The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was signed into law in late December 2019 as part of the Further Consolidated Appropriation Act, 2020.

The bipartisan bill contains numerous provisions aimed to expand access to workplace retirement plans and help Americans secure a financially sound future. Many of the provisions directly affect all of the approximately 100 million participants and related plan sponsors involved in defined contributions plans. It is crucial for current plan sponsors to understand, plan and respond to the SECURE Act provisions affecting single and multiemployer defined contribution plans.

Following are eight key provisions in the SECURE Act:

Additional Eligibility Considerations for Part-Time Employees

Currently, plans may exclude part-time employees (less than 1,000 hours worked). The SECURE Act introduced a new provision in which part-time employees are eligible if they meet the 1,000 hour existing requirement or have three consecutive years of service with 500 cumulative hours of service. Employees who are allowed to participate because of the consecutive year rule may be excluded from employer contributions and various tests required by the IRS and ERISA. This provision applies to plan years beginning after December 31, 2020. Service hours prior to 2021 will not be counted.

Expanded Qualified Withdrawal Options

Within one year of childbirth or adoption, employees may withdraw up to $5,000 from their retirement account penalty-free. The participant can avoid tax on the distribution if repaid at a future date. Repayments are treated as a rollover for contribution purposes. The employee may also take a qualified hardship distribution if residing in a presidentially declared disaster area. Additional terms apply to the disaster hardship distribution. This provision applies to plan years beginning after December 31, 2019.

Age Increase for Required Minimum Distribution (RMD)

The adjustment of the RMD age has increased from 70 ½ to 72. The adjustment is only applicable for participants attaining age 70 ½ after December 31, 2019.

To read more on this provision affecting retirement planning, click here.

Changes to Lifetime Income Investment Option Environment

The new provision creates an employer safe harbor that diverts liability from employers who offer guaranteed income investments. If this investment option is offered in the plan, participant benefit statements must include a disclosure regarding annuity details annually. Although uncommon, lifetime income options provide participants with a constant distribution stream for the remainder of their life. The effective date has not yet been determined and will be set after additional guidance and disclosure from the Department of Labor (DOL).

Increases of IRS Imposed Penalties

Penalties for late or materially incomplete filings can build and become burdensome. In addition to the separate civil DOL daily penalty of approximately $2,000 for late filing of Form 5500, the IRS has increased its failure-to-file penalties on Form 5500 from $25 a day to $250 a day, with a maximum amount of $150,000. This provision applies to plan years beginning after December 31, 2019.

Flexibility on Safe Harbor Contribution Elections

The new rule will eliminate employer notification requirements and allow employers flexibility in amending nonelective contribution status, providing another option to pass a failed actual deferral percentage (ADP) test by retrospectively amending a plan for a safe harbor nonelective contribution. Additionally, it increased the amount of the contribution cap on autoenrollment amounts from 10% to 15%. This provision applies to plan years beginning after December 31, 2019.

Tax Credit Incentives for Small Businesses

Two provisions incentivize new and existing plan sponsors in the form of tax credits related to the (1) initial start-up of a benefit plan and (2) automatic enrollment for new participants. The tax credit cap has increased from $500 to up to $5,000 and will apply for up to three years. In addition, new and existing plans sponsors are eligible to receive a tax credit of $500 (per year for up to three years) for converting an existing plan to a plan that includes an automatic enrollment feature for newly eligible participants. This provision applies to tax years beginning after December 31, 2019.

Increased Access to Multiple-Employer Plans

Currently, only “closed” multiple-employer plans (MEPs) are allowed (all participating employers must operate in the same industry or be members of a common established trade association). Effective for plan years beginning after December 31, 2020, the provision allows unrelated employers to band together and operate a pooled employer plan (PEP). This will provide small businesses an efficient and cost-effective option in offering an employee benefit plan. In appearance, the PEP will operate as a single employer plan; with a single plan document, a single Form 5500 filing and a single plan audit. Please note extensive terms apply related the adoption and operation on a PEP.

The law provides that all plans comply with the SECURE act provisions by the effective dates specified. An extended remedial amendment period applies in which plan documents can be updated to incorporate the new plan provisions by the last day of the first plan year beginning on or after January 1, 2022, unless otherwise extended.

As many of the provisions may be affecting millions of participants and related plan sponsors involved in defined contribution plans, it is important for plan sponsors to be aware of the changes.

Author: John Fitzpatrick | [email protected]