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.
8. Portability of Lifetime (Annuity) Income
Options
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. Treatment of 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.
12. Allowing Part-time Workers Who Have Been
Working for 3 Years to Participate in 401(k) Plans
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 Required Minimum Distributions
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.
17. Plans Adopted by Filing Due Date for Year
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.
18. Combined Annual Reports for Group of Plan
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.
