In an effort to make saving for retirement easier and more accessible for many Americans, President Trump officially signed into law the Setting Every Community Up for Retirement Act (“SECURE Act”) on December 20, 2019. The SECURE Act contains a number of provisions that impact retirement plans. Several of the most noteworthy are discussed below. Plan sponsors should consult their advisors and/or ERISA counsel for specific questions as to how the SECURE Act will impact their plans.
Required Minimum Distributions (RMDs) Now Begin at Age 72
Americans are working longer and will no longer be required to withdraw assets from tax-qualified retirement plans, 403(b) plans, 457(b) plans, and IRAs at age 70½. RMDs now begin at age 72 for individuals who turn 70½ in the calendar year 2020. If an individual turned age 70½ in 2019 and has already begun taking RMDs, they should generally continue to take the RMDs. If an individual is turning 70½ in 2020 and had planned on taking an RMD, they may want to work with a financial advisor to reconsider their withdrawal plans.
IRA Contributions Beyond Age 70½
As Americans live longer, an increasing number are continuing to work past their traditional retirement age. Under the SECURE Act, an individual can continue to contribute to his/her traditional IRA past age 70½ as long as they are still working. That means the rules for traditional IRAs will align more closely with 401(k) plans and Roth IRAs. This change will begin for tax year 2020 contributions.
Long-term Part-time Employees (401(k) Plans)
Generally, a retirement plan can exclude employees that work less than 1,000 hours during the year. However, the SECURE Act prohibits a retirement plan with a deferral feature (e.g., a 401(k) Plan) from excluding employees from making elective deferrals if those employees have completed more than 500 hours of service in each of three consecutive 12-month periods. Note that this new rule does not require that such employees be made eligible for employer contributions, does not apply to union plans, and does not apply to 403(b) plans. In addition, the requirement does not apply until years beginning after December 31, 2020, and for the determination of whether an employee has completed more than 500 hours in three consecutive 12-month periods, 12-month periods beginning before January 1, 2021 are not taken into account. Also, employees who are eligible for elective deferrals under this new requirement can be excluded for purposes of coverage, nondiscrimination, and top-heavy testing.
RMD Creates New “Ten Year Rule” for Most Beneficiaries after Death
Previously, if you inherited an IRA or 401(k), you could “stretch” your distributions and tax payments out over your single life expectancy. Now, for IRAs inherited from original owners who have passed away on or after January 1, 2020, the new law requires many beneficiaries to withdraw assets from an inherited IRA or 401(k) plan within 10 years following the death of the account holder. Exceptions to the 10-year rule include assets left to a surviving spouse, a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are less than 10 years younger than the original IRA owner or 401(k) participant.
Tax Credits for Small-Business Owners That Start a Retirement Plan
The SECURE Act provides a start-up retirement plan credit for smaller employers of $250 per non-highly compensated employees eligible to participate in a workplace retirement plan at work (minimum credit of $500 and maximum credit of $5,000). This credit would apply to small employers with up to 100 employees over a 3-year period beginning after December 31, 2019 and applies to SEP, SIMPLE, 401(k), and profit sharing types of plans. If the retirement plan includes automatic enrollment, an additional credit of up to $500 is also available.
New Rules for Multiple Employer Plans (MEPs)
Effective for Plan years beginning after December 31, 2020, the SECURE Act facilitates the adoption of open MEPs by allowing completely unrelated employers to participate in a MEP and eliminates the IRS’s “one bad apple” rule, which stipulates that all employers participating in an MEP may face adverse tax consequences if one employer fails to satisfy the tax qualification rules for the MEP. Given that roughly half of private-sector workers in the U.S. don’t have access to a retirement plan through their employer, open MEPs can help deliver low-cost, high-quality retirement plans for millions of small business workers.
In-Service Withdrawal Options for Birth and Adoption
For distributions made after December 31, 2019, the SECURE Act permits an individual to take a “qualified birth or adoption distribution” of up to $5,000 from an applicable defined contribution plan, such as a 401(k) or an IRA. The 10% early withdrawal penalty will not apply to these withdrawals, and they can be repaid as a rollover contribution to an applicable eligible defined contribution plan or IRA.
