For the first time since 2006, significant retirement plan legislation has been passed. On December 20, 2019, the President signed spending legislation that included the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). It contains many changes affecting employee benefit plans, particularly employer-sponsored retirement plans, but also health and welfare plans.
Although some plan changes are effective now (with some alternative effective dates not mentioned that apply to collectively-bargained and governmental plans), plan amendments will not be required until at least the end of the first plan year beginning on or after January 1, 2022 (i.e., December 31, 2022, for calendar year plans).
Over the coming months, we will be monitoring agency guidance, sending clients issue-specific updates and offering educational opportunities. In the meantime, this table provides an overview of significant changes that may impact retirement plan sponsors. The legislation made additional changes beyond the scope of this bulletin, such as changes to health and welfare plans (addressed in a separate bulletin here), Section 529 plans and IRAs. More information on IRA changes that may impact participant estate planning for IRAs is available here.
This legislation affects all retirement plans in some way. If you have any questions regarding its impact on your plan or these changes in general, please contact a member of Warner’s Employee Benefits Practice Group.
| Retroactively Effective Changes | |
| Change | What It Means |
| 403(b) Plan Termination In-Kind Distributions | Upon plan termination, in-kind distributions of 403(b) plan custodial accounts may be made to participants and beneficiaries. This change may be adopted retroactively for plan years beginning after December 31, 2008. |
| Testing Relief for Soft Frozen DB Plans | Effective upon enactment of SECURE Act unless an earlier effective date is elected, the Act provides relief for defined benefit plans that have been soft frozen (i.e., closed to new participants) from certain nondiscrimination, coverage and participation requirements. |
| CSEC DB Plan PBGC Premiums | PBGC premium rates for Cooperative and Small-Employer Charity (CSEC) defined benefit plans are reduced to $19/participant for flat-rate premiums and $9/$1,000 of unfunded vested benefits for variable-rate premiums for plan years after December 31, 2018. |
| Effective Upon Enactment of Secure Act (December 20, 2019) | |
| Change | What It Means |
| No Credit Cards for Loans | Loans taken from qualified employer plans (e.g., 401(k) plan, 403(b) plan or a governmental plan) shall not be permitted through a credit card or similar arrangement. |
| Safe Harbor for Lifetime Income Option Selection | An improved safe harbor for a fiduciary’s prudent selection of insurers offering a lifetime income option has been created. If followed, it will offer protection from liability for losses that may result due to the insurer's inability to satisfy its financial obligations. |
| Effective for Plan Years Beginning on or After December 31, 2019 | |
| Change | What It Means |
| Extended Time to Adopt New Plan | A qualified employer retirement plan may be adopted after the close of a tax year if it is done before the deadline (including extensions) for filing an employer’s tax return. |
| Timing for Election of Safe Harbor Status | There is a longer period of time to adopt a nonelective safe harbor plan for a plan year. A plan may be amended to become a nonelective safe harbor plan if it is amended:
|
| Annual Safe Harbor Notice | Safe harbor plans with a nonelective contribution (generally 3%) are no longer required to provide a safe harbor notice. A notice continues to be required for plans with a safe harbor matching contribution. |
| Increased QACA Auto Escalation Cap | The cap on automatic escalation of contributions in plans with a qualified automatic contribution arrangement (QACA) has increased from 10% to 15%. This change has no effect on non-QACA plans where there has been no cap, but it may cause employers to re-think their current cap from a policy perspective. |
| Birth or Adoption Withdrawals | A 401(k), 403(b) or governmental 457(b) plan may allow an in-service withdrawal (of up to $5,000) without penalty after a birth or legal adoption of a child. The distribution may be repaid to an eligible retirement plan to which a rollover contribution could be made. |
| Age for In-Service Distributions | The spending legislation reduces the minimum age for in-service distributions in defined benefit and governmental 457(b) plans to age 59½. |
| Increase in RMD Age | The age used to determine when required minimum distributions (RMDs) must begin has increased from 70½ to 72 for distributions required to be made after December 31, 2019, with respect to individuals who turn 70½ after December 31, 2019. |
| Post-Death RMD Timing | For deaths of participants in defined contribution plans after December 31, 2019, the "stretch-out" option for required distributions to certain designated beneficiaries is eliminated, and distributions will generally need to be completed by the end of the 10th calendar year following the year of the participant’s death. This provision does not apply to certain eligible beneficiaries such as surviving spouses. |
| Portability of Lifetime Income | A participant may transfer a lifetime income investment to another employer plan (such as a 401(k), 403(b) or governmental 457(b)) or IRA. |
| Tax Credits for New Plan and/or Adding Automatic Enrollment | For a small employer (100 or fewer employees), the tax credit for costs to adopt a plan is increased (to a maximum of $5,000 for the first three years) and a credit (up to $500/year for the first three years) is added for the addition of automatic enrollment to a plan (or adoption of a plan with that feature). |
| Increase in Filing Penalties | Effective for returns with due dates after December 31, 2019, penalties for failure to file returns related to retirement plans (e.g., Form 5500) increase. |
| Effective for Plan Years beginning on or after December 31, 2020 | |
| Change | What It Means |
| Long-Term Part-Time Employee Eligibility | For plan years beginning after December 31, 2020, 401(k) plans must allow participation by long-term part-time employees who work more than 500 but less than 1,000 hours per year for three consecutive years and meet any applicable plan age requirement. The SECURE Act allows employers to exclude these participants from employer contributions without violating non-discrimination or top heavy requirements, but they must receive vesting credit for years with more than 500 hours of service. |
| Lifetime Income Disclosure | Defined contribution plans will be required to annually provide participants with an estimate of the monthly income the participant’s balance would produce. This requirement is not effective until 12 months after DOL publishes a rule or model notice (which DOL must do within one year of the Secure Act’s passage). |
| Elimination of MEP Bad Apple Rule | The failure of one employer (i.e., “bad apple”) in a defined contribution multiple employer plan to satisfy tax-qualification requirements will not cause a compliance failure for the entire plan if certain requirements are met. |
| Pooled Employer Plans Permitted | Pooled employer plans (PEPs) may be adopted to allow unrelated employers to form a multiple employer plan without the requirement to have a common interest. The SECURE Act contains additional provisions on fiduciary responsibility, reporting and disclosure for these plans. |