SECURE Act Summary
On December 20, 2019 the "SECURE Act" (Setting Every Community Up for Retirement Enhancement Act of 2019) was enacted part of the Further Consolidated Appropriations Act, 2020, P.L. 116-94, H.R. 1865 (with basically the same provisions of H.R. 1994, originally passed by the House on May 23, 2019). The SECURE Act makes significant changes to retirement savings law. This legislation is the first significant retirement benefit legislation in more than a decade.
The following is a brief summary of the key provisions in the SECURE Act:
1. Authorizing Multiple Employer Defined Contribution Plans
The SECURE Act expands the use of multiple employer plans ("MEPs") by allowing totally unrelated companies to use a single shared defined contribution MEP provided the third-party plan administrator is a pooled plan provider registered with the IRS and acknowledges that it is a named fiduciary of the plan. (SECURE Act § 101 adding IRC § 413(e) and ERISA §§ 3(43) and 3(44)) The Committee Report 116-65 on an earlier version of the SECURE Act (which was substantially the same as the version passed) (May 16, 2019) (the "Committee Report") notes that this change will make MEPs more attractive by eliminating barriers to the use of MEPs and improving the quality of MEP service providers. Under prior guidance, an open MEP used by unrelated employers even without commonality of interests or not in same industry or locality would run afoul of Department of Labor guidance. Under the SECURE Act and IRC § 413(e)(4), the Treasury is directed to issue guidance as to how to spin of assets of a non-compliant employer into a separate plan (so as to avoid the one bad apple issue). The new rules are effective for plan years beginning after December 31, 2020.
2. Increasing the Auto Enrollment Safe Harbor Cap after First Year of Enrollment
Existing rules provided that for automatic enrollment safe harbor 401(k) plans, there is a cap on the default contribution rate to 10% of an employee’s compensation. The SECURE Act increases the automatic enrollment limit for salary deferrals under the automatic enrollment safe harbor from 10% to 15% of compensation for any year after the first year of participation. (SECURE Act § 102 amending IRC § 401(k)(13)(C)(iii)) This is effective for plan years beginning after December 31, 2019.
3. Simplification of Safe Harbor 401(k) Rules.
The SECURE Act, with respect to non-elective safe harbor plans, i.e., 401(k) plans that provide employer contributions of 3% of each employee’s compensation regardless of whether the employees make deferrals, provides for elimination of the annual safe harbor notice requirement, although participants must still receive an annual notice to make or change elections which is required for all 401(k) plans. However, employers that make safe harbor matching contributions will still need to give the advance notice. This change is effective for plan years beginning after December 31, 2019. SECURE Act § 103 amending IRC § 401(k)(12).
The SECURE Act also provides with respect to non-elective safe harbor plans an allowance of a retroactive amendment to a plan to become a non-elective safe harbor 401(k) plan at any time before the 30th day preceding the close of the plan year, and allowance of an amendment after that time if it provides for a nonelective contribution of at least 4% of compensation (rather than 3%) for all eligible employees for that plan year, if the amendment is made no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year. SECURE Act § 103 amending IRC § 401(k)(13). This relief does not apply to safe harbor matching contribution plans. These provisions are effective for plan years beginning after December 31, 2019.
4. Small Employer Credits
Increased Credit for Small Employer Pension Plan Start-Up Costs - The SECURE Act increases the credit for small employer pension plan startups by changing the calculation of the flat dollar amount limit on the credit to the greater of (a) $500 or (b) the lesser of (i) $250 multiplied by the number of non-highly compensated employees of the employer who are eligible to participate in the plan or (ii) $5,000. The credit applies for up to three years. (SECURE Act § 104 amending IRC § 45E)
5. Small Employer Automatic Enrollment Credit (up to 3 years) - The SECURE Act creates a new tax credit of up to $500 per year (up to 3 years) to employers of small businesses (100 or less employees) to defray startup costs for new section 401(k) plans and SIMPLE IRA plans that include automatic enrollment. (SECURE Act § 105, adding IRC § 45T)
6. Repeal Prohibition on Contributions to Traditional IRAs After Age 70-1/2 Maximum Age for Traditional IRA Contributions
The SECURE Act repeals the prohibition on contributions to traditional IRAs by individuals who have attained age 70-1/2. (SECURE Act § 107 striking IRC § 219(d)(1)) The Committee Report notes that as Americans live longer, an increasing number continue employment beyond traditional retirement age. This is effective for contributions made on or after January 1, 2020.
