The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), which was passed as part of two spending bills signed by President Trump on December 20, 2019, contains extensive changes affecting employer-sponsored retirement plans and IRAs. The changes are intended to increase participation and accumulations in retirement savings plans, enhance flexibility in distributions, and reduce administrative burdens on plan sponsors. The SECURE Act also eliminated certain excise taxes and fees that were imposed under the Affordable Care Act (“ACA”) enacted in 2010.
Certain provisions of the SECURE Act are effective January 1, 2020, but a special remedial amendment period included in the new law extends the deadline to December 31, 2022, for plan sponsors to make retroactive amendments to plan documents.
We have highlighted below many of the important changes made under the SECURE Act:
| Changes to Qualified Plan Requirements | Rule | Effective Date | Plans Impacted |
| Required Minimum Distributions | Age raised to 72 from 70 ½; there is no change for those already in pay status, and no change for those who turned 70 ½ in 2019 and whose “required beginning date” is April 1, 2020. | Applies to distributions made, and individuals turning age 70 ½, after December 31, 2019. | IRC 401(a), 401(k), 403(b), 457(b)plans, IRAs, defined benefit plans |
| 401(k) Safe Harbor Plans with Qualified Automatic Contribution Feature (QACA) | The cap on the default rate for automatic elective deferrals in a QACA is raised to 15% from 10%. | Plan years beginning after December 31, 2019. | 401(k) & 403(b) plans with QACA feature |
| 401(k) Safe Harbor Plans – Notice and Election Timing | Notice requirement eliminated for plans using nonelective contributions to satisfy the safe harbor (but not matching contributions). Plan sponsors can switch to a safe harbor 401(k) plan with nonelective contributions at any time before the 30th day before the close of the plan year. Amendments after the 30th day before the close of the plan year are allowed if (1) the amendment provides a nonelective contribution of at least 4% of compensation (rather than at least 3%) 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). | Plan years beginning after December 31, 2019. | 401(k) & 403(b) plans |
| New Eligibility for Long-Term Part-Time Employees | Long-term part-time employees (who are at least age 21, excluding employees covered by collective bargaining agreements) are now eligible to make elective deferrals to a 401(k) plan. The new rule applies to employees who work at least 500 hours in three consecutive 12-month periods. Employees eligible under this rule are not entitled to employer matching or nonelective contributions, and are not counted for coverage, discrimination testing, or top-heavy purposes. | Plan years beginning after December 31, 2020. 12-month periods beginning before January 1, 2021, will not be taken into account. | 401(k) plans (not including collectively bargained plans) |
| Lifetime Income Disclosure on Benefit Statements | Defined contribution plans are required to provide participants with a benefit statement once within a 12-month period that contains a “lifetime income disclosure” showing the lifetime income stream equivalent to the participant’s account balance based on a qualified joint and survivor annuity and single life annuity. The Department of Labor (“DOL”) is directed to issue a model disclosure form, assumptions, and guidance within one year of the SECURE Act’s enactment (December 20, 2019). | The changes will apply to statements furnished more than 12 months after the DOL issues guidance. | ERISA defined contribution plans |
| 10-year Rule for Inherited Retirement Plan Accounts and IRAs | All distributions to a beneficiary after an employee’s death, other than an “eligible designated beneficiary,” must be made by the end of the 10th calendar year following the year of death. No distributions are required to be made until the end of the 10-year period, although distributions may be made before then. The new timing rule does not apply to an “eligible designated beneficiary,” defined as a surviving spouse, a minor child of the account owner, a disabled or chronically ill individual, and beneficiaries not more than 10 years younger than the employee. Certain commercial annuities are also excluded. | Effective for distributions with respect to employees who die after December 31, 2019. | 401(a), 401(k), 403(b), governmental 457(b) plans, IRAs |
