The SECURE Act is official
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On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law as part of the 2020 spending bill. The Act contains many provisions affecting both qualified retirement plans and Individual Retirement Accounts (IRAs). Some of these provisions are complex changes that will require additional guidance and interpretation. For employers, the following information highlights some of the key provisions affecting qualified retirement plans along with proposed effective dates.
Safe Harbor 401(k) Flexibility and Notice Requirements
Increased opportunity will be available to add non‐elective (profit sharing) contributions as late as 30 days prior to plan year end subject to certain crediting levels. It also eliminates the annual notice requirement for safe harbor plans that make non‐elective contributions. The automatic deferral rate cap for automatic enrollment plans electing Qualified Automatic Contribution Arrangements (QACA) will increase from 10% to 15%.
Effective Date: Plan years beginning after December 31, 2019.
Part‐Time Employee Coverage
401(k) Plan sponsors will be required to allow employees that work at least 500 hours during each of three consecutive 12‐month periods to make deferral contributions to their plans. This coverage requirement is in addition to employees that have satisfied the one year of service requirement working at least 1,000 hours during one 12‐month period. While eligible to make deferrals, employers may elect to exclude part‐time employees from receiving any employer contributions offered. Elections may also be made to exclude part‐time employees from non‐discrimination testing, coverage, and top‐heavy rules.
Effective Date: Plan years beginning after December 31, 2020; 12‐month periods beginning before January 1, 2021 will not be considered.
For JFG Retirement Plan Sponsors: Payroll and recordkeeping platforms, along with your internal processes, will need to be enhanced to track this requirement to ensure identification of eligible part‐time employees.
- Required Minimum Distributions (RMDs) will become payable in the calendar year following attainment of age 72 which is extended from age 70‐1/2.
- Effective Date: Distributions made after December 31, 2019 for individuals attaining age 70‐1/2 after that date.
- Inherited 401(k) and IRA rules that previously allowed non‐spouse beneficiaries to stretch payments over their anticipated life expectancies are modified by the Act. The new rule limits payment to not more than a 10 year period for certain beneficiaries and presents opportunities for individual estate and tax planning conversations with advisors.
- Retirement plan withdrawals from retirement plans will be permitted for birth or adoption expenses up to $5,000 penalty free, but subject to taxation.
- Effective Date: Plan years and distributions beginning after December 31, 2019.
At least once during any 12‐month period, a lifetime income disclosure must be provided to defined contribution plan participants illustrating monthly payments the participant would receive if their total account balance was used to provide an income stream during retirement. The Secretary of Labor is charged with developing a model disclosure along with assumptions to be used in projections without establishing fiduciary liability for these estimates.
Effective Date: Statements furnished more than 12 months after the Department of Labor issues interim final rules, model disclosures and assumptions.
For JFG Retirement Plan Sponsors: We currently make this information available on the participant Retirement Plan Website using the MyRetirement tool, subject to a participant’s engagement in completing the requested information and data points.
- Selection of lifetime income providers may be subject to a fiduciary safe‐harbor to satisfy prudence considerations for purchases of guaranteed retirement income contracts. Plan fiduciaries will be protected from liability for losses that may result from an insurer’s inability to satisfy obligations under the terms of the contract.
Effective Date: To be established.
For JFG Retirement Plan Sponsors: Alternatively, plan sponsors should consider participant purchases of lifetime income products at time of distribution of participants’ account balances. Doing so will remove the plan sponsor of lifetime income analysis and selection of provider(s) in favor of the former participant assuming responsibility.
- Permits direct trustee to trustee transfers of lifetime income investments if this type of option is no longer authorized for holding within a plan.
Qualified retirement plans may be established as of the prior year if adopted before the due date of the taxable year (including extensions).
Effective Date: Applies to plans adopted for tax years beginning after December 31, 2019.
Open Multiple Employer Plans (MEPs)
The Act establishes defined contribution Open MEPs referred to as Pooled Plans. These plans will be considered single ERISA plans providing for multiple employers to band together to form retirement plans that will likely achieve certain economies of scale along with delegation of certain fiduciary responsibilities. These pooled plans will not be required to be comprised of employers with commonality of interest or geographic nexus as contained in Department of Labor regulations issued earlier in 2019.
Effective Date: Plan years beginning after December 31, 2020.
For Retirement Plan Sponsors: Open MEPs may benefit employers contemplating starting a retirement plan and willing to forego some individual plan design flexibility in favor of possible reduction of administrative costs through economies of scale.
Increased Tax Credits for Start‐up Plans or Employers Joining an Open MEP
Credits may increase from the current $500 level up to $5,000 depending upon certain factors. In addition, small employers may be eligible for an additional $500 credit for adopting new automatic enrollment features to their plan. This automatic enrollment credit may apply for up to three years.
Effective Date: Plan years beginning after December 31, 2019
For more information, contact a Johnson Financial Group Retirement Plan Services advisor today.
This summary is not intended to provide a complete discussion of the regulatory changes and requirements. The appropriate regulatory authorities may issue guidance or clarification that influence the actual implementation of these enactments.