7. Plan Participant Loans through Credit Cards Not Allowed
The SECURE Act prohibits plans from making plan loans accessible to participants through credit cards or any other similar arrangement. (SECURE Act § 108 adding IRC § 72(p)(2)(D)) The Committee Report notes that the change will ensure that plan loans are not used for routine or small purchases, which would deplete retirement savings. This rule is effective for loans made after December 20, 2019.
In order to encourage the use of annuity options in retirement plans, the SECURE Act permits tax-qualified defined contribution plans, section 403(b) plans, and eligible 457(b) plans to be amended to provide for (i) direct rollovers to other employer-sponsored retirement plans or IRAs of a lifetime annuity income investment or (ii) distributions of an annuity income investment in the form of a qualified distribution, if the annuity income distribution option is no longer authorized to be held as an investment option under the existing plan. (SECURE Act § 109, amending IRC §§ 401(a)(38), 401(k)(2)(B)(i)(VI), 401(k)(2)(B)(iii), 403(b)(11)(D), 403(b)(7)(A), 457(d)(1)(A)(iv) and 457(d)(1)(D)) The Committee Report notes that this change will permit participants to preserve annuity their income investments and avoid surrender charges and fees. This is effective for plan years beginning after December 31, 2019.
9. Fiduciary Safe Harbor for Selection of Lifetime Income Provider
The SECURE Act provides that fiduciaries (i) have an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for guaranteed retirement income contract (annuity options) and (ii) are protected from liability for any losses that may result to the participant or beneficiary due to an insurer's inability in the future to satisfy its financial obligations under the terms of the contract. The safe harbor requires that fiduciary (i) engages in an objective and thorough search to identify the insurer, (ii) considers the financial capability of such insurer to satisfy its obligations under the guaranteed retirement income contract and (iii) considers the cost (including fees and commissions) of the guaranteed retirement income contract; and on the basis of such consideration, (i) the fiduciary concludes that at the time of selection the insurer is financially capable of satisfying its obligations under the guaranteed contract, and (ii) the relative cost of the selected guaranteed contract is reasonable. The fiduciary must obtains written representations from the insurer that (i) the insurer is licensed to offer guaranteed retirement income contracts, (ii) the insurer, at the time of selection and for each of the immediately preceding seven plan years operates under a certificate of authority from the insurance commissioner of its State, has filed audited financial statements in accordance with state law, maintains reserves which satisfies all the state statutory requirements and is not operating under an order of supervision, rehabilitation, or liquidation. In addition, the insurer must undergo at least every five years a financial examination (under state law) domiciliary State (or representative, designee, or other party approved by such commissioner) by the insurance commissioner or its designee, and the insurer must notify the fiduciary of any change its representation. The statute provides that nothing in this provision shall be construed to require a fiduciary to select the lowest cost contract. A fiduciary may consider the value of a contract, the insurer’s financial strength and the cost of the contract. (SECURE Act § 204 adding ERISA § 404(e)) These provisions are effective December 20, 2019.
10. Custodial Accounts on Termination of Section 403(b) Plans
The SECURE Act provides that, not later than six months after the date of enactment, the Treasury shall issue guidance under which if an employer terminates a 403(b) custodial account, the final distribution to participants needed to effectuate the plan termination may be the distribution of an individual custodial account in kind to the participant. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out, subject to the 403(b) rules in effect at the time that the individual custodial account is distributed. The Treasury guidance is to be retroactively effective for taxable years beginning after December 31, 2008. (SECURE Act § 110)
11. Clarification of Retirement Income Account Rules Relating to Church-Controlled Organizations
The SECURE Act of 2019 amends IRC § 403(b)(9) to clarify that individuals who may be covered by retirement income accounts maintained by church-controlled organizations may include not only duly ordained or licensed ministers but also employees of tax-exempt church-controlled organizations that are controlled by or associated with a church or a convention or association of churches (e.g., church-affiliated hospitals and universities). (SECURE Act § 111 amending IRC § 403(b)(9).) This is effective for years beginning on or after December 20, 2019.
Long term part-time employees who work less than 1,000 hours per year can under current law be excluded from participating in a qualified retirement plan. The SECURE Act will require employers to maintain a 401(k) plan to have a dual eligibility requirement of (i) completing 1,000 hours of service or (ii) having three consecutive years of service where the employee completes at least 500 hours of service in each. (SECURE Act § 112 amending IRC § 401(k)(2)(D)) This rule will not apply to collectively bargained plans. With respect to long-term part-time employees who are eligible under the above provisions matching or other employer contributions are not required, relief is provided from the nondiscrimination and top-heavy rules for such coverage. New IRC § 401(k)(15). The effective date is for plan years beginning after December 31, 2020.
