Officially entitled the Setting Every Community Up for Retirement Enhancement Act, but more commonly known as the SECURE Act, the new law, passed on December 20, 2019, includes many policy changes affecting defined contribution (DC) plans and defined benefit (DB) plans.
Below is an abstract[1] of the major provisions of the SECURE Act which impact qualified retirement retirement plans.
SECURE Act plan amendments are due by the last day of the first plan year beginning on or after January 1, 2022.
Areas of focus:
- Retirement plan tax credits
- Additional time to adopt plan
- Expanded coverage for part-time employees
- Multiple Employer Plans (MEPs)
- Notice requirements for non-elective Safe Harbor 401(k) plans
- Auto-escalation cap increase
- Conversion rule for change to Safe Harbor 401(k) plans
- Lifetime income provisions
- Testing relief for Defined Benefit Plans
- Reduced minimum age for in service withdrawals from pension and 457(b) plans
Retirement plan tax credits
Beginning in 2020, the existing tax credit of $500 for small businesses starting their first ever retirement plan will increase to as much as $5,000 per year for three years, depending on the number of non-highly compensated employees (non-HCEs) eligible to participate in the plan ($250 per non-HCE).
In addition, small employers (<100 employees) who add eligible automatic enrollment arrangements to their new or existing plan may be eligible for an additional $500 tax credit per year for three years.
Additional time to adopt plan
Starting in 2020, employers who want to adopt a new stock plan (including ESOPs), pension, profit-sharing, or annuity plan will now have until the due date of the employer’s federal income-tax return (plus extensions) to establish a plan for that year.
It’s important to note that 401(k) deferrals can only be made prospectively, not retroactively.
Expanded coverage for part-time employees
Under prior law, part-time employees working fewer than 1,000 hours in a year could be excluded from participation in company retirement plans.
For plan years starting after December 31, 2020, employees working three consecutive years of at least 500 hours each and attaining age 21 or one year of 1,000 hours and attaining age 21 must become eligible for plan participation.
Multiple Employer Plans (MEPs)
For plan years starting after December 31, 2020, employers with no industry or business relationship will be able to band together to offer multiple employer plans (MEPs).
This legislation will make plans for smaller employers more affordable and less administratively burdensome, however there could be draw backs with regards to limited options regarding plan design and investment choices.
Notice requirements for non-elective Safe Harbor 401(k) plans
For plans years starting in 2020 and onward, the required annual safe harbor notice for employers making a 3% non-elective contribution has been eliminated, thus reducing some administrative burden.
Note that safe harbor notices for safe harbormatching contributions must still be provided.
Auto-escalation cap increase
For plan years beginning after December 31, 2019, the cap on qualified automatic contribution arrangements