The SECURE Act – a Congressional holiday gift?

In the midst of holiday gift-giving Congress passed and the President signed an Act considered by many to be the most significant piece of retirement plan legislation since the Pension Protection Act of 2006. Whether the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) will ultimately be considered a gift to employers, only time will tell. In the meantime, this article will summarize the provisions expected to be most impactful on employers.

Changes to Required Minimum Distributions (RMDs) (effective immediately)

Extending the Required Beginning Date (RBD) for distributions from IRAs and qualified retirement plans from age 70 ½ to age 72 appears to be one of the most widely publicized changes. Because this change applies only to participants who turn 70 ½ after Dec. 31, 2019, any participants already required to begin RMDs must continue such distributions, even if they have not yet reached age 72. Although most individuals will want to take advantage of this delayed RBD, retirement plan sponsors are not required to include this extension in their plans. In fact, plan sponsors may choose to require distributions at an earlier age so long as such requirement is set forth in their plan document.

The SECURE Act extended the five-year post-death distribution period to a 10-year period. In doing so it also eliminated lifetime or “stretch” distributions for any beneficiaries who do not otherwise qualify as “eligible designated beneficiaries” (EDBs). Beneficiaries who qualify as EDBs include a participant’s spouse, minor children, any chronically ill or disabled beneficiaries, and beneficiaries who are no more than 10 years younger than the participant/IRA owner. Discussion of how to define these EDBs as well as the distribution payout periods that apply to them is beyond the scope of this article—it is advised that you contact your attorney for more information.

Extension of plan adoption due date (effective for tax years beginning on or after Jan. 1, 2020)

Employers now have until the employer’s tax return due date to adopt a new qualified retirement plan. For example, if a calendar year employer desires to adopt a plan for the 2020 calendar year, that employer is no longer required to have that plan in place by Dec. 31, 2020. However, such extended adoption applies solely to employer contributions. Participant deferrals cannot be made until the written plan is in place and the participants have completed deferral elections.

Changes to Safe Harbor plans (effective for plan years beginning on or after Jan. 1, 2020)

Safe Harbor notices are no longer required for Safe Harbor plans making nonelective (profit sharing) Safe Harbor contributions. However, plans providing Safe Harbor matching contributions must still provide timely notice. Additionally, the SECURE Act now allows a 401(k) plan to be amended to adopt a nonelective Safe Harbor design at any time throughout the plan year. If the amendment is within the last 30 days of a plan year, the Safe Harbor contribution must be increased to four percent. Otherwise, the historical three percent minimum contribution remains. Note, however, that a mid-year nonelective Safe Harbor amendment may not be adopted in any plan year in which matching contributions have been made. Finally, the SECURE Act increased the maximum automatic contribution percentage that can be made under a qualified automatic contribution arrangement (QACA) plan from 10% of compensation to 15% of compensation. Except, however, the cap remains 10% for the first year of a participant’s automatic deferrals.

Coverage of part-time employees (effective for plan years beginning on or after Jan. 1, 2021)

To rectify a situation in which an employer has long-term employees who never work 1,000 hours in any plan year and, therefore, never become eligible for the 401(k) plan, effective 2021 the SECURE Act requires 401(k) plans to allow any employee who is 21 years of age or older and who has worked at least 500 hours in each of three consecutive 12-month periods to participate in the plan with respect to deferrals. If the written plan document so provides, the plan may continue to exclude these long-term part-time employees from employer contributions unless they work at least 1,000 hours in a plan year. Because years of service prior to Jan. 1, 2021, can be ignored for this purpose, the actual impact of this change will not be realized until 2024. Nevertheless, employers should monitor their recordkeeping beginning 2021 so they have the information needed in 2024 to determine whether any long-term part-time employees must be covered.  

Distributions for birth and adoption (effective immediately)

If employers so desire, plans may be amended to allow for distributions up to $5,000 for birth and adoption expenses. Such distributions will be exempt from the 10% premature distribution penalty if made within one year of the birth or adoption. If their IRA or vested plan balances exceed $5,000, each parent is eligible to take a distribution up to the $5,000 maximum. If the plan so allows, such distributions may be repaid to the plan and treated as a rollover.

Late filing penalties significantly increased (effective for forms required to be filed after Dec. 31, 2019)

The SECURE Act drastically increased the potential penalties the IRS can impose on an employer for late filing of Form 5500. Such penalties are increased from $25 per day or $15,000 per year to $250 per day or $150,000 per year.

New and increased tax credits (effective for tax years beginning on or after Jan. 1, 2020)

The current small employer (less than 100 employees) tax credit for starting a new plan is increased from $500 to the greater of $500 or $250 times the number of eligible non-highly compensated employees (up to  a maximum of $5,000 per year). An additional tax credit of $500 per year for up to three tax years will be available for any small employer that adds automatic enrollment to a new or existing 401(k) plan. 

Required lifetime income disclosure (effective 12 months after DOL issues final rules)

In response to ongoing discussions regarding participant education of annuity payout options, the SECURE Act requires all defined contribution plans to include in their annual participant benefit statements an estimate of the monthly benefit that would be generated by their account balance if taken in the form of a qualified joint and survivor annuity or a single life annuity. The Department of Labor (DOL) is directed to issue a model disclosure and prescribe assumptions that sponsors can use to calculate such estimates. The effective date of these disclosures is delayed until 12 months after the DOL issues its final rules, the model disclosure and the assumptions. In addition, the SECURE Act created a new fiduciary Safe Harbor to encourage plan sponsors to add annuities as distribution options.

Conclusion

Adopted so late in the year, the SECURE Act was passed prior to the IRS or DOL issuing guidance, even for the provisions taking effect immediately. Clarifying guidance is expected before the due date for adopting written plan and IRA amendments, which is the last day of the plan year beginning on or after Jan. 1, 2022. Despite the absence of guidance, because so many of the SECURE Act changes are already effective, employers should be reviewing their plan operations now. And because Illinois businesses that employ at least 25 employees and do not otherwise provide an employer-sponsored retirement plan are required to enroll their employees in the Illinois Secure Choice Savings Program, there couldn’t be a better time to adopt a plan of your own. Contact a Chuhak & Tecson Employment law attorney with questions or to get started. 

This Chuhak & Tecson, P.C. communication is intended only to provide information regarding developments in the law and information of general interest. It is not intended to constitute advice regarding legal problems and should not be relied upon as such.

For additional information contact Kimberly T. Boike (312 855 6418), principal, or Anne M. Wolniakowski (312 855 4338), principal.