On Friday, December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Act of 2019 (the “SECURE Act”) as part of a spending bill to fund the government through September 30, 2020 (H.R. 1865, the “Further Consolidated Appropriations Act of 2020”). The SECURE Act, which is undoubtedly the most significant pension reform in over 13 years, includes almost 30 provisions aimed at increasing coverage of American workers in employer-sponsored plans, modifying distribution rules, easing administrative requirements for safe harbor 401(k) plans, and more. Most notably, many of the new law’s provisions became effective on January 1, 2020.
Below is a summary of the SECURE Act’s key provisions.
401(k) Plan Coverage for Long-Term Part-Time Employees
Before the SECURE Act, part-time employees could be excluded from participating in a 401(k) plan if they did not complete at least 1,000 hours of service in a year. The SECURE Act includes a new mandate to cover long-term part-time employees who work at least 500 hours in three consecutive 12-month periods and are age 21 or older. No employer contribution (including top-heavy minimum contributions) is required until the employee has satisfied the plan’s normal eligibility requirements. In addition, there is a special vesting rule for these individuals, which appears to provide vesting credit at 500 hours of service.
This new mandate is generally effective for plan years beginning after December 31, 2020. Practically speaking, these changes mean that employers will need to add new programing to their systems after 2020 to properly track long-term part-time employees in order to determine whether any such employee becomes eligible for plan participation.
Modifications to Distribution Rules
- Penalty-Free Distributions for Birth of Child or Adoption. The SECURE Act permits individuals to have penalty-free withdrawals of up to $5,000 from their defined contribution plan accounts for expenses related to the birth or adoption of a child for up to one year following the birth or legal adoption. These penalty-free withdrawals can be made after December 31, 2019.
- Increase in Age for Required Beginning Date for Mandatory Distributions. Before the SECURE Act, participants were generally required to begin taking distributions from their qualified retirement plan account on April 1 following the calendar year the participant turned 70½ (or following the year of retirement, if later). The SECURE Act increases the required minimum distribution age from 70½ to 72. This provision is effective for individuals turning 70½ after December 31, 2019.
- Changes to Required Minimum Distribution Rules. The SECURE Act changes required minimum distributions rules for non-defined benefit plans to generally require that all distributions to a designated beneficiary be made by the end of the tenth calendar year from the year of death. The 10-year distribution requirement does not apply to a designated beneficiary who is – at the date of the plan participant’s death – a surviving spouse, disabled beneficiary or a child of the employee who has not reached the age of majority. This provision applies to participants who die after December 31, 2019.
Administrative Changes to 401(k) Safe Harbor Rules
The SECURE Act provides a number of changes to 401(k) plans, effective for plan years beginning after December 31, 2019, including:
- Automatic-enrollment safe harbor plans are allowed to increase the cap by raising payroll contributions from 10% to 15% of an employee’s paycheck, while giving employees an opportunity to opt out of the increase.
- The annual safe harbor notice will no longer be required for nonelective contribution 401(k) safe harbor plans (but not matching contribution 401(k) safe harbor plans).
- Traditional 401(k) plans can now be amended mid-year to become nonelective contribution 401(k) safe harbor plans at any time before the 30th day before the close of the plan year (this option is not available for matching contribution 401(k) safe harbor plans). Amendments after that time will be allowed if the amendment provides (i) a nonelective contribution of at least 4% of compensation for all eligible employees for that plan year, and (2) that the plan is amended no later than the close of the following plan year.
Significant Increase in Penalties for Failure to File Retirement Plan Returns
The penalty for the failure to file a Form 5500 increases substantially under the SECURE Act to $250 per day, not to exceed $150,000. The penalty for failure to file Form 8955-SSA increases to $10 per participant per day, not to exceed $50,000.
These changes apply to forms required to be filed after December 31, 2019.
Open Multiple Employer Plans
Before the SECURE Act, an employer was not permitted to participate in a multiple employer plan unless the employer had a “commonality of interest” (e.g., in the same industry) with the other employer(s). The SECURE Act allows two or more unrelated employers (i.e., employers without a “commonality of interest”) to join together to form a new type of multiple employer plan, referred to by the SECURE Act as a “Pooled Employer Plan.” These new plans will be treated as a single plan under the Employee Retirement Income Security Act of 1974, as amended (ERISA), which means the plans will have a single plan document, one Form 5500 filing and a single independent plan audit.
