The SECURE Act was passed into law on December 20, 2019.
David Whaley, partner at Thompson Hine LLP in Cincinnati, Ohio, explains that the law is a collection of singular ideas that have been floating around for a long time that have been consolidated into one act. While there have been some who have likened it to the passage of the Pension Protection Act (PPA) of 2006, Whaley says the SECURE Act is not a full modification of retirement programs. For example, the acceptance of open multiple employer plans (MEPs) is unrelated to the change in required minimum distributions (RMDs), which is unrelated to the ability to adopt a retirement plan by the time of filing the employer’s tax return.
Whaley notes that the majority of the law’s provisions are effective for plan years beginning after 12/31/2019. So, preparations should already be underway.
There are three provisions plan sponsors should get a handle on immediately, according to Barb van Zomeren, senior vice president of ERISA [Employee Retirement Income Security Act] at Ascensus in Brainerd, Minnesota. “The increase in the age for RMDs, the elimination of the ability of certain beneficiaries to stretch IRA payments over their lifetime, and the exception to the 10% early distribution penalty for distributions for birth or adoption of a child are the most urgent for plan sponsors to address,” she says.
Van Zomeren explains that if an individual is born on or after July 1, 1949, he will turn 70 ½ in 2020, so he won’t have to take an RMD until he turns age 72. However, those who turned 70 ½ in 2019 will fall under old rules; they will get their initial RMD April 1, 2020, and will continue to get distributions each year.
She says plan sponsors should be aware of how the provision applies to those in RMD status and those who will have to wait, and they need to explain it to participants. Plan sponsors likely rely on their service providers for help in processing distributions, and many service providers are asking the IRS for relief on RMDs because they have to program their systems for rolling over RMDs and taking taxes, according to van Zomeren.
As for the elimination of the stretch IRA, van Zomeren says it is important for participants and beneficiaries to understand the change to a 10-year payout period. She notes there are exceptions in the law for chronically ill and disabled participants. Plan service providers will need to be able to handle payouts in the near-term as beneficiary payouts actually occur.
The SECURE Act permits participants in qualified defined contribution (DC) plans and IRAs to elect a penalty-free in-service withdrawal of up to $5,000 within one year following the birth or adoption of a child and allows later repayment of such withdrawals (effective for distributions made after December 31, 2019). “At this point, I understand the elimination of the distribution penalty for birth or adoption to be optional, but we need clarification on this,” van Zomeren says. “Also, clarification is needed on the open-ended repayment period.” She also says plan sponsors and service providers need to understand whether the 20% withholding on distributions applies. “This is one of the provisions for which more guidance is needed before plan sponsors want to let participants take advantage of the feature.”
Other provisions effective in 2020
According to attorneys at Sidley Austin LLP, other provisions of the SECURE Act that are effective in 2020 include:
- permanent nondiscrimination testing relief with respect to benefit accruals and benefits, rights and features provided to a closed class of participants in defined benefit (DB) plans that have been closed to new participants and the ability of closed DB plans to aggregate testing with DC plans;
- a fiduciary safe harbor with respect to the selection of an insurer to provide a guaranteed retirement income contract under which a fiduciary is deemed to have satisfied its prudence requirement regarding selection of an insurer if a plan fiduciary satisfies certain specified conditions in selecting an insurer. The SECURE Act expressly notes that, to satisfy this safe harbor, a fiduciary is not required to select the lowest cost contract. This provision does not have a stated effective date.;
- participants are permitted to transfer annuities that are no longer authorized to be held as investment options under a qualified DC plan to another eligible employer plan or IRA;
- the annual notice requirement for nonelective 401(k) safe harbor plans—those plans that provide a nonelective employer contribution of at least 3% of each eligible employee’s compensation—is eliminated;
- plans are allowed to be amended to become nonelective 401(k) safe harbor plans at any time before the 30th day before the close of the plan year; also they are allowed to be amended to become nonelective 401(k) safe harbor plans after that date if the plan is amended to provide a nonelective employer contribution of at least 4% of each eligible employee’s compensation and the amendment is made by the last day for distributing excess contributions for the plan year (generally, the last day of the next plan year);
- qualified automatic contribution arrangement (QACA) safe harbor plans are allowed to increase the cap on automatically raising payroll contributions from 10% to 15% of an employee’s paycheck, with the option to opt out;
- the deadline for employers to adopt new retirement plans for the preceding taxable year is extended until the due date of the employer’s tax return;
- the distribution of qualified plan loans through credit cards or similar arrangements is prohibited;
- the maximum age permitted for making contributions to a traditional IRA is repealed, thus permitting individuals to make IRA contributions after age 70-1/2;
- temporary tax relief for certain qualified disaster distributions from retirement plans; and
- an increase in the penalties for failure to file Form 5500, withholding notices and annual registration of certain plans.
Van Zomeren says there are other provisions of the SECURE Act that encourage retirement plan access and additional participation. For one, there is a new start up credit for the adoption of an automatic enrollment feature in DC plans for first three years it’s maintained. There is also a credit for adopting a retirement plan, from $500 to $5000 depending on the number of employees and number of non-highly compensated employees (NHCEs).
She adds that, the provision of being able to adopt a new plan as late as the employer’s tax filing deadline, including extension, would allow an employer, for example, to adopt a profit sharing plan and make it a 401(k) at a later time once it sees how profits are doing.
According to van Zomeren, one section included in the SECURE offers a remedial amendment period. It allows plan sponsors to make changes immediately, but they have until the end of the 2022 plan year to adopt an amendment. This will mostly apply to those provisions that are optional and not required.
Whaley explains that amendments for any required modifications are not required to be incorporated into the plan document until the modification shows on the cumulative list from the IRS, at which time the agency will provide the date by which amendments have to be adopted.
Van Zomeren says as recordkeepers address any changes to their systems to comply with the law, plan sponsors can expect education from them about the provisions of the SECURE Act and how they will impact sponsors’ plans. Plan sponsors will be informed of additional features they may consider for plan design, as well as what kind of documentation and amendments need to be made.
“Right now, plan sponsors should educate themselves [about SECURE Act provisions], prioritize which are impactful immediately and consider others for plan design,” van Zomeren says. “Considering the law was enacted late in last year with a January 1, 2020, effective date, there will be additional guidance and relief [the retirement plan industry] should watch for.”