The SECURE Act: What You Need to Know

Passed in late 2019, the government funding bill, the Further Consolidated Appropriations Act of 2020, included a comprehensive retirement bill.  The Setting Every Community Up for Retirement Enhancement  (SECURE) Act contains many changes to retirement plan law.  In this article, TRI-AD’s Technical Resource Group provides you with a summary of some of the more significant changes in the law, and will also be covering the provisions of this legislation in next month’s Retirement Plans Legislative and Regulatory Update.

  • Increased age of 72 for required minimum distributions (RMD) – the law increases the age from 70 ½ to age 72 when participants must start taking minimum distributions from a qualified retirement plan and a traditional IRA. The law only applies to individuals who will attain age 70½ after December 31, 2019.  This provision is effective for tax years beginning after December 31, 2019.
  • 401(k) safe harbor plan changes – the law contained good changes for safe harbor plans. These provisions are effective for plan years beginning after December 31, 2019.
    • No notice for plans which provide safe harbor nonelective contributions – the law removes the requirement to provide a notice to employees when the employer makes a safe harbor nonelective contribution (usually 3% of pay). However, in some plan designs, a notice may still be required.
    • Timing rule changes to apply safe harbor provisions to a retirement plan – if a plan is failing nondiscrimination testing, the plan sponsor can amend their 401(k) plan late in or after the plan year to provide a safe harbor nonelective contribution (usually 3% of pay) without a notification to employees. The amendment to add the safe harbor nonelective contribution can be adopted by either of the following dates:
      • the 30th day before the close of the plan year, or
      • before the last day for distributing excess contributions for the plan year, but only if the nonelective contribution is increased to at least 4% of pay. Normally, excess 401(k) contributions are refunded to highly compensated employees on or before March 15th following a calendar plan year.  In some situations, this could be a longer period of time, up to 6 months after the end of the plan year.
    • Increase in maximum automatic enrollment escalation – for safe harbor plans that meet automatic enrollment requirements, Qualified Automatic Contribution Arrangement (QACA), employers may increase the maximum automatic enrollment escalation percentage from 10% to 15% of pay.
  • Timing rules to adopt a retirement plan – employers may now implement a new qualified retirement plan by signing the plan document by the due date of the tax return, plus extensions, for the year the plan is implemented. This is effective for plans adopted for taxable years beginning after December 31, 2019.  However, plans with elective deferral provisions such as 401(k) and 403(b) plans, the new plans must still be adopted before deferrals are taken from paychecks and deposited into the plan.
  • Disclosure of lifetime income to participants on benefit statements – the law mandates that defined contribution benefit statements provide information about the projected lifetime income stream that the current account balance will provide at retirement. The law requires that within a year, the Department of Labor (DOL) must develop the assumptions to be used in these calculations and model disclosures.  The disclosures will be required to be provided to participants on benefit statements furnished more than 12 months after the date the DOL issues the guidance and the model notice.
  • Part-time workers required to be eligible to defer – long-term part-time employees must be eligible to participate in a 401(k) plan once they have reached age 21 and have worked at least 500 hours in 3 consecutive 12-month periods. Employers are not required to provide matching or other types of contributions for these part-time employees.  Employers are not required to include these individuals in nondiscrimination and coverage testing and do not have to provide top-heavy benefits/contributions and vesting.  This provision is effective for plan years beginning after December 31, 2020. The 12-month periods beginning before January 1, 2021 will not be taken into account, so the first year part-time employees may be eligible for the plan under this new provision will be in plan years beginning in 2024.
  • Penalty-free withdrawals for birth of a child or adoption – the new law applies to IRAs, defined contribution plans, 401(k), 403(b), and 457(b) plans, and allows participants or IRA account owners to withdraw up to $5,000 for eligible adoption and birth expenses up to a year after the event. This distribution is not subject to early withdrawal penalties and the mandatory withholding in a retirement plan will not apply to these withdrawals.  However, participants will have to pay ordinary income taxes on these withdrawals on their personal tax returns.  Amounts may be recontributed back to the plan or IRA.  These rules are effective for distributions after December 31, 2019.
