As you may have heard, Congress recently passed — and the President signed into law — the SECURE Act, which is landmark legislation that affects the rules for creating and maintaining employer sponsored retirement plans. SECURE stands for the Setting Every Community Up for Retirement Enhancement Act. The SECURE Act is generally effective January 1, 2020.
Here is a brief synopsis of the important parts of the SECURE Act that may affect your retirement plan. Not all of the changes may be viewed as favorable, but there may be steps you could take to minimize their impact.
Modification to the Required Beginning Date for the Required Minimum Distributions:
For required minimum distributions (RMDs) required to be made after December 31, 2019, with respect to individuals who attain age 70.5 after such date, the SECURE Act defers the required starting date of the RMDs until the calendar year in which the individual attains age 72 (instead of age 70.5 under pre-SECURE Act law). This gives an extra year-and-a-half for individuals to leave their funds in the plan (or IRA) before they are required to start receiving their retirement income. This new rule only applies to individuals who attain age 70.5 after December 31, 2019. If you attained age 70.5 prior to January 1, 2020, then you are required to use the rules in effect prior to the SECURE Act.
Allow long-term part-time employees to participate in 401(k) plans:
Currently, employers are allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans — like a 401(k) plan — to their employees.
However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.
Post-Death Required Minimum Distribution Rules:
With respect to participants or IRA owners (referred to as participants) who die after December 31, 2019 the RMD rules are modified to require, generally, that upon the death of the participant the remaining account balance must be distributed to designated beneficiaries within 10 years after the date of death. This rule applies regardless of whether the participant dies before, on, or after the required beginning date, unless the designated beneficiary is an “eligible designated beneficiary.”
An eligible designated beneficiary is an individual who on the date of death of the participant is one of the following:
- the surviving spouse of the participant;
- a child of the participant who has not reached majority;
- a chronically ill individual as specially defined in the Internal Revenue Code, and
- any other individual who is not more than ten years younger than the participant.
Under the eligible designated beneficiary exception, following the death of the participant, the remaining account balance generally may be distributed over the life or life expectancy of the eligible designated beneficiary beginning in the year following the year of death — this is similar to the pre-SECURE Act law.
Following the death of an eligible designated beneficiary, the account balance must be distributed within 10 years after the death of the eligible designated beneficiary. If the eligible designated beneficiary is the child of the Participant and he/she reaches the age of majority, then the balance in the account must be distributed within 10 years after such date.
Modification of the notice requirements and amendment timing rules to facilitate adoption of the three percent employer contribution 401(k) safe harbor plans:
The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective employer contributions under either of two plan designs (referred to as a 401(k) safe harbor plan) and satisfies a notice requirement. Under traditional 401(k) safe harbor plans, the plan either (1) satisfies a matching contribution requirement, or (2) provides for an employer contribution to a defined contribution plan of at least three percent of an employee's compensation on behalf of each non-highly compensated employee who is eligible to participate in the plan.
Starting in 2020, the new rules eliminate the safe harbor notice requirement for the three percent nonelective employer contribution safe harbor plan, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides (1) an employer contribution of at least 4 percent of compensation (rather than at least 3 percent) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).
New small employer automatic plan enrollment credit:
Automatic enrollment is shown to increase employee participation and higher retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new tax credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.
Expand retirement savings by increasing the auto enrollment safe harbor maximum:
An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.
Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10 percent to 15 percent, but only for years after the participant's first deemed election year. For the participant's first deemed election year, the cap on the default rate is 10 percent.
Expansion of portability of lifetime income options:
Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.
Fiduciary safe harbor added for selection of annuity providers:
When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan "fiduciary," which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the "prudence requirement").
Starting on December 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer's future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.