13. Withdrawals from Retirement Plans for Birth or Adoption
The SECURE Act provides for withdrawals from retirement plans of up to $5,000, even before 59-1/2 and without the IRC § 72(t) 10% early distribution penalty in the year following the birth or adoption of a child. (SECURE Act § 113 adding IRC § 72(t)(2)(H)) This is effective for distributions made after December 31, 2019.
14. Age for
Prior to 2020, minimum distributions would generally be taken from retirement plans or IRAs beginning with the year in which the employee or IRA owner attains age 70-1/2 (or April 1 following the first year in which this occurs). The SECURE Act of 2019 changes the required beginning date on which the required minimum distributions must begin from the calendar year in which the participant attains age 70-1/2 to the calendar year in which the participant attains age 72. (SECURE Act § 114 amending IRC §§ 401(a)(9)( C)(i)(I), 401(a)(9)(B)(iv)(I) and 401(a)(9)( C)(ii)(I), last sentence of § 408(b) and § 457(d)(1)(A)(i)) According to the Committee Report, although the policy behind the required minimum distribution rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes, nevertheless, age 70-1/2 was first applied in the early 1960s and has never been adjusted to take into account increases in life expectancy. This applies for distributions made after December 31, 2019 for individuals who attain age 70½ after such date.
15. Community Newspapers Pension Funding Relief
Community newspapers are generally family-owned, non-publicly traded, independent newspapers. The SECURE Act provides pension funding relief for community newspaper plan sponsors by increasing the interest rate to calculate those funding obligations to 8%. Additionally, the SECURE Act provides for a longer amortization period of 30 years from 7 years. (SECURE Act § 115 adding IRC § 430(m)) These two changes would reduce the annual amount struggling community newspaper employers would be required to contribute to their pension plan. This is effective for plan years ending after December 31, 2017.
16. Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations
Many home healthcare workers do not have a taxable income because their only compensation comes from "difficulty of care" payments exempt from taxation under IRC § 131. Because such workers do not have taxable income, they cannot save for retirement in a defined contribution plan or IRA. The SECURE Act allows home healthcare workers to contribute to a plan or IRA by amending IRC sections 415(c) and 408(o) to provide that tax exempt difficulty of care payments are treated as compensation for purposes of calculating the contribution limits to defined contribution plans and IRAs. (SECURE Act § 116 adding §§ 408(o)(5) & 415(c)(8)) This is effective for plan years beginning after December 31, 2015 and for IRA contributions made after December 31, 2019.
The SECURE Act amends IRC § 401(b) to provide that a qualified retirement plan is adopted before the due date (including extensions) of the tax return for the taxable year may be treated as having been adopted as of the last day of the taxable year. (SECURE Act § 201 amending IRC § 401(b)) The Committee Report notes that this additional time to establish a plan provides flexibility for employers considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings. This is effective for plans adopted for tax years beginning after December 31, 2019. See also below regarding SECURE Act § 601 relating to provisions relating to Plan amendments needed for implementing SECURE Act.
The SECURE Act directs the IRS and DOL to provide for the filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing would be defined contribution plans with the same trustee, the same named fiduciary under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. (SECURE Act § 202) The Committee Report notes that the change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan. This is effective for plan years beginning after December 31, 2021.
19. Disclosure Regarding Lifetime Annuity Income
SECURE Act amends ERISA to require that benefit statements provided to defined contribution plan participants must include a "lifetime income disclosure" at least once every 12-months. The lifetime income disclosure would show the monthly payments the participant would receive if the total account balance were provided as lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant's surviving spouse and a single life annuity. The DOL is directed to develop a model disclosure. Disclosure in terms of monthly payments will allow participants to correlate the funds in their defined contribution plan to lifetime income. Plan fiduciaries, plan sponsors, or other persons will have no liability under ERISA solely by providing annuity income stream equivalents that are derived in accordance with permitted assumptions and guidance and that include the explanations contained in the model disclosure. (SECURE Act § 203 adding ERISA §§ 105(a)(2)(B)(iii) and 105(a)(2)(D)) This applies to benefit statements furnished more than 12 months after the latest to occur of the DOL issuing (i) interim final rules, (ii) the model disclosure or (iii) the assumptions that may be used in the disclosure.
