On December 20, 2019, the President signed into law the “Setting Every Community Up for Retirement Enhancement Act of 2019” (the “SECURE Act”).
The SECURE Act contains several significant provisions affecting sponsors, administrators, participants and beneficiaries of IRAs, pension, profit sharing and 401(k) plans:
- The age when “required minimum distributions” (RMDs) from these plans must begin has been raised from 70 ½ to 72.
- Under the SECURE Act, a beneficiary of an inherited IRA or 401(k) must receive the entire balance of the account by the end of the tenth year following the death of the IRA owner or plan participant. Previously, an inherited IRA could be “stretched” over the life expectancy of the beneficiary with RMDs being required to be withdrawn annually based on IRS life expectancy tables. The SECURE Act does not require annual withdrawals so the entire account can be withdrawn in a lump sum at the end of the tenth year. The new rules do not apply to a surviving spouse, a minor child of the participant (until such child reaches the age of majority), or a disabled or chronically ill beneficiary.
- There is no longer a maximum age for contributions to traditional IRAs (i.e., non-Roth IRAs). Previously, contributions could not be made by individuals over the age of 70 ½.
- Defined contribution plans would be required to allow long-term part-time employees, defined as employees over the age of 21 who worked more than 500 hours for three consecutive years, to participate.
- Retirement plans may allow penalty-free withdrawals of up to $5,000 during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. The amount distributed may be repaid.
As a result of these changes, individuals should review their current retirement plan beneficiary designations and the terms of any trusts named as beneficiaries of retirement accounts (particularly any trusts established for minors) to confirm the effects of the SECURE Act on their retirement and estate planning choices.
Upon enactment, the SECURE Act authorizes a new kind of qualified multiple employer plan called a Pooled Employer Plan (PEP). PEPs are pooled individual account plans intended to provide benefits to employees of two or more unrelated employers. PEPs will be required to be administered by a Pooled Plan Provider (PPP), presumably a bank or investment firm, acting as a fiduciary subject to the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC). Under the SECURE Act, employers’ potential liability would be limited only to their own employees and not to those of any other employers or the PPP. Thus, the SECURE Act would encourage PPPs to offer programs to small and mid-sized employers which would enable them to pool investments and share administration costs of individual retirement accounts (IRAs) for their employees, thereby reducing costs and making plans more attractive to such employers.
In another field, the SECURE Act seeks to make lifetime income contracts (such as annuities and guaranteed investment contract) of insurers more attractive to administrators of qualified retirement plans by including provisions, among others, adding to their portability. The portability provisions include (1) qualified distributions of a lifetime income investment, or (2) distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract. The SECURE Act also provides for annual lifetime income stream disclosures and limitations of liability for fiduciaries, plan sponsors and others who provide lifetime income stream equivalents derived in accordance with assumptions and rules pursuant to the SECURE Act. The SECURE Act further shields a fiduciary from liability for the selection of an insurer for a guaranteed retirement income contract if the fiduciary engages in an objective, thorough, and analytical search to identify insurers from which to purchase such contracts including the financial capability of the insurer, cost and other factors. Previously, an employer faced potential liability whenever an insurer failed. The SECURE Act contains a provision that a fiduciary is not required to select the lowest cost contract and allows a fiduciary to consider other factors including features and benefits of the contract and attributes of the insurer such as financial strength.