The Setting Every Community Up for Retirement Enhancement Act of 2019, enacted December 20, 2019, implements a wide range of changes to longstanding rules. While these changes are not as drastic as prior pieces of legislation, they affect employers and employees alike, and an understanding of their application is necessary to ensure plan sponsors and fiduciaries recognize qualification issues and fully utilize new opportunities in the best interests of plan participants.

Below is a roadmap of material updates and modifications contained in the SECURE Act (or elsewhere in in the new law), broken into three categories:  (1) Affordable Care Act modifications; (2) retirement plan modifications; and (3) administrative modifications and penalties.

Affordable Care Act modifications

  • Extension of PCORI: The Affordable Care Act (ACA) imposed a fee on sponsors of self-insured group health plans (and health insurers) to help fund the Patient-Centered Outcomes Research Institute (PCORI). The PCORI fee is calculated by multiplying the average number of participants for the plan year by the applicable dollar amount for the year. For plan years ending after September 30, 2018, and before October 1, 2019, the applicable dollar amount was $2.45.

    The PCORI fee was scheduled to expire for plan years ending after September 30, 2019, but the SECURE Act extends the fee another ten years. Thus, employers sponsoring self-insured group health plans will need to continue to file Form 720 and pay the PCORI fee by July 31 following each plan year ending on or before September 30, 2029. (We note that the validity of ACA continues to be under attack. On December 18, 2019, the US Court of Appeals for the Fifth Circuit held that ACA's individual coverage mandate is unconstitutional and remanded the case to the lower court to determine the impact of its ruling on other provisions of the law. All ACA provisions, other than the individual mandate, continue to apply pending the outcome of this case.)
  • Repeal of Cadillac tax: ACA imposed a 40 percent excise tax, often known as the "Cadillac tax," on certain employer-sponsored group health plans considered to provide "rich" benefits. The tax, which has been the subject of vigorous opposition, applied to the extent the aggregate cost of the coverage exceeded certain specified dollar levels. After two delays, the "Cadillac tax" was scheduled to take effect on January 1, 2022. The new law completely and permanently repeals it.

Retirement plan modifications

  • Safe harbor plan changes: The SECURE Act eliminates the annual notice requirement for safe harbor non-elective contributions (but maintains the annual notice requirement for safe harbor matching contributions). Additionally, for plans that have not provided a safe harbor matching contribution at any time during the plan year, the act allows employers to adopt a safe harbor plan with non-elective contributions up to 30 days before the end of the plan year or, if the employer agrees to make at least four percent non-elective contributions, by the close of the following plan year. The act also increases the maximum automatic enrollment percentage under a qualified automatic contribution arrangement (QACA) from 10 percent to 15 percent. These changes apply for plan years beginning after 2019.
  • Disclosures regarding lifetime income options: The SECURE Act requires defined contribution plans to annually provide information to participants demonstrating the monthly payments the participant would receive if their account were paid as a single life annuity or qualified joint and survivor annuity, even if the plan does not offer those distribution options. The information must be included in at least one benefit statement during each 12-month period. The Secretary of Labor is to issue guidance describing the assumptions that may be used in determining the lifetime monthly payment streams, as well as a model disclosure statement. This requirement will be effective 12 months after the issuance of such guidance.
  • Portability of lifetime income options: If a defined contribution, 403(b) or eligible government 457(b) plan offers investment options with lifetime income features, and these investment options are removed from the plan, the SECURE Act permits participants to take a distribution of the option (typically an annuity) without regard to restrictions on in-service distributions, either by direct rollover to an eligible retirement plan or through direct distribution to the individual. This rule is effective for plan years beginning after 2019.
  • Fiduciary safe harbor for lifetime income provider: In a change intended to address fiduciary concerns in the selection of insurers to pay benefits under a lifetime income contract, the SECURE Act provides a safe harbor for fiduciaries with respect to the selection of the insurer. Fiduciaries had expressed concern about fiduciary liability in the event the selected insurer became insolvent years after the contract was purchased, but before all contracted benefits were paid. Under the safe harbor, the prudent person requirement of the Employee Retirement Income Security Act (ERISA) generally will be deemed satisfied if the fiduciary: (1) engages in an objective, thorough and analytical search for a provider; (2) considers the financial capability of the provider to satisfy its obligations under the contract and the cost of the contract in relation to the benefits and features provided; and (3) concludes that, at the time of the selection, the provider is financially capable of satisfying its obligations and the relative cost of the contract is reasonable. The SECURE Act allows a fiduciary to rely on representations of the insurer so long as the fiduciary does not have actual knowledge to the contrary.
  • Protection for long-term part-time workers: The SECURE Act requires 401(k) plans to allow employees to make salary deferral contributions after they have worked at least 500 hours in three consecutive 12-month periods and have attained at least age 21. Under current law, employees generally may be excluded unless they complete at least 1,000 hours of service during a 12-month period. This change is applicable for plan years beginning after 2020, but qualifying 12-month periods beginning before 2021 are not required to be taken into account. Thus, the earliest an employer will need to add these new employees to its plan is 2024.