20. Modification of Nondiscrimination Rules for Closed Defined Benefit Plans
The SECURE Act provides relief from nondiscrimination, minimum coverage and minimum participation rules for defined benefit plans that are closed to new participants but allow existing participants to continue to accrue benefits. This relief is subject to the plan satisfying certain requirements, including that the plan’s benefits were nondiscriminatory during the year in which the plan was closed and the two following years. The modification will protect the benefits for older, longer-service employees as they near retirement. This is generally effective on the date of enactment – December 20, 2019, although plan sponsors can elect an earlier effective date.
21. Modification of PBGC Premiums for CSEC Plans
In 2014, different funding rules were adopted for three types of pension plans: single-employer, multiemployer and cooperative and small employer charity (CSEC) plans. The SECURE Act provides flat-rate premiums of $19 per participant, and variable rate premiums of $9 for each $1,000 of unfunded vested benefits for CSEC plans. (SECURE Act § 206 adding ERISA §§ 4006(a)(3)(A) & 4006(a)(3)(E)(v)) This is effective presumably on the date of enactment – December 20, 2019.
22. Expansion of Section 529 Plans
The SECURE Act expands 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments (including those for siblings) and private elementary, secondary, or religious schools. (SECURE Act § 302 adding IRC §§ 529(c)(8) and 529(c)(9)) This is effective for distributions made after December 31, 2018.
23. Modifications to Required Minimum Distribution Rules
The SECURE Act modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the employee or account owner. Under the SECURE Act, distributions to individuals are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner's death; provided, however, that this 10-year requirement will not apply to the surviving spouse of the employee (or IRA owner), to disabled or chronically ill individuals, to individuals who are not more than 10 years younger than the employee (or IRA owner), or to children of the employee (or IRA owner) who have not reached the age of majority. (SECURE Act § 401 amending IRC § 410(a)(9)(E) and adding § 401(a)(9)(H)) This is generally effective for distributions with respect to employees who die after December 31, 2019. However, for collectively bargained plans, this applies with respect to employees who die in calendar years after the earlier of (i) the later of the date of termination of the collective bargaining agreement or December 31, 2019 or (ii) December 31, 2021.
24. Reduced Minimum Age for Pension Plan In-Service Distributions (from Division M)
The SECURE Act in a different section (to offset certain expenses arising in that section) allows in-service distributions under a defined benefit, money purchase plans or governmental section 457(b) plan at age 59 ½ (rather than age 62 that was permitted for pension plans or age 70 ½ that was permitted for 457(b) plans). This is effective for plan years beginning after December 31, 2019. (SECURE ACT Division M § 104).
25. Increase in Penalty for Failure to File Tax Return
In general tax provision, the SECURE Act increases the penalty for failure to file a tax return to the lesser of $435 or 100% of the amount of the tax due. (SECURE Act § 402 amending IRC § 6652) According to the Committee Report, increasing the penalties will encourage the filing of timely and accurate returns which will improve overall tax administration. This is effective for tax returns for which the due date with extension is after December 31, 2019.
26. Increased Penalties for Failure to File Retirement Plan Returns
The SECURE Act increases the failure to file penalties for retirement plan returns. The Form 5500 penalty would be increased from $25 to $250 per day, not to exceed $150,000 (up from $15,000). Failure to file a registration statement would incur a penalty of $10 per participant per day (up from $1), not to exceed $10,000 (up from $1,000). Failure to provide a required withholding notice would result in a penalty of $100 for each failure (up from $10), not to exceed $50,000 for all failures during any calendar year (up from $5,000). (SECURE Act § 403 amending IRC §6651)) This is effective for returns, statements and notifications required to be provided/filed after December 31, 2019.
27. Information Sharing
The SECURE Act allows the IRS to share returns with the U.S. Customs and Border Protection for purposes of administering the heavy vehicle use tax. (SECURE Act § 404 adding IRC § 6103(o)(3)) This is effective presumably on the date of enactment – December 20, 2019.
28. Plan Amendment Deadline
Tax-qualified retirement plans will need to be formally amended to reflect the requirements of the SECURE Act. The deadline for such amendments is the end of the first plan year beginning on or after January 1, 2022 (January 1, 2024 for collectively bargained and governmental plans). However, tax-qualified plans must be operated in accordance with the new law as of the respective effective dates.