- The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), signed into law on Dec. 20, 2019, provides incentives for employers to provide retirement plans and also enhances retirement opportunities for employees.
- The SECURE Act contains many provisions that apply to employer-sponsored retirement plans in 2020. Although plan amendments do not have to be made for a few years, plan administration (including notification to employees and participants and revised election forms) will need to change much sooner.
- This Holland & Knight alert provides a summary of the major provisions affecting employee benefits.
After being approved by both the U.S. House of Representatives and the Senate, the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) was signed into law by President Donald Trump on Dec. 20, 2019, as part of the Further Consolidated Appropriations Act, 2020. While providing incentives for employers to provide retirement plans and enhancing retirement opportunities for employees, the SECURE Act also contains provisions to increase tax revenue. A summary of the major provisions affecting employee benefits are outlined below.
Relief for Employers
- Greater Availability of Multiple Employer Plans. Prior to the SECURE Act, unrelated employers (not in the same controlled group and without a geographical or industry connection) could not participate in the same qualified defined contribution plan. Under the SECURE Act, if certain fiduciary and registration requirements are met, a qualified defined contribution plan may be maintained by unrelated employers, which can reduce the burden on individual employers of operating a qualified retirement plan. The SECURE Act also contains provisions limiting the liability for operational failures to only the employer responsible for the failure, rather than the entire plan. (Applies to plan years beginning after Dec. 31, 2020)
- Relaxed Requirements for Non-Elective Safe Harbor 401(k) Plans. The safe harbor notice requirement is eliminated for nonelective 401(k) safe harbor plans (but not for 401(k) plans that have safe harbor matching contributions). A plan may be amended to become a nonelective 401(k) safe harbor plan for a plan year at any time prior to the 30th day before the end of the plan year (i.e., before Dec. 1 for calendar plan years). A plan can be amended to become a nonelective 401(k) safe harbor plan after the 30th day before the end of the plan year, if the plan provides for a nonelective contribution of at least 4 percent and the amendment is made by the last day for distributing excess contributions (i.e., April 15 of the year following the year of the deferral). (Applies to plan years beginning after Dec. 31, 2019)
- Combined Annual Reports for Certain Defined Contribution Plans. Form 5500 (Annual Return/Report of Employee Benefit Plan) will be modified to allow all members of a group of defined contribution plans to file one consolidated form if the plans 1) share the same trustee, named fiduciaries and administrator, 2) have the same plan year, and 3) provide the same investments or investment options to participants and beneficiaries. (Applies to plan years beginning after Dec. 31, 2021)
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider. Following the provided safe harbor guidelines would shield fiduciaries from liability for losses due to a selected lifetime income provider failing to pay the full amount of benefits when they are due. (Effective Dec. 20, 2019)
- Testing Relief for Certain "Soft" Frozen Defined Benefit Plans. The SECURE Act makes permanent and broadens minimum participation and nondiscrimination testing relief for defined benefit plans that provide continuing benefit accruals for existing participants but are closed to new participants. (Generally effective Dec. 20, 2019)
- More Time to Adopt Certain Retirement Plans. Employers that adopt qualified retirement plans other than 401(k) plans before the expiration of the time to file their federal tax returns, including extensions, may treat the plan as if it were adopted on the last day of the taxable year. (Applies to plans adopted for taxable years beginning after Dec. 31, 2019)
Enhancements for Participants
- Long-Term, Part-Time Employees 401(k) Plan Eligibility. Prior to the SECURE Act, the maximum permissible service requirement to make elective deferrals to a 401(k) plan was 1,000 hours in a period of 12 consecutive months. Under the SECURE Act, the maximum permissible service requirement is the earlier of 1) completing 1,000 hours in a 12-month period or 2) completing 500 hours in three consecutive 12-month periods (excluding 12-month periods starting before Jan. 1, 2021). Employees who meet the 500 hours/three-year rule but not the 1,000 hours/one-year rule are not required to receive matching or nonelective contributions on their behalf, and these employees can be excluded from nondiscrimination and top-heavy testing. (Generally applies to plan years beginning after Dec. 31, 2020)
- Increase in Age for Required Beginning Date for Mandatory Distributions. The age for required minimum distributions has been increased from 70½ to 72. (Applies to participants who turn 70½ after Dec. 31, 2019)
