The Impact of the SECURE Act

This past holiday season, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It was signed into law on December 20, 2019 and is the most sweeping legislation to impact retirement plans since the Pension Protection Act of 2006.

The retirement industry as a whole is diligently reading through the legislation. There are several areas that need further guidance from the IRS and DOL before administrators can make any recommendations at a plan level. Below are overviews of the provisions of the SECURE Act that we feel have the most direct impact on the majority of retirement plans.

Increased Age for Required Minimum Distributions (Section 114)

Effective for Plan Years beginning on or after January 1, 2020

The age has increased from 70 ½ to 72. This change only impacts those who turn 70 ½ after December 31, 2019. Anyone who turned 70 ½ prior to January 1, 2020 continue to fall under the prior regulations.
Adopting Safe Harbor Feature (Section 103)

Effective for Plan Years beginning on or after January 1, 2020

A plan sponsor will have the ability to switch from a non-safe harbor 401(k) plan to a non-elective safe harbor 401(k) plan up to 31 days before the plan year end. A plan sponsor can also make the switch within the last 31 days of the plan year, but the non-elective contribution would then have to be at least 4% of compensation, instead of 3%.
Qualified Automatic Contribution Arrangement (QACA) Increase (Section 102)

This is a form of Safe Harbor Plan

For plans using the QACA feature, the escalation limit increases from 10% to 15%. Although plans are not required to escalate up to the new limit, the change is intended to assist plan sponsors who want to help participants attain retirement readiness.
Participation of Part-Time Employees (Section 112)

Required Provision

To expand coverage under retirement plans, Congress has decided to reduce eligibility standards; but, the reduction only applies for salary deferrals. Any employee who works 500 hours in 3 consecutive years will be eligible for salary deferrals. However, service before the plan year beginning on or after January 1, 2021 is not counted. Consequently, the earliest an employee can be eligible to defer under this new standard is January 1, 2024. Employees eligible under this new rule will not be required to receive any employer contributions and will be excluded from nondiscrimination and top-heavy testing.
Increasing Penalties for Form 5500 and 8955-SSA (Section 403)

Effective Immediately

In order to offset lost revenue, Congress significantly increased penalty amounts for late filers. For Form 5500: $250 per day, not to exceed $150,000 (up from $25 per day and $15,000). For Form 8955-SSA: $10 per day, not to exceed $50,000 (up from $1 per day and $5,000). The increase applies to forms required to be filed after December 31, 2019.
Birth or Adoption Withdrawals (Section 113)

Effective Immediately (optional)

Participants can now withdraw up to $5,000 for qualified birth or adoption without the 10% early withdrawal penalty. In addition, the amount may be repaid to a retirement plan. The law change does not require plans to allow in-service distributions. Rather, the change ensures that, where such distributions are permitted and taken, participants will not be hit with the 10% early withdrawal penalty if received before age 59 ½. Plan sponsors still have the ability to limit or prohibit in-service withdrawals from the plan. We, and many others in the Retirement industry, do not recommend allowing this provision at this time due to outstanding questions and additional guidance necessary to administer this option appropriately.
Lifetime Income Projection (Section 203)

Required

Participants will be required to receive a disclosure of lifetime income, which is a projection of annuitized monthly income, on their benefit statement at least annually. Further guidance is needed on this provision. It will not be applicable for at least 12 months after the DOL issues guidance and model language.
Tax Credits for Small Employers Establishing a New Plan (Sections 104 & 105)

Effective for Tax Years beginning after December 31, 2019

Small employers, with up to 100 employees, who are establishing a new plan will receive a credit the greater of (1) $500, or (2) the lesser of (a) $250 per non-highly-compensated employee eligible to participate in the plan, or (b) $5,000. An additional $500 credit is provided for plans that include automatic enrollment. Each credit applies for up to 3 years.
Fiduciary Safe Harbor for Selection of Lifetime Income Provider (Section 204)

Effective Immediately

Employers offering defined contribution plans are provided with a fiduciary safe harbor that satisfies the prudence requirement, encouraging them to offer in-plan annuity options that provide lifetime income during retirement.
Plan Adoption Through Tax-Filing Deadline (Section 201)

Effective for Tax Years beginning after December 31, 2019

Permits an employer to adopt a qualified plan as late as the tax return due date, including extensions, for the taxable year and treat it as having been adopted as of the last day of the taxable year.

While some of the listed provisions are effective immediately, and plans must act in accordance with the law, it’s important to keep in mind that amendment language for plan documents has yet to be drafted. The IRS has set an initial deadline date of the last day of the first plan year beginning on or after January 1, 2022 for these amendments. The IRS can and may extend this deadline.

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