The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law in December 2019. Coming as somewhat of a surprise before the year’s end, it was included in the Further Consolidated Appropriations Act.
Many of the provisions of the SECURE Act have a wide-ranging impact on retirement savings plans and 401(k) plans in particular. Here’s a brief overview of some of the key ones:
- Open Multiple Employer Plans: The Open MEP provision will make it easier and more economical for smaller employers to offer retirement plans by allowing for the creation of pooled retirement plan providers. It removes the common nexus requirements and allows Open MEPs for employers that don’t share common traits to be administered by the pooled plan provider. The provision also protects small employers in Open MEPs from penalties if other members violate fiduciary rules, also known as the “one bad apple” liability risk that a non-conforming member can pose to an entire plan, long been a stumbling block for MEPs.
- Safe harbor for annuities in 401(k)s: Section 204 gives fiduciary safe harbor to 401(k) plan sponsors who include annuities among offerings to plan participants. Many defined contribution plan sponsors have been reluctant to offer annuities due to concerns about fiduciary liability if the annuity provider becomes insolvent. Under Section 204, if an annuity provider chosen for a 401(k) plan were to go out of business or defraud plan participants, employees would not be able to sue the employer afterward.
- Lifetime income disclosures: Requires 401(k) plan sponsors to inform participating workers of the projected monthly income they could expect at retirement based on their current account balance. When additional guidance is issued, plan sponsors will need to determine whether this necessitates additional communications to plan participants, especially if an annuity is not actually an option for a plan distribution.
- Enhanced portability of lifetime income options: Permits qualified DC plans, 403(b) plans or governmental 457(b) plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
- Elimination of the Stretch IRA: Most IRA beneficiaries (not a spouse) are now required to deplete an inherited IRA within 10 years. Prior, IRAs could be “stretched out” over beneficiaries’ lifetimes, providing decades of tax-deferred (or tax-free in the case of Roth IRAs) compounding. This is the provision that is expected to pay for virtually everything else in the SECURE Act, bringing in an estimated $15.7 billion over 10 years.
- Age for RMDs raised to 72: Instead of having to take out annual Required Minimum Distributions from a 401(k) and IRA starting at age 70½, the minimum age is now 72.
- Part-time employees eligible for 401(k)s: Effective in 2021, employers will be required to offer 401(k) eligibility to part-time employees, provided they are at least 21 years old and have completed either one full year of service with more than 1,000 hours worked or three consecutive years of service with at least 500 hours worked per year.
- Penalty-free birth/adoption withdrawals: Beginning in 2020, 401(k) or IRA participants who withdraw up to $5,000 from a plan will not be subject to the 10% penalty tax on early withdrawals (before reaching age 59½) if the withdrawal is taken to cover “qualified” birth or adoption expenses.
- Small employer tax credit for auto-enrollment: The tax credit for small employers that start new retirement plans, including 401(k)s, increases from $500 per year to as much as $5,000 per year for three years. There is also a new $500 per year tax credit for up to three years for small employers adopting new plans that include automatic enrollment.
- Increase of cap for automatic enrollment safe harbor: “Safe harbor” 401(k) plans are allowed to automatically escalate workers’ contributions up to a maximum 15% savings rate, instead of the prior maximum of 10%.
- Combined annual reports for certain DC plans: Form 5500 (Annual Return/Report of Employee Benefit Plan) will be modified to permit all members of a group of defined contribution plans to file one consolidated form if the plans: 1) share the same trustee, named fiduciaries and administrator, 2) have the same plan year, and 3) provide the same investments or investment options to participants and beneficiaries. This change applies to plan years beginning after Dec. 31, 2021. The SECURE Act also increases penalties from the IRS tenfold for failing to file Forms 5500 and to provide certain notices to participants, effective for filings and notices due after 2019.
- Relaxed requirements for non-elective safe harbor 401(k) plans: The safe harbor notice requirement is eliminated for nonelective 401(k) safe harbor plans, but not for 401(k) plans that have safe harbor matching contributions. This provision applies to plan years beginning after Dec. 31, 2019.