- Increase of 10 Percent Cap for Automatic Enrollment Safe Harbor. Prior to the SECURE Act, the safe harbor rules on qualified automatic contribution arrangements (QACAs) limited the maximum automatic contribution rate to 10 percent of a participant's compensation. Under the SECURE Act, the 10 percent cap remains until the last day of the first plan year that begins after the employee's date of participation, but in subsequent plan years the maximum permissible automatic contribution rate is 15 percent. (Applies to plan years beginning after Dec. 31, 2019)
- Penalty-Free Withdrawals Related to the Birth or Adoption of a Child. A qualified defined contribution plan may now permit a participant to take a penalty-free withdrawal of up to $5,000 (determined on a controlled group basis), to cover expenses related to 1) the birth of a child or 2) the adoption of a child who is under 18 or incapable of self-support, during the one-year period following the date the child is born or adopted. These withdrawals are not subject to the 10 percent excise tax on early distributions and may be repaid to an eligible retirement plan. (Applies to distributions made after Dec. 31, 2019)
- Portability of Lifetime Income Options. Participants with lifetime income investments (such as annuity contracts) that are no longer authorized investment options under a qualified defined contribution plan, 403(b) plan or governmental 457(b) plan may now make in-service transfers of such lifetime income investments to an IRA or other eligible employer plan without regard to plan restrictions on in-service distributions. (Applies to plan years beginning after Dec. 31, 2019)
- Expanding Section 529 Plans. The SECURE Act permits tax-free treatment of distributions from Section 529 plans in order to pay for certain apprenticeship program expenses as well as up to $10,000 of student loan repayments per individual. (Applies to distributions made after Dec. 31, 2018)
- Lifetime Income Disclosure. Lifetime income disclosures will have to be included in annual benefit statements provided to participants of defined contribution plans. The required disclosure will outline an estimate of monthly annuity income payments that the participant would receive if the participant's account balance was used to purchase a qualified joint and survivor annuity (with a spouse the same age) and a single life annuity. The Secretary of Labor is also required to provide model income disclosures and assumptions to be used by plan administrators. (Applies to benefit statements furnished more than 12 months after the latest issuance by the Secretary of Labor of interim final rules, model disclosures or assumptions)
- Modified Required Distribution Rules for Designated Beneficiaries. Pursuant to the SECURE Act, distributions made to many designated beneficiaries following the death of a participant in a defined contribution plan or IRA must be made within 10 years following the participant's death rather than be stretched out over the beneficiary's lifetime (which was the rule prior to the SECURE Act). This 10-year rule does not apply to a beneficiary who is a surviving spouse, minor child, disabled, chronically ill, or is not more than 10 years younger that the participant. (Generally applies to distributions with respect to participants who die after Dec. 31, 2019 or for governmental plans and certain collectively bargained plans Dec. 31, 2021)
The SECURE Act contains a number of other provisions, including up to a tenfold increase in penalties for certain filing and notification failures, guidance on church-controlled pension plans, permitting certain accounts under a 403(b) plan to be distributed in kind upon plan termination, and increased tax credits for small employers who establish retirement plans or add automatic enrollment.
Provisions enacted under the Further Consolidated Appropriations Act, 2020 but not contained in the SECURE Act include the reduction of the minimum age for making distributions from a pension plan to a participant who has not separated from service from age 62 to age 59½ (effective for plan years beginning after Dec. 31, 2019), the elimination of the excise tax on certain high-cost employer health plans (known as the "Cadillac tax") and the annual fees on health insurance providers, the repeal of the unrelated business income tax on qualified parking and transportation fringe benefits provided to employees of tax-exempt organizations, and the extension of qualified disaster distributions from qualified plans to certain victims of presidentially declared disasters that occurred after Jan. 1, 2018.
When Amendments Must Be Adopted
The remedial amendment period to make any amendments required under the SECURE Act runs until the last day of the first plan year beginning on or after Jan. 1, 2022, or for governmental plans, Jan. 1, 2024.
The SECURE Act contains many provisions that apply to employer-sponsored retirement plans in 2020. Although plan amendments do not have to be made for a few years, plan administration (including notification to employees and participants and revised election forms) will need to change much sooner.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.