United States: The SECURE Act Makes Significant Changes To Retirement Plans

Published in NH Bar News 2/19/2020

The Setting Every Community Up for Retirement Enhancement Act (the “Act” or the “SECURE Act”), passed and signed into law on December 20, 2019, is the first major retirement plan legislation since the Pension Protection Act of 2006.  The Act makes significant changes to retirement plans and individual retirement accounts (“IRAs”) with some changes effective as early as January 1, 2020.  Although the majority of the provisions are designed to increase retirement savings, the Act also contains four provisions designed to increase tax revenue. The full scope and implications of many Act provisions will not become completely clear until clarifying regulations are issued. This article will focus on the significant provisions of the SECURE Act that impact employer retirement plans.

Part-time Employee Participation in Section 401(k) Plans

The Act significantly changes the 401(k) plan eligibility rules for part-time employees.  Previously, employers could exclude a part-time employee so long as the employee never completes 1,000 hours of service in a year. For plan years beginning after December 31, 2020, a 401(k) plan must allow an employee to make elective deferrals if the employee has worked at least 500 hours per year with the employer for at least three consecutive years, and has attained age 21 (a “long-term part-time employee”).  The long-term part-time employee must be permitted to participate and make deferrals no later than the earlier of (1) the first day of the first plan year beginning after the date on which the employee satisfied the age and service requirements, or (2) the date 6 months after the date on which the individual satisfied these requirements. The Act does not require long-term part-time employees to be otherwise eligible to receive employer contributions.

Disclosure of Lifetime Income Streams in 401(k) Plans and Related Provisions

In order to inform employees how their retirement plan account balances will translate into income at retirement, the Act requires participant benefit statements to annually include a lifetime income disclosure.  This disclosure will state the monthly payments the participant will receive if the participant's plan account is annuitized to provide a lifetime income stream for the participant and the participant's spouse. The Act requires that by December 20, 2020, the U.S. Department of Labor issue a standardized disclosure including the assumptions that employers will use in converting participants’ account balances to lifetime income streams.  The Act also includes provisions to facilitate, but not require, retirement plans to offer guaranteed lifetime income options. Defined contribution plans for private employers, unlike defined benefit plans and plans of many tax exempt employers, generally do not offer benefits in the form of annuities. The Act encourages employers to offer annuities through insurance contracts by amending the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”) that require fiduciaries to act prudently when selecting an annuity provider.  The Act provides an optional safe harbor for plan fiduciaries responsible for reviewing the financial capabilities of insurers offering the lifetime income contracts. The Act requires any plans taking advantage of a lifetime income product to include a portability feature so participants will have the ability to roll the annuity investment into an IRA without penalty.

Multiple Employer Defined Contribution Plans

The Act dramatically expands the existing rules related to multiple employer retirement plans (“MEPs”) to allow more employers to participate in a MEP. MEPs consist of two or more employers who participate in the same plan. MEPs are commonly maintained by employers in the same industry who satisfy the required close relationship test, and are used by professional employer organizations (PEOs) to provide qualified retirement plan benefits to employees working for PEO clients. The Act’s new pooled employer plan rules will permit financial services firms, insurance companies and other entities to offer unrelated employers a managed retirement plan option under which the sponsoring entity, rather than the employer, bears the major compliance burden of operating the plan.  These new rules are intended to encourage small employers to adopt retirement plans by lowering costs due to economies of scale and by reducing the compliance burden that employers would otherwise bear. 

Other Secure Act Provisions Impacting Employer Plans

The Act also increases the business tax credit for retirement plan startup costs to make setting up retirement plans more affordable for small businesses and encourages small-business owners to adopt automatic enrollment by providing additional tax credits. The Act also permits retirement plans and IRAs to allow penalty free distributions of up to $5,000 for expenses associated with the birth or adoption of a child.  The Act amended several Tax Code provisions to simplify the administration of plans that provide employer non-elective safe harbor contributions and plans with automatic enrollment and automatic increase provisions. Lastly, starting in 2020, employers can treat qualified retirement plans adopted after the close of a tax year, but before the due date of its tax return, as having been adopted as of the last day of the prior year. Under pre-Act law, a plan established after the close of the year could be effective only for the year adopted.

Revenue Raising Provisions

The Act includes provisions substantially increasing the penalties for the late filing of retirement plan tax returns and IRS Form 8955-SSA used to report and disclose terminated participants’ benefits to the IRS and Social Security Administration. The most controversial provision of the Act is the provision that requires retirement plan and IRA accounts to be distributed, and thus fully taxed, within ten years following the death of the account owner in the case of a nonspouse beneficiary. This provision, effective for deaths after 2019, will substantially alter tax and estate planning for those who had intended to defer taxation on plan and IRA benefits by arranging for distributions over the life expectancies of young nonspouse beneficiaries. 

This article highlights some of the significant SECURE Act provisions that will impact employer retirement plans. As the Act contains various effective dates for the changes, employers will need to review the Act and implement required changes operationally as soon as this year. Employers will also need to adopt retroactive plan amendments but the Act provides that adoption of those amendments will not occur until at least the 2022 plan year.

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