  • Fiduciary safe harbor for lifetime income options – in order to encourage annuity options in a retirement plan, the new law outlines a fiduciary safe harbor for selecting a lifetime income provider. If the employer and/or a fiduciary meets the requirements, they should be protected from fiduciary liability if something goes wrong.
  • Reduce age for in-service distributions from pension plans and governmental 457(b) plans – this was not a provision in the SECURE Act, but part of the funding bill. The law now allows in-service distributions in a pension plan and a governmental 457(b) plan at age 59 ½ (previously age 62 and 70 ½ respectively).  This is effective for plan years beginning after December 31, 2019.
  • Tax credits for small employers – the following tax credits are effective for taxable years beginning after December 31, 2019:
    • Increase in tax credits for startup costs for small employer retirement plans – a small employer may receive a three-year tax credit of up to $5,000 for startup costs associated with implementing a new retirement plan.
    • Tax credit for addition of eligible automatic contribution arrangements (EACA) – a small employer may receive a tax credit of up to $500 for 3 years after a certain type of automatic enrollment feature (known as an EACA) is added to a retirement plan.
  • Repeal of maximum age for making IRA contributions – individuals over the age of 70½ can now make a contribution to a traditional IRA effective for taxable years after December 31, 2019.
  • Distribution timing rules for beneficiaries in defined contribution plans and IRAs – generally distributions after the death of the participant or IRA owner must be made by the end of the tenth calendar year following the year of death. However, this provision is not applicable to beneficiaries who are surviving spouses, disabled, chronically ill, an individual not more than 10 years younger than the participant/IRA owner, and a minor child.  This rule is effective for deaths occurring after December 31, 2019.
  • Pooled employer plans (PEP) – the law now provides that employers can band together and sponsor a retirement plan, even if there is no common ownership or relationship between the companies. These types of plans will be attractive for smaller employers who wish to minimize costs and administrative functions associated with sponsoring a retirement plan.  In these arrangements, a pooled plan provider will be named and will be a fiduciary responsible for all administrative duties and other requirements.  The pooled plan provider must register with the DOL and IRS.  If the requirements are met, the plan will be treated as a single retirement plan.  These rules are effective for plan years beginning after December 31, 2020. 
  • Treatment of custodial accounts for terminating 403(b) plan – the law provides that guidance must be provided by the Treasury Secretary within six months to provide that if a 403(b) plan terminates, an in-kind distribution of a custodial account may remain tax-deferred with the custodian. This provision is retroactively effective for taxable years after December 31, 2008.
  • Expansion of 529 plans – assets in these plans can now be used to repay up to $10,000 in student loans. This new rule is effective for distributions made after December 31, 2018.
  • Increase in Internal Revenue Code Penalties for late 5500’s and 8955-SSA – penalties for late filings have increased significantly for returns filed after December 31, 2019.
    • Form 5500 – late filing penalty is $250 / day up to $150,000 (prior used to be $25 / day up to $15,000)
    • Form 8955-SSA (this form reports terminated participants with vested benefits to the IRS and Social Security Administration) – late filing penalty is $10/participant/day up to $50,000
    • 8955-SSA – the penalty for failure to update a participant’s status is $10/participant/day up to $10,000

Although some of these provisions appear simple, service providers will need to make many changes to administrative systems, forms, processes, plan documents, etc.  Employers will need to amend their plan documents for some of these provisions.  According to the legislation, amendments are due by the end of the plan year beginning on or after January 1, 2022 (January 1, 2024 for governmental plans).  The amendment due dates may change.

Employers may want to wait to implement these rules until additional guidance is provided by the IRS and/or DOL.  These agencies will eventually publish proposed regulations and then final regulations.  Since a large number of the Secure Act provisions are effective now, we hope the agencies will publish the guidance soon.

Please join us for more detailed information on the SECURE Act on February 27, 2020, 10:00 – 11:00 a.m. Pacific Time, for our Retirement Plans Legislative and Regulatory Update web seminar. Register here.