Subject to certain conditions, the SECURE Act also amends the Internal Revenue Code of 1986 (Code) to eliminate the “one bad apple rule” for Pooled Employer Plans. In other words, the SECURE Act provides a procedure for ensuring that one employer’s disqualifying defect does not cause the disqualification of the entire Pooled Employer Plan (again, subject to certain conditions).
A Pooled Employer Plan must be sponsored by a Pooled Plan Provider – i.e., a financial services company, third-party administrator, insurance company, record keeper, or similar entity – who must serve as an ERISA Section 3(16) administrator and serve as the named fiduciary for the plan.
These changes apply to plan years beginning after December 31, 2020.
Lifetime Income Provisions
- Lifetime Income Disclosures. The SECURE Act requires employers to provide defined contribution plan participants with an estimate of the amount of monthly income the participant would receive if their plan balance were paid in a single life annuity or a joint survivor annuity. The lifetime income disclosure must be included on participants’ annual benefit statements and be provided at least once every 12 months, and employers will not have fiduciary liability if they provide estimates in accordance with Department of Labor (DOL) assumptions and guidance. The methodology for calculating lifetime income is still in the works, as the SECURE Act directs the DOL to develop a model disclosure and provide assumptions that employers may use to calculate lifetime income. This provision applies to benefit statements furnished more than 12 months after the DOL issues the latest of an interim final rule or the model disclosure and assumptions.
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider. Before the SECURE Act, employers that wished to include an annuity investment option in their defined contribution plan were required to evaluate the financial capability of an insurer, without protection from fiduciary liability in making that decision. The SECURE Act creates a new fiduciary safe harbor wherein employers are deemed to have satisfied the prudence requirement with respect to the selection of insurers – and are protected from liability for any losses that may result from such selection – if the employer receives certain written representations from the insurer as to the insurer’s status under and satisfaction of state insurance laws.
- Portability of Lifetime Income Options. If a lifetime income investment (e.g., an annuity) is no longer offered under a defined contribution plan, Section 403(b) plan, or governmental Section 457(b) plan, the SECURE Act permits participants to (i) transfer the investment to another employer-sponsored retirement plan or IRA, or (ii) receive a distribution of such investment in the form of a qualified plan distribution annuity. This provision is effective for plan years beginning after December 31, 2019.
Increase to Small Employer Tax Credits
Before the SECURE Act, an eligible employer with 100 or fewer employees was eligible to receive a nonrefundable income tax credit for start-up costs relating to the adoption of a new qualified retirement plan. Under the SECURE Act, the tax credit for the first three years after adopting a new qualified retirement plan will equal 50% of the plan’s start-up costs up to a maximum of $5,000. The SECURE Act also provides for a separate nonrefundable credit (up to $500 per year for three years) if a small employer adds auto enrollment to an existing plan or if auto enrollment is included in a new plan.
These changes are effective for taxable years beginning after December 31, 2019.
Other Key Provisions
Additional provisions in the SECURE Act:
- Prohibit the distribution of plan loans through credit cards or other similar arrangements (effective for loans made after enactment of the SECURE Act).
- Allow all members of a group of plans to file a consolidated Form 5500. Plans eligible for consolidated filing must be: (i) defined contribution plans or individual account plans; (ii) have the same trustee, the same named fiduciary (or named fiduciaries), the same administrator and the same plan year; and (iii) provide the same investments or investment options to participants and beneficiaries (effective for Forms 5500 for plan years beginning after December 31, 2021).
- Modify nondiscrimination testing rules for frozen defined benefit plans under what is known as a “soft freeze,” wherein a plan does not allow new participants, but existing participants continue to accrue benefits under the plan. More specifically, the SECURE Act liberalizes the methods that can be used to pass the nondiscrimination testing making it viable to continue to maintain frozen defined benefit plans for the covered employees.
- Permit a new pension or profit-sharing plan to be treated as having been adopted for the prior tax year if the employer adopts the plan no later than the due date (including extensions) of the employer’s federal tax return for such year (effective for plans adopted for taxable years beginning after December 31, 2019). Note that this change does not apply to 401(k) plans, as such plans must be adopted prior to any participant being eligible to make salary deferral contributions.
It is important to note that the SECURE Act includes a remedial amendment period that allows plans to operate in accordance with the new law without having to immediately amend the plan. This remedial amendment period requires most plans to adopt conforming amendments by the end of the 2022 plan year.