At long last, the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) has been signed into law. The SECURE Act results in many changes to qualified retirement plans, such as 401(k) plans, pension plans, 403(b) plans, and a few changes to health and welfare plan laws. Most of these will be welcome changes for plan sponsors.
Summary of SECURE Act Significant Provisions
Effective in 2020, the SECURE Act provides the following:
- Delays the age for commencing required minimum distributions from retirement plans and individual retirement accounts (IRAs) from age 70-1/2 to age 72, but this change is effective only for individuals who attain age 70-1/2 after December 31, 2019;
- Eliminates the annual notice requirement for 401(k) nonelective safe harbor plans (those safe harbor plans that provide an employer nonelective contribution of at least 3% of eligible participant compensation), effective for plan years after December 31, 2019;
- Allows a plan to become a 401(k) nonelective safe harbor plan at any time before the 30th day before the end of the plan year;
- Allows a plan to become a 401(k) nonelective safe harbor plan if the plan is amended to provide a nonelective employer contribution of at least 4% of each participant’s compensation and the amendment is made by the last day for distributing excess contributions from the plan (generally, the last day of the next plan year), effective for plan years beginning after December 31, 2019;
- Increases the maximum limit on qualified automatic contribution arrangement 401(k) safe harbor plans from 10% to 15% percent of participant compensation, effective for plan years beginning after December 31, 2019;
- Creates a new tax credit of up to $500 per year to employers to defray startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment, and this credit also is available to employers that convert an existing plan to an automatic enrollment design;
- Allows participants in defined contribution retirements plans (such as 401(k) plans) and IRAs to elect a penalty-free in-service withdrawal of up to $5,000 per individual (so that two working parents, each participating in a retirement plan, could withdraw a total of $10,000) within one year following the birth or adoption of a child and allows the later repayment of such withdrawals (effective for distributions made after December 31, 2019), IF the retirement plan or IRA permits such withdrawals;
- Extends the deadline for employers to adopt new retirement plans for the preceding taxable year until the due date of the employer’s tax return, effective for plans adopted for taxable years beginning after December 31, 2019;
- Eliminates “stretch IRAs” by requiring that all distributions to a designated beneficiary be made by the end of the 10th calendar year following the year in which the IRA owner dies (but this is not applicable if the beneficiary is a surviving spouse, disabled, chronically ill, a minor child or not more than 10 years younger than IRA owner), effective for distributions by reason of an employee or IRA owner’s death after December 31, 2019 (note that this change applies to qualified defined contribution plans in addition to IRAs);
- Provides permanent relief from nondiscrimination testing with respect to benefit accruals and benefits, rights and features provided under a frozen defined benefit plan that have been closed to new participants;
- Permits participants to transfer annuities that have been eliminated as authorized investment options under a qualified defined contribution retirement plan to another eligible employer retirement plan or IRA;
- Prohibits the distribution of qualified plan loans through credit cards or similar arrangements, effective for loans made after December 20, 2019;
- Eliminates the maximum age permitted for making contributions to a traditional IRA, so that individuals may make IRA contributions after age 70-1/2, effective for contributions made after December 31, 2019;
- Provides an ERISA fiduciary safe harbor for the selection of an insurer to provide a guaranteed retirement income contract so that the fiduciary is deemed to have satisfied its prudence requirement in the selection of an insurer if a plan fiduciary satisfies certain specified conditions (thereby making it easier for a qualified retirement plan to offer a lifetime income product);
- Increases the penalties for failure to file Form 5500 ($250 per day not to exceed $150,000), withholding notices ($1,000 for each failure, not to exceed $50,000 for failures during a calendar year) and annual registration ($10 per participant per day, not to exceed $50,000) of certain plans, effective for returns and notices required to be filed or provided after December 31, 2019; and
- Repeals the excise tax of 40% (known as the “Cadillac” tax) on high-cost health insurance plans
Effective in 2021, the SECURE Act provides the following:
- Prohibits a 401(k) plan from excluding employees who complete 500 or more hours of service per year in three consecutive years from making employee salary deferral contributions to the plan (the current threshold is 1,000 hours of service in a 12-month period), but employers may exclude such employees from eligibility for employer contributions and for purposes of applying the nondiscrimination, coverage and top-heavy rules, effective for plan years beginning after December 31, 2020; and
- Expands the ability of unaffiliated employers to adopt a multiple employer plan (referred to as a “pooled employer plan”) if certain conditions are met, effective for plan years beginning after December 31, 2020.
Effective in 2022, the SECURE Act provides the following:
- Allows consolidated Form 5500 filings for similar defined contribution plans with the same trustee, ERISA named fiduciaries, administrator, plan year and investments, effective upon the issuance of a consolidated Form 5500, which is supposed to occur by than January 1, 2022, for filings for plan years beginning after December 31, 2021.
In addition, the SECURE Act provides the following:
- Requires defined contribution retirement plan sponsors to give each participant annual estimates of the annuity payment amounts the participant could receive if the participant’s account is paid out as a lifetime income stream. This new disclosure requirement is not effective until issuance of guidance by the Department of Labor.
Finally, the Further Consolidated Appropriations Act of 2020 (which is the spending package that includes the SECURE Act) provides the following:
- Allows qualifying disaster distributions of up to $100,000 from qualified retirement plans and IRAs that are exempt from the 10% early distribution penalty tax and the normal withholding requirements;
- Individuals may repay a qualifying disaster distribution over a three-year period and distributions not repaid generally will be taxed ratably over a three-year period, unless the participant elects otherwise; and
- For participants impacted by a qualifying disaster, qualified retirement plans now may allow participants to request a plan loan of up to $100,000 (the current limit is $50,000). Participants may delay loan repayments for up to one year.
Most qualified retirement plans will require amendment to reflect the SECURE Act, which provides for a remedial amendment period until the 2022 plan year (the 2024 plan year for governmental plans), or a later date if Treasury provides for any plan amendment required under the SECURE Act.
The Sherman & Howard Employee Benefits Group is ready to provide a detailed analysis of and advice regarding these SECURE Act changes.