    The new law does not require the employer to make any employer contributions for workers who enter the plan under this special participation rule, even if it does so for other participants. If an employer chooses to make employer contributions for such employees, however, the workers are entitled to vesting credit for their three qualifying 12-month periods (even though vesting normally requires completion of 1,000 hours of service). Employees participating under this special rule may be excluded for minimum coverage and nondiscrimination testing purposes and application of the top-heavy rules.
  • Relief for frozen defined benefit plans: Defined benefit plans that are frozen to new participants and continue to provide benefit accruals for all or some existing participants are sometimes forced to reduce or cease benefits in order to comply with nondiscrimination rules. This can occur due to natural changes over time in the demographics of the remaining group of participants. Similarly, efforts by employers to provide make-up benefits under defined contribution plans to those whose defined benefit plan accruals are frozen also may be thwarted by nondiscrimination testing. In particular, benefit reduction may be necessary for compliance with the defined benefit plan minimum participation test, the nondiscriminatory benefits test and nondiscriminatory benefits, rights and features test. In recent years the IRS has issued temporary guidance that has provided relief to some (but not all) employers facing these concerns. The SECURE Act provides permanent and more expansive relief where either (1) the class of participants accruing benefits under a defined benefit plan was closed to new entrants before April 5, 2017, or (2) the class was closed 5 years or more after the establishment of the plan and during the 5-year period preceding the closure there was no substantial increase in coverage or benefits, rights and features. An employer may elect for these provisions of the SECURE Act to apply to plan years beginning as early as the first plan year beginning after December 31, 2013.
  • Increase in age for required minimum distributions: The SECURE Act increases the age at which required minimum distributions must commence from age 70.5 to age 72. This age change applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70.5 after 2019.
  • Modification of required minimum distribution rules for designated beneficiaries: The SECURE Act modifies the payout rules for defined contribution plan death benefits with respect to employees who die after 2019. Under these modified rules, defined contribution plan death benefits must now be paid to a designated beneficiary by the end of the 10th year following the year of the participant's death, unless the beneficiary is the participant's spouse, a minor child or a disabled or chronically ill person, or is not more than 10 years younger than the participant. The law defines this new category as "eligible designated beneficiaries."

    While this change is mandatory (and affects IRAs in addition to defined contribution plans), plan sponsors should review whether this change affects the operation of their plan based on the plan's existing provisions. It should also be noted that the above change to the minimum distribution rules for certain beneficiaries was accomplished by adding a new paragraph 401(a)(9)(H) to the existing Internal Revenue Code section, but otherwise left in place all of the other Internal Revenue Code 401(a)(9) existing rules.
  • Reduction in minimum age for allowable in-service distributions: The SECURE Act reduces the voluntary in-service distribution age for defined benefit plans from age 62 to age 59.5. Solely with respect to government 457(b) plans, the law adds a permissible in-service distribution at age 59.5. These changes are effective for plan years beginning after 2019.
  • Exception to 10 percent early-distribution tax for qualified birth or adoption distributions: The SECURE Act allows in-service distributions, including from 401(k) plans, of up to $5,000 within one year after the birth or adoption of a child (other than an adoption of a spouse's child), and exempts such distributions from any applicable 10 percent early-distribution tax. Subject to certain limitations, individuals also have the opportunity to recontribute the distributions. This rule applies to distributions made after 2019. Because the change is permissive, plan sponsors will need to consider whether to add this flexibility.
  • Multiple employer plans: The SECURE Act paves the way for expansion of "multiple employer plans" (MEPs). MEPs generally are defined contribution retirement plans sponsored by two or more employers who are not a part of the same control group. Regulations issued by the Department of Labor last July expanded the type of MEPs that may be considered a single plan for ERISA purposes, but still required some commonality of interest between the participating employers, for example, that all employers be in the same trade or industry or have a principal place of business in the same geographic region. This type is known as a "closed" MEP. Beginning after 2020, the law permits "open" MEPs, or MEPs sponsored by wholly unrelated employers, to be considered single ERISA-covered plans. The law permits "pooled plan providers" to create the MEP, which will allow unrelated employers to adopt the provider's plan. The primary intent of this change is to allow small employers an easier method of providing retirement benefits to their employees, while taking advantage of economies of scale that may result in lower fees and better investment opportunities.

    Notably, the law supports the use of MEPs by providing relief where one participating employer fails to comply with one or more qualification requirements. Under existing law (commonly known as the "one bad apple" rule), the entire plan could be subject to disqualification. Under the SECURE Act, as long as the plan provides that assets of that participating employer will be transferred to a separate plan for that employer, only that employer will be at risk of liability for such violation. While the SECURE Act provides qualification relief, ERISA fiduciary responsibilities generally remain at a per-employer level. Although more detailed guidance is needed, given the favorable changes made by the SECURE Act, it is expected that a new market will develop this year for open MEPs sponsored by "pooled plan providers" (generally, providers who register with the Secretary of the Treasury and acknowledge fiduciary status).
  • Treatment of custodial accounts upon termination of 403(b) plan: The SECURE Act provides that, upon termination of a 403(b) plan, a custodial account may be distributed in kind to a participant or beneficiary. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account (similar to the treatment of fully paid individual annuity contracts under Revenue Ruling 2011-7) until paid out, subject to compliance with the 403(b) rules in effect at the time that the individual custodial account is distributed. This change is retroactively effective for plan years beginning after 2008.

    This change will give additional flexibility to sponsors of 403(b) plans who either are converting from a 403(b) to a 401(k), or who have previously done so and have a frozen 403(b) plan. Note that the Secretary of the Treasury must issue further guidance within the next six months.
  • Participant loans: For loans made after December 20, 2019, the SECURE Act prohibits retirement plans from making participant loans through the use of a credit card or other similar arrangement. As a result, any loan made through the use of a credit card or other similar arrangement will be treated as a distribution under the plan.
  • Disaster tax relief: In response to recent natural disasters, the SECURE Act provides that the 10 percent early-distribution tax will not apply to qualified disaster distributions of up to $100,000. Qualified disaster distributions are distributions made to individuals who suffered an economic loss in a qualified disaster zone during the period beginning on January 1, 2018, and ending 180 days after the enactment of the law. Individuals receiving qualified disaster distributions are permitted to spread taxes on the distributions ratably over a three-year period. They may also recontribute all or a portion of a disaster distribution within three years of the distribution date.

    For the 180-day period beginning December 20, 2019, the law also increases plan loan limits from $50,000 to $100,000 for individuals affected by qualified natural disasters, and extends the repayment period for at least one year.

Administrative modifications and penalties

  • Combined annual report for group of plans: In an effort to reduce collective administrative costs, the SECURE Act allows a group of sufficiently similar plans to file a consolidated Form 5500. The plans must be individual account plans or defined contribution plans, and each must share the same trustee, named fiduciaries, administrator, plan year and investment options. The Secretary of Treasury and the Secretary and Labor, in cooperation, must implement this change by January 1, 2022, to be effective for plan years beginning after 2021.
  • Increased penalties for failure to file: For tax returns due after 2019, the SECURE Act increases the penalty for late filings to the lesser of 100 percent of the tax due or $435 (increased from $330). With respect to several retirement plan filings and notifications due after 2019, penalties imposed by the Secretary of the Treasury increase by 10 times their prior amounts. This includes an increase to $250 per day (not to exceed $150,000) for a failure to file a Form 5500. Importantly, these penalties are in addition to the draconian penalties imposed by ERISA.
  • Retroactive plan adoption: The SECURE Act allows an employer to adopt a qualified retirement plan after the close of a taxable year, and to treat it as if adopted on the last day of such taxable year, so long as it is adopted prior to the due date (including any extensions) of the employer's tax return. This change is effective for plans adopted for taxable years beginning after 2019.
  • Remedial plan amendment period: Changes required by the SECURE Act generally do not need to be made until December 31, 2022 (with a potential extension if prescribed by the Secretary of the Treasury).

Dentons' Employee Benefits and Executive Compensation group is monitoring the implementation of the SECURE Act and is ready to assist employers with understanding and incorporating the requirements of the new law.

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