| Fiduciary Safe Harbor for Selecting Lifetime Income Providers | New safe harbor protection is provided under the ERISA’s “prudent man” standard of care for fiduciaries against liability for any losses that may result to the participant from selection of an insurer for a guaranteed retirement income contract. The safe harbor requires that the fiduciary conduct a thorough search to identify annuity providers; consider the financial capability of the insurers to satisfy its obligations under the contracts; consider the cost (including fees and commissions) of the guaranteed retirement income contract in relation to the benefits and features of the contract and administrative services to be provided under the contract; and, on that basis, conclude that at the time of the selection, the insurer is financially capable of satisfying its obligations under the contract, and the cost is reasonable. | December 20, 2019. | ERISA defined contribution plans |
| Child Birth or Adoption Permitted Withdrawals | Withdrawals up to $5,000 are permitted from plans for expenses related to the birth or adoption of a child for up to one year following the birth or legal adoption. The Section 72(t) 10% early withdrawal penalty does not apply. Distributions may be re-contributed to an applicable eligible retirement plan to which a rollover can be made. | Applies to distributions made after December 31, 2019. | 401(k), 403(b), governmental 457(b) plans, IRAs |
| No Plan Loans Using Credit Cards | Defined contribution plans are prohibited from making plan loans by using credit cards or other similar arrangements. | Applies to loans made after December 20, 2019. | Defined contribution plans that allow loans |
| Age for In-Service Withdrawals Lowered to 59 ½ | Defined benefit plans can offer participants access to their benefits starting at age 59 ½, reduced from age 62. | Plan years beginning after December 31, 2019. | 401(a) defined benefit or money purchase pension plans, governmental 457(b) plans |
| Frozen/Closed Pension Plans – Discrimination Testing Relief | New IRC provisions provide relief to closed and frozen defined benefit plans where benefits are still accrued from nondiscrimination, minimum coverage, and minimum participation testing, subject to certain requirements. | Effective December 20, 2019. Plan sponsors may elect to apply relief to plan years beginning after December 31, 2013. | Defined benefit plans |
| In-Kind Distributions from Terminating 403(b) Plans | Terminated 403(b) plans with custodial accounts can distribute accounts in kind to be held as an IRA. The distributed accounts will be held by the custodian and will receive 403(b) treatment until the amounts are actually paid to the participant or beneficiary. | Implementing guidance due by June 2020, and will be retroactively effective for taxableyears beginning after December 31, 2008. | 403(b) plans |
| Changes to Plan Administration, Fees, and Excise Taxes | Rule | Effective Date | Plans Impacted |
| Increased IRS Penalties | Failure to file Form 5500 penalty increased to $250 per day (but not to exceed $150,000). (Note that additional penalties may be imposed by the DOL under ERISA.) Failure to file Form 8955-SSA (terminated vested participant report) penalty increased to $10 a day (but not to exceed $50,000). Failure to file a notice of change in status (under Section 6057(b)) (change in plan name, name or address of the plan administrator, the termination of the plan, or the merger or consolidation of the plan with any other plan or its division into two or more plans) penalty increased to $10 a day (but not to exceed $10,000). | Effective for returns and notices due after December 31, 2019. | ERISA plans |
| Extended Date for Adopting Plans | Plans adopted retroactively for a plan year, but before the time prescribed by law for filing the return of the employer for the taxable year (including extensions thereof), may be treated as having been adopted as of the last day of the taxable year. | Applies to plans adopted for tax years beginning after December 31, 2019. | 401(a) plans |
| Health Insurance Plans – Repealed ACA Taxes | The looming “Cadillac Tax” under the ACA is repealed; it was scheduled to take effect in 2022. It would have imposed a 40% excise tax on the value of employer-sponsored health coverage of more than $10,000 for self-only coverage and $27,500 for family coverage based on 2022 indexing. Employers must still continue to report the value of employer-sponsored coverage in Box 12 on W-2, using code DD. | [Repealed before effective date.] |
We expect IRS guidance will clarify specific issues that are likely to arise as plan sponsors and employee benefits practitioners navigate the implementation phase of the new plan requirements under the SECURE Act. While the deadline to amend benefit plans for the changes under the SECURE Act is not until the end of 2022, many of the changes are effective January 1, 2020. Therefore, Plan sponsors should begin reviewing their plan documents and their plan’s vendor operations to ensure they are in compliance with the new SECURE Act requirements.