Emphasis on Lifetime Income in Defined Contribution Plans
The SECURE Act includes three provisions that emphasize the DOL’s focus on lifetime income options (i.e., ways to encourage employees to use retirement plans for lifetime retirement income instead of spendable lump sum payments):
- Effective immediately, provides fiduciary protection for the selection of a lifetime income provider (e.g., annuity companies, etc.) as an investment option under defined contribution plans.
- Effective for plan years beginning after December 31, 2019, allows participants to make direct rollovers (or transfers of annuity contracts) to an IRA or other employer-sponsored plan of their “lifetime income investments” if the investment is no longer authorized to be held as an investment option under the applicable plan.
- Requires that plan sponsors provide a lifetime income disclosure at least once every 12 months that will show the monthly annuity amount that could be purchased with the lump sum value of the participant’s account (based on predetermined assumptions). The DOL is required to issue a model statement for this purpose by December 31, 2020, and the disclosure requirement becomes effective 12 months after the DOL’s final guidance.
Qualified Automatic Contribution Arrangement (QACA) Automatic Enrollment
A QACA for 401(k) plans is a useful design for many employers because it allows automatic enrollment in the plan’s elective deferral feature with a free pass on nondiscrimination testing, while still allowing employers to keep a vesting schedule for the employer match. The design also permits automatic annual increases to the elective deferral percentage. Previously, the automatic increases were capped at 10% of compensation. The SECURE Act changed this cap to 15% of compensation. This change is effective for plan years beginning after December 31, 2019.
401(k) Safe Harbor Plans
Previously, an employer had to implement a 401(k) safe harbor status before the beginning of each plan year. In addition, the employer could make either (i) a certain level of matching contribution, or (ii) a 3% non-elective contribution on behalf of certain participants. For plan years beginning after December 31, 2019, the SECURE Act provides greater flexibility by allowing an employer to convert to a safe harbor design and make a non-elective contribution (but not matching contribution) after the start of the plan year. However, the required non-elective contribution will increase to 4% if the plan amendment is not adopted at least 30 days prior to the end of the plan year in which the amendment will be effective. Employers already utilizing the non-elective contribution safe harbor should also note that they no longer need to provide an annual notice.
Other SECURE Act Changes:
- Ten-Fold Increase in Form 5500 Penalties – For filings due after December 31, 2019, the SECURE Act increases the penalties associated with a late filing of Form 5500 annual reports to $250 a day to a maximum of $150,000, up from the previous $25 a day and $15,000.
- 403(b) Plans with Custodial Accounts Can Now Be Terminated – Pending the issuance of guidance from the Treasury Department (which the SECURE Act requires by July 2020), a 403(b) Plan that holds assets in custodial accounts will be able to complete a termination of the Plan by distributing the custodial accounts in kind to the participants/beneficiaries.
- In-Service Distributions for Defined Benefits Plans Allowed at Age 59 ½ – For plan years beginning after December, 31, 2019, recent legislation lowers the age for permitted in-service distributions to age 59 ½ from age 62 for defined benefit plans and from age 70 ½ for governmental 457(b) plans.
- Expanded Relief for Frozen Defined Benefit Plans – The SECURE Act retroactively expands and extends the relief that has been provided under annual IRS guidance from the nondiscrimination rules for frozen defined benefit plans. Employers who continue to maintain a fully or partially frozen defined benefit plan should consult with ERISA counsel and the plan’s actuary to determine if the new rules should be incorporated into the plan documents or plan administration.
- Expansion of Section 529 Plans – For distributions made after December 31, 2018, the SECURE Act allows tax-free distributions from 529 education savings accounts to cover costs associated with registered apprenticeships and up to $10,000 of qualified student loan repayments (principal or interest).
For more information about McKonly & Asbury’s Employee Benefit Plan services, or for questions regarding this article, please contact Stephanie Kramer, Supervisor with McKonly & Asbury, at email@example.com.