5500 covering all such plans (this can allow employers to make one consolidated filing if they sponsor more than one plan.)
  • Effective – for returns and reports filed for plan years beginning on or after January 1, 2022.
  • Optional.

Benefit statements to include lifetime income disclosure

  • Individual account plans (401(k), etc.) must at least annually provide participants with a lifetime income disclosure that is to be based on a model to be provided by the Department of Labor (DOL).
  • The plan fiduciary or sponsor will have no liability if they comply with the DOL rules and assumptions in the disclosure.
  • Effective – 12 months after the latest of the DOL issuance of assumptions, model notice or interim final rules (estimated – 2021 or 2022.)
  • Required.

Fiduciary safe harbor for selecting annuity provider

  • A plan fiduciary that engages in an objective, thorough and analytical selection process for an insurer to provide individual annuities to participants will not be liable for losses that occur after distribution of the annuity or due to the insurer’s inability to satisfy the financial terms of the annuity.
  • In considering the financial capability of the insurer, the plan fiduciary may receive written representations from the insurer. There is no requirement to select the lowest cost provider.
  • Effective – not specified.
  • Optional - there is no requirement that a fiduciary seek to qualify under the safe harbor.

Deadline for Amendments

Employers and plan sponsors will have until the last day of the first plan year beginning on or after January 2022 (i.e., by December 31, 2022 for a calendar year plan) to amend their plans to comply with the SECURE Act’s required provisions and they may operate their plans in accordance with optional provisions as long as plan amendments are made by the same deadline. Collectively bargained and governmental plans have an additional two years to comply - until 2024.

Employers should start working with their legal advisors and benefits consultants to consider the changes made by the SECURE Act and develop their own employee benefit action plans. This decision-making process should include a review of plan documents and exploration of how the specific changes may impact the employer’s particular benefits program and related costs.