Alert / Retirement
Retirement reform is here

Congress and the President pass the SECURE Act

Congress and the president have passed the most significant retirement plan legislation in more than a decade. After years of failed attempts, Congress included the Setting Every Community Up for Retirement Enhancement (SECURE) Act in the recent $1.4 trillion yearend funding bill. It will immediately impact plan sponsors in 2020.

Politics aside

Both parties agreed that there would be no winner in the upcoming elections if the impending funding deadline passed and the government shut down. As a result, Congress passed, and the president signed, the Further Consolidated Appropriations Act, 2020, an appropriation bill that will fund the government for the remainder of the 2020 fiscal year. Like any bipartisan legislative effort, deals and compromises were made to ensure passage. One significant deal was including the SECURE Act, a comprehensive retirement reform bill. SECURE has long been positioned as necessary to promote retirement savings access, to address challenges to small business, and to remove inefficiencies plan sponsors face daily. Because it represents commonsense principles, SECURE was one of the few Congressional bills with broad-based bipartisan support, and thus it made its way into the spending bill.

Summary of retirement plan provisions

The funding measure includes all 29 parts of the SECURE Act version that the House passed almost unanimously in May. It also includes an additional provision that will give plan sponsors an extension to amend their documents to comply. That addition was essential as many of SECURE’s changes become effective Jan. 1, 2020. The major retirement changes are:

  • PART-TIME EMPLOYEES — Previously, plans could exclude part-time employees (i.e., less than 1,000 hours of service in a year). Plans are now required to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. The provision would provide nondiscrimination and top-heavy testing relief with respect to long-term part-time employees, as no employer contributions are required for these employees. For vesting purposes, a year of service is a 12-month period during which the part-time employee earned at least 500 hours of service. This provision is effective for plan years beginning after 2020, but service during 12-month periods beginning prior to 2021 is not considered.
  • LIFETIME INCOME DISCLOSURE — Plans are now required to provide defined contribution plan participants with an estimated monthly annuity income amount the participant’s balance could produce in retirement. Estimates must appear on participants’ annual benefit statements. SECURE clarifies that plan sponsors will not have fiduciary responsibility for providing estimates. It directs the Department of Labor (DOL) to issue model lifetime income disclosures and assumptions for use in converting participant account balances to lifetime income stream equivalents. This provision is effective for benefit statements furnished more than one year after DOL guidance is issued.
  • POOLED EMPLOYER PLANS — Unrelated employers now can pool their resources by participating in a new type of multiple employer plan. ERISA would treat these pooled plans as a single plan, potentially allowing for savings and administrative efficiencies. This provision is effective for plan years beginning after 2020.
  • FIDUCIARY SAFE HARBOR FOR SELECTION OF LIFETIME INCOME PROVIDER — Employers can benefit from a new fiduciary safe harbor when they include a lifetime income investment option in their defined contribution plans. If they receive certain representations from the insurer as to its status under and satisfaction of state insurance laws, plan fiduciaries will satisfy fiduciary requirements with respect to the financial capability of the insurer. This provision is effective on the date the law was enacted.
  • Portability of Lifetime Income Options — Now participants may take a distribution of a “lifetime income investment” without regard to the restrictions on plan withdrawals (i.e., prior to a “distributable event” such as death, disability, age 59 ½ or termination of employment). The distribution would be allowed only if:
    • the lifetime income investment is no longer authorized to be held under the plan, and
    • the distribution is made via
      • a direct rollover to an IRA or other retirement plan, or
      • a distribution of an annuity contract.
        This provision is effective for plan years beginning after 2019.
  • REQUIRED MINIMUM DISTRIBUTION RULES — For individuals who reach age 70 ½ after 2019, the required minimum distribution (RMD) age is increased from 70 ½ to 72. If an individual attains age 70 ½ in 2019, they must take an RMD for 2019 and 2020, even though they may not attain age 72 until 2021. This will require plans to modify treatment of distributions to participants who attain age 70 ½ in 2020 because these distributions are no longer RMDs and may be subject to direct rollover rights and 20 percent withholding.
  • INCREASE ON LIMIT ON AUTOMATIC ENROLLMENT QACA SAFE HARBOR DEFAULT RATE — The auto escalation limit increases from 10 percent to 15 percent (10 percent cap during the participant’s first year of participation). This provision is effective for plan years beginning after 2019.
  • ELECTING SAFE HARBOR STATUS — The two main nondiscrimination safe harbors for 401(k) plans require either a match or nonelective contributions. Both require an employee notice within a reasonable time prior to the beginning of the plan year, and there are restrictions on the ability to adopt a safe harbor mid-year. SECURE:
    • eliminates the safe harbor notice requirement with respect to nonelective 401(k) safe harbor plans;
    • permits a sponsor to amend a plan to become a nonelective 401(k) safe harbor plan at any date prior to the 30th day before the close of the plan year; and
    • permits a sponsor to amend a plan to become a nonelective 401(k) safe harbor plan after the 30th day before the close of the plan year if:
      • the plan is amended to offer a 4 percent of compensation or greater nonelective contribution to all eligible employees, and
      • the amendment is made by the last day for distributing plan year excess contributions (i.e., generally by the close of the following plan year).
        This provision is effective Jan. 1, 2020.
  • INCREASE TO SMALL EMPLOYER PLAN START-UP CREDIT — Currently employers with 100 or fewer employees receive three years of annual tax credits equal to 50 percent of retirement plan startup and administration costs, up to an annual cap of $500. The $500 cap is increasing to the greater of: 1. $500 or 2. the lesser of: 1. $5,000 or 2.$250 multiplied by the number of nonhighly compensated employees eligible to participate in the plan. This provision is effective for plan years beginning after 2019.
  • NEW AUTO ENROLLMENT CREDIT — Small employers that adopt automatic enrollment provisions will receive an additional $500 credit for three years. This is true whether the automatic enrollment provisions are adopted when the plan is first effective or later. This provision is effective for plan years beginning after 2019.
  • PLAN ADOPTION DATE — Employers may now adopt a qualified retirement plan after the close of a taxable year so long as they do so before their tax return filing deadline for the taxable year. This provision is effective for plan years beginning after 2019.
  • CHILDBIRTH OR ADOPTION WITHDRAWALS — Individuals may now take penalty-free withdrawals of up to $5,000 for expenses related to a child’s birth or adoption for up to one year following the event. This provision is effective for distributions after 2019.
  • LIMITS ON LOANS THROUGH CREDIT CARDS — The SECURE Act prohibits plan loans made through credit cards. Effective for loans made after the date of enactment.
  • CONSOLIDATION OF REPORTING — The IRS and DOL must work together to modify Form 5500 so that all members of a group of plans may file a consolidated Form 5500 if they:
    • are defined contribution plans;
    • have the same trustee, the same named fiduciary and the same administrator;
    • use the same plan year; and
    • provide the same investments or investment options to participants and beneficiaries. Effective for plan years beginning after 2021.
  • INCREASED PENALTIES — SECURE increases a Form 5500 filing failure penalties to $105 per day (capped at $50,000). Sponsors will incur an increased penalty of $100 per day (capped at $50,000 per year) for failing to provide a required withholding notice. Penalties for failures to file a registration statement for deferred vested benefits or a required notification of change are increased to $10 per day (capped at $50,000 and $10,000). The penalty for a late tax return is increased to the lesser of $400 (adjusted for inflation) or 100 percent of the amount required to be shown as tax on the return. These increased penalties are effective for plan years beginning after 2020.
  • NONDISCRIMINATION FLEXIBILITY FOR FROZEN PLANS — Defined benefit plans meeting certain requirements will receive nondiscrimination, minimum coverage, and 401(a)(26) relief on benefit accruals, and benefits, rights and features for remaining participants in plans closed to new hires. Relief would also apply (1) to defined benefit plans that close certain plan features to new hires, (2) to defined contribution plans that provide make-whole contributions or features for participants who had benefited under a now frozen defined benefit plan, and (3) with respect to the minimum participation rules, to defined benefit plans that close or freeze. This provision is effective on the date of enactment, subject to an option for employers to apply the rules to plan years beginning after 2013.

Next steps

For the most part, the SECURE Act represents great progress toward encouraging more employers to offer retirement plans, offering lifetime income options, and fixing plan administration pain points. Obviously, a lot of work must be done to bring plans into compliance. Top priority will be adapting plans to accommodate part-time workers and understanding the logistical and system issues impacting payroll, HRIS and plan recordkeeping. Expect guidance and clarification from both the IRS and DOL, but in the interim, begin discussions with your plan service providers to establish a course of action. The year-end funding legislation covered a lot of other ground, as well. For more information about impacts on employee benefits and risk insurance programs, please see our Executive Summary from Lockton Government Relations. Should you have any questions, please contact your Lockton Retirement Services Team. 

The communication is offered solely for discussion purposes. Lockton does not provide legal or tax advice. The services referenced are not a comprehensive list of all necessary components for consideration. You are encouraged to seek qualified legal and tax counsel to assist in considering all the unique facts and circumstances. Additionally, this communication is not intended to constitute US federal tax advice, and is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code or promoting, marketing, or recommending any transaction or matter addressed herein to another party. This document contains the proprietary work product of Lockton Financial Advisors, LLC, and Lockton Investment Advisors, LLC, and is provided on a confidential basis. Any reproduction, disclosure, or distribution to any third party without first securing written permission is expressly prohibited. Investment advisory services offered through Lockton Investment Advisors, LLC, an SEC-registered investment advisor. For California, Lockton Financial Advisors, LLC, dba Lockton Insurance Services, LLC, license number 0G13569.

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