Holiday Gift to Plan Participants, Additional Work for Plan Sponsors in SECURE’d Retirement Benefits

The Setting Every Community Up for Retirement Enhancement Act of 2019 and related appropriations legislation (the SECURE Act) is expected to be signed into law today.  The SECURE Act will require significant changes to be made, in both form and operation, with respect to tax-qualified plans. Certain changes made by the SECURE Act take effect at the beginning of 2020, so it is critical for plan sponsors to determine as soon as possible whether immediate action will be required. The summary below assumes that President Trump signs the legislation today.

Summary of Significant Provisions

Effective immediately or in 2020, the SECURE Act:

•  increases the date for commencing required minimum distributions from retirement plans and individual retirement accounts (IRAs) from age 70-1/2 to age 72 (effective for distributions made after, and with respect to individuals who attain age 70-1/2 after, December 31, 2019)
• permits participants in qualified defined contribution 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)
• provides permanent nondiscrimination testing relief with respect to benefit accruals and benefits, rights and features provided to a closed class of participants in defined benefit plans that have been closed to new participants and expands the ability of closed defined benefit plans to aggregate testing with defined contribution plans (generally effective December 20, 2019)
• eliminates “stretch IRAs” by requiring that all distributions to a designated beneficiary be made by the end of the 10th calendar year following the year in which the IRA owner dies (except if such beneficiary is a surviving spouse, disabled, chronically ill, a minor child or not more than 10 years younger than IRA owner) (effective for distributions by reason of an employee or IRA owner’s death after December 31, 2019)
• repeals the so-called “Cadillac” excise tax of 40 percent on high-cost health insurance plans
• provides 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
• permits participants to transfer annuities that are no longer authorized to be held as investment options under a qualified defined contribution plan to another eligible employer plan or IRA (effective for plan years beginning after December 31, 2019)
• eliminates the annual notice requirement for nonelective 401(k) safe harbor plans (those plans that provide a nonelective employer contribution of at least 3 percent of each eligible employee’s compensation) (effective for plan years after December 31, 2019)
• allows plans 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 allows plans 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 percent 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) (effective for plan years beginning after December 31, 2019)
• increases the cap on qualified automatic contribution arrangement 401(k) safe harbor plans from 10 percent to 15 percent for years following the participant’s first year of participation (effective for plan years beginning after December 31, 2019)
• extends the deadline for employers to adopt new retirement plans for the preceding taxable year until the due date of the employer’s tax return (applies to plans adopted for taxable years beginning after December 31, 2019)
• prohibits the distribution of qualified plan loans through credit cards or similar arrangements (effective for loans made after December 20, 2019)
• repeals the maximum age permitted for making contributions to a traditional IRA, thus permitting individuals to make IRA contributions after age 70-1/2 (effective for contributions made after December 31, 2019)
• increases the penalties for failure to file Form 5500, withholding notices and annual registration of certain plans (applies to returns and notices required to be filed or provided after December 31, 2019)
• provides temporary tax relief for certain qualified disaster distributions from retirement plans

Effective in 2021, the SECURE Act:

• prohibits 401(k) plans from excluding employees who complete at least 500 hours of service per year in three consecutive years from participating in the plan (previously, the threshold was 1,000 hours), though employers may exclude such employees (i) from eligibility for employer contributions, and (ii) for purposes of satisfying nondiscrimination, coverage and top-heavy rules (effective for plan years beginning after December 31, 2020, but 12-month periods beginning before January 1, 2021 will not be taken into account)
• expands the ability of unaffiliated employers to adopt a type of multiple employer plan, referred to as a “pooled employer plan”, if certain conditions are met (effective for plan years beginning after December 31, 2020)

Effective in 2022, the SECURE Act:

• allows consolidated Form 5500 filings for similar defined contribution plans with the same trustee, named fiduciary(ies) under the Employee Retirement Income Security Act, administrator, plan year and investments for participants and beneficiaries (effective upon issuance of a consolidated Form 5500, no later than January 1, 2022, and will apply to filings for plan years beginning after December 31, 2021)

In addition, the SECURE Act:

• requires defined contribution plan sponsors to give each participant annual estimates of the annuity payment amounts the participant could receive if the participant’s account is paid out as a lifetime income stream (effective after issuance of guidance by the U.S. Department of Labor). Note that this provision doesn’t require plans to offer annuity forms of payment