Key Provisions of the SECURE Act Affecting Defined Contribution Plans
January 15, 2020
Passed in December 2019 after much bi-partisan effort, the Setting Every Community Up for Retirement Enhancement (SECURE) Act includes reforms intended to increase access to workplace plans and expand retirement savings. The Act’s passage will impact defined contribution (DC) plans, as well as defined benefit (DB) plans, individual retirement accounts (IRAs), and 529 plans.
The following is a summary of key provisions that will impact sponsors of defined contribution plans.
Expansion of Multiple-Employer Plans
- Pooled Employer Plans (Section 101)
o The Act allows unrelated employers to join together in a new type of “open” multiple-employer plan (or “MEP”), known as a “Pooled Employer Plan.” Current law generally allows only employers who are related in some way, e.g., in the same industry or members of an association, to form MEPs.
o Each of the new Pooled Employer Plans will be treated as a single plan under the Employee Retirement Income Security Act of 1974 (“ERISA”).
o The act eliminates the “one bad apple” rule, easing concerns that the qualification issue of a single employer could result in the disqualification of an entire Pooled Employer Plan or related-employer MEP.
o Although the fiduciary responsibility of the employers participating in the pooled plan is limited, they retain the responsibility for the selection and monitoring of the pooled plan provider (which will also be the named plan fiduciary and administrator).
Employer-Sponsored Plan Start-up
- Increase to Small Employer Plan Start-Up Credit (Sections 104 and 105)
o Currently, an eligible employer with 100 or fewer employees may receive an income tax credit for qualified start-up costs of adopting a new qualified retirement plan. The Act raises the cap on the credit from $500 to up to $5,000 for three years.
o The Act provides for a credit for small employers that establish plans that include automatic enrollment in new 401(k) or SIMPLE IRA plans or for existing plans that add automatic enrollment as a feature (up to $500 per year for three years).
o Effective for taxable years beginning after December 31, 2019.
Lifetime Income Provisions
- Lifetime Income Disclosure (Section 203)
o The Act requires employers to provide an estimate of monthly income that a participant's balance could generate if converted to a qualified joint and survivor annuity and a single life annuity.
o The disclosure must be included in participants’ annual benefit statements
o The Act directs the Department of Labor to issue model disclosures as well as assumptions that may be used in the calculation of the income streams.
o Effective for benefit statements furnished more than 12 months following the DOL’s publication of an interim final rule or model disclosures and assumptions, whichever is later.
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider (Section 204)
o The bill provides a safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed income contract.
o Fiduciaries will be shielded from liability for losses that may result from an insurer's inability to satisfy its contractual financial obligations, provided safe harbor requirements are met.
o The direction regarding which steps an employer must take to satisfy its fiduciary obligations addresses one of the key issues employers had with the previous 2008 DOL safe harbor regarding insurer selection.
o Effective immediately upon enactment.
- Portability of Lifetime Income Options (Section 109)
o If a lifetime income investment is no longer authorized to be held as an investment option within a qualified defined contribution plan, section 403(b) plan, or governmental section 457(b) plan, it may be transferred to another employer-sponsored retirement plan or IRA or distributed in the form of a qualified plan distribution annuity.
o Effective for plan years beginning after December 31, 2019.
Plan Distribution Provisions
- Increase in Age for Required Beginning Date (Section 114)
o The age at which required minimum distributions must begin is increased from 70 ½ to 72.
o Effective for individuals turning 70 ½ after December 31, 2019.
- Post-Death Required Minimum Distribution Rules for IRAs and Defined Contribution Plans (Section 401)
o Under the legislation, distributions to individuals other than the surviving spouse of the employee, disabled or chronically ill individuals, individuals who are not more than ten years younger than the employee, or minor child of the employee, 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.
o Effective for distributions because of a participant’s death after December 31, 2019 (or December 31, 2021, for governmental plans and certain collectively bargained plans).
- Childbirth or Adoption Withdrawals (Section 113)
o The bill allows for penalty-free withdrawals of up to $5,000 from qualified defined contribution, 403(b), and governmental 457(b) plans and IRAs for any “qualified birth or adoption distributions.”
o Effective for distributions after December 31, 2019.
- Reduced Minimum Age for In-Service Distributions (Section 104 of Division M)
o In-service distributions under a governmental section 457(b) plan are allowed at age 59 ½, versus the previous age 70 ½.
o Effective for plan years beginning after December 31, 2019.
- Limits on Loans through Credit Cards (Section 108)
o The Act prohibits the distribution of plan loans through credit cards or like arrangements.
o Effective for loans made after the date of enactment.
Plan Administration Provisions
- Part-Time Employees (Section 112)
o Employers maintaining a 401(k) plan must permit participation by employees after three consecutive years of service where the employee completes at least 500 hours of service.
o Effective for plan years beginning after December 31, 2020.
- Increase on the Cap for Automatic Enrollment QACA Safe Harbor (Section 102)
o In 401(k) plans operated under the QACA (Qualified Automatic Contribution Arrangements) safe harbor, the SECURE Act increases the cap on the automatic enrollment safe harbor default contribution rate from the current 10 percent limit to 15 percent
o Effective for plan years beginning after December 31, 2019.
- Nonelective 401(k) Safe Harbor Changes – Applicable To Traditional and QACA Safe Harbors (Section 103)
o The bill eliminates the safe harbor notice requirement but maintains the requirement to allow employees to make or change an election at least once per year.
o The bill also permits amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least four percent of compensation (rather than at least three percent) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year.
o Effective for plan years beginning after December 31, 2019.
- Consolidation of Reporting (Section 202)
o The Act directs the IRS and DOL to revise Form 5500 and enable the filing of a consolidated Form 5500 for a group of plans. To be eligible for consolidated filing, plans must 1). be defined contribution plans, 2). have the same trustee, 3). have the same named fiduciary (or fiduciaries) under ERISA, 4). have the same administrator, 5). use the same plan year, and 6). provide the same investments or investment options to participants and beneficiaries.
o Effective for plan years beginning after December 31, 2021.
- Increased Penalties for Failure to File Retirement Plan Returns (Section 403)
o Penalties for failing to file a Form 5500 are increased to $250 per day, to a maximum of $150,000. Penalties for failing to provide a required withholding notice (which applies to both qualified plans and IRAs) are increased to $100 per day, to a maximum of $50,000 in penalties per year.
o Effective for returns due after December 31, 2019.
- Increase in Penalty for Failure to File (Section 402)
o The minimum penalty for a late tax return is increased to the lesser of $435 or 100 percent of the amount required to be shown as tax on the return.
o Effective for returns due after December 31, 2019.
403(b) Plan Termination Provision
- Treatment of Custodial Accounts on Termination of Section 403(b) Plans (Section 110)
o The Act directs that guidance will be issued that will provide that, upon the termination of an employer’s a 403(b) plan, an account may be distributed in-kind to a participant or beneficiary. The resulting individual custodial account will be maintained, tax-deferred, as a 403(b) custodial account until paid out. The individual account will remain subject to compliance with the 403(b) rules in effect at the time that the account is distributed.
o Effective, retroactively, for plan years beginning after December 31, 2008.
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