This past year has been unpredictable, at best, but as we move into 2021, there is one thing we can be certain of: more change is coming. The SECURE Act included a number of provisions to retirement plans, several of which go into effect this month. To best plan for these imminent changes, here’s a look at what lies ahead.
Long-term part-time employees
There is a growing workplace trend of employees taking leave or changing from full-time to part-time status. To account for this, the SECURE Act provides employees who are 21 or older that have worked more than 500 hours for three consecutive plan years, with an opportunity to participate in their employer’s 401(k) plan.
Previously, part-time employees had to work more than 1,000 hours during each plan year, which, by definition, precluded many new mothers or employees caring for a sick relative from being able to participate.
Starting in 2024, there will be a whole new group of employees who become eligible for the plan, which in turn may impact the total amount an employer matches, vesting schedules, and compliance tests because these part-time employees will now become eligible sooner than they would under previous rules and need to be accounted for in those calculations.
We are awaiting regulatory guidance as to whether these employees must also be counted for purposes of determining whether the plan is a “large plan” and therefore required to undergo an audit.
Disclosure of lifetime income
Starting in August, the SECURE Act will require that all participant benefit statements include a lifetime income disclosure. The disclosure must express a participant’s total accrued benefits listed as monthly payments that a participant or beneficiary would receive if the account balance were to provide a lifetime income stream.
Two sets of lifetime income stream illustrations are required: one a qualified joint and survivor lifetime income stream based on the assumption that the participant has a spouse of equal age, and the other as a single-life annuity. The Department of Labor (DOL) issued model disclosure language in September.
Benefit statements for self-directed plans must also contain certain explanations about the participant’s plan investment rights and the importance of a well-balanced and diversified investment portfolio, as well as furnish a notice of a DOL website providing information about investing.
Aggregated plans
At long last, the much-awaited concept of “open” Multiple Employer Plans (MEPs) has become a reality. The SECURE Act allows unrelated employers to band together in these MEPs, also referred to as Pooled Employer Plans (PEPs), with the promise of reducing the costs and administrative burdens that each participating employer would otherwise bear alone.
A PEP allows unrelated employers to agree to a single plan document, file a single Form 5500, and participate in one plan audit. The “one bad apple” rule no longer applies, thereby protecting PEP members from liability risks for other employers’ noncompliance.
Still, a PEP may not be appropriate for all employers, including small businesses that would now have to bear some of the cost for a potentially expensive plan audit. Not to mention that index funds and technology have made 401(k) plans highly efficient and possibly less expensive than a PEP.
This is an expansion of the Department of Labor’s last ruling on the subject, which allowed open MEPs in the form of association retirement plans that could be administered by trade organizations or chambers of commerce.
The SECURE Act now permits financial services companies and others to serve as Pooled Plan Providers and administer these plans, thereby serving as the ERISA section 3(36) Plan Administrator and plan fiduciary. Form PR for potential PPPs to become certified is now available.
While we’re still awaiting guidance on some of the nuances of these imminent SECURE Act changes, it’s important for advisors and sponsors to understand the impact they can have on both new and existing plans. We all know 2021 will continue to bring with it new regulations and challenges, so the best thing we can be is prepared by understanding the impact of these changes.
Allison Brecher is General Counsel and Chief Compliance Officer at New York City-based digital retirement platform provider Vestwell. She has more than 20 years of legal and regulatory experience having handled high-profile and complex litigation involving employee benefits, ERISA, regulatory matters, data privacy, and electronic discovery.
Allison Brecher is the general counsel of Vestwell, a digital retirement platform that streamlines administration and management of retirement plans.
