United States: The SECURE Act: Key Takeaways And Applicability Dates For Plan Sponsors

On Dec. 20, 2019, the president signed into law the Setting Every Community Up for Retirement Enhancement Act (the "SECURE Act" or "Act"). The law changes several provisions governing retirement savings for Americans. In addition to providing incentives for certain small employers to implement retirement plans and expanding open multiple employer plans, the Act includes several provisions that apply to employer-sponsored qualified retirement plans. A brief summary of some of the key provisions impacting plan sponsors of defined contribution plans is provided below.

Mandatory Action Items for Plan Sponsors

Modifications to Required Minimum Distribution Rules: The Act increases the required minimum distribution age from 70½ to 72, applicable to distributions made after Dec. 31, 2019, with respect to individuals who attain age 70½ after such date. In addition, the Act limits the ability of certain beneficiaries to stretch minimum distributions, providing that if a participant in a defined contribution plan dies before the participant's entire account balance is distributed, distributions to a beneficiary who is not an eligible designated beneficiary must generally be completed within 10 years after the participant's death (distributions to an eligible designated beneficiary (i.e., a spouse) continue to be payable over the life of the eligible designated beneficiary). These changes apply to distributions with respect to employees who die after Dec. 31, 2019.

Inclusion of Part-Time Employees in 401(k) Plans: Previously, individuals who worked less than 1,000 hours of service in a year could be excluded from participating in a Section 401(k) plan. The Act limits this exclusion (other than for certain collectively bargained plans), providing that employees who complete three consecutive years of service with at least 500 hours of service during each of those three years (and are at least 21 years of age) must be permitted to participate in 401(k) plans. However, these individuals can be excluded from coverage and nondiscrimination testing. While this provision is effective for plan years beginning after Dec. 31, 2020, for purposes of calculating 500 hours of service during a 12-month period, 12-month periods beginning before Jan. 1, 2021, will not be taken into account.

Plan Loans: Prior to the passage of the Act, there was no limitation on the method by which participant loans were made from qualified plans. The Act amends Section 72(p) of the Internal Revenue Code to prohibit the making of loans through the use of credit cards or other similar arrangements. This provision is applicable for any loans made after the date of enactment of the Act.

Administrative Changes for Plan Sponsors

Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year: The Act provides that if an employer adopts a stock bonus, pension, profit-sharing or annuity plan before the due date (including extensions) for filing the tax return for the taxable year in which the employer adopts such plan, the employer is permitted to treat the plan as having been adopted as of the last day of such taxable year. This change is applicable to plans adopted for taxable years beginning after Dec. 31, 2019.

Combined Annual Reports for Similar Plans: The Act directs the Secretary of Treasury and the Secretary of Labor to modify Form 5500s to allow certain plans to file aggregate annual returns. To qualify, the plans must be individual account plans or defined contribution plans with the same trustee, named fiduciary (or fiduciaries) and administrator; must have plan years that start on the same date; and must provide the same investments or investment options to participants and beneficiaries. These provisions are to be implemented for Form 5500 filings for plan years beginning after Dec. 31, 2021.

Pension Benefit Statement: The Act requires defined contribution plans to include in pension benefit statements a lifetime income disclosure at least once during any 12-month period, illustrating the monthly payments the participant would receive if the participant's total account balance were used to provide lifetime income streams, including a single life annuity and a qualified joint and survivor annuity for the participant and the participant's surviving spouse. The Secretary of Treasury is directed to publish interim final rules, a model disclosure and assumptions that can be used by administrators to convert benefits into lifetime income stream equivalents. This provision will not be effective until 12 months after the latest of the Treasury's publishing of such interim final rules, model disclosure or assumptions.

Fiduciary Safe Harbor for Selection of Lifetime Income Provider: The Act includes steps that a fiduciary can take to fall within a safe harbor when selecting lifetime income providers. Plan fiduciaries will be deemed to satisfy their obligation of prudence if they engage in an objective, thorough and analytical search; conclude at the time of the selection that the insurer is capable of satisfying its financial capabilities; and conclude that the relative cost of the contract is reasonable. The fiduciary will also be allowed to rely on certain representations from the insurer with respect to its financial stability.

Changes Intended to Expand and Preserve Retirement Savings

Simplification of Safe Harbor 401(k) Rules: Safe harbor 401(k) plans are subject to numerous requirements. The Act eliminates and loosens some of these requirements. The safe harbor notice requirement is eliminated for plans that make the safe harbor qualified nonelective employer contribution, but remains in place for safe harbor plans that make a safe harbor match contribution. Additionally, the Act provides that a plan may be amended after the beginning of a plan year to provide for nonelective contributions. This retroactive amendment needs to be adopted before the 30th day prior to the end of the plan year. Alternatively, the plan can be amended following the end of the year, in which case, the qualified nonelective employer contribution is required to be four (4) percent rather than three (3) percent. This change is applicable for plan years beginning after Dec. 31, 2019.

Automatic Enrollment Safe Harbor Cap Increase: The Act increases the cap on automatic employee deferrals from ten (10) to fifteen (15) percent of compensation, starting with plan years following the first full plan year of automatic enrollment. The cap remains ten (10) percent for the initial automatic enrollment period and for the first full plan year of automatic enrollment. While the cap is not required to be increased, for plan sponsors that desire to increase the cap, it can be implemented for plan years beginning after Dec. 31, 2019.

Portability of Lifetime Income Options: Several of the provisions of the Act were aimed at encouraging more lifetime income options in defined contribution plans. Qualified defined contribution plans, Section 403(b) plans and governmental Section 457(b) plans may make a direct trustee-to-trustee transfer to another eligible employer-sponsored retirement plan or Individual Retirement Account of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity if made within the 90 days preceding the date on which a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change is applicable to plan years beginning after Dec. 31, 2019.

Treatment of Custodial Accounts on Termination of Section 403(b) Plans: The Act directs the Secretary of Treasury to issue guidance to provide that if an employer terminates a 403(b) custodial account, the account can be distributed in kind. The Act directs that any guidance will be retroactively effective for taxable years beginning after Dec. 31, 2008.

Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption: The Act allows an employer to permit penalty-free distributions, not to exceed $5,000 in the aggregate, for a "qualified birth or adoption." The employee may also be permitted to repay this amount to the plan. This provision can be applied to distributions made after Dec. 31, 2019.

Other Changes Impacting Plan Sponsors

Increased Penalties for Failure to File Retirement Plan Returns: The Act also increases certain penalties for returns, statements and notifications with a due date (including extensions) after Dec. 31, 2019. The revised fee schedule is summarized below: 

Next Steps

As discussed above, the Act contains numerous changes to retirement plans and IRAs. While further guidance will likely be needed, in the meanwhile, employers and plan sponsors should review their plan documents and systems to determine what, if any, amendments will need to be made and what systems should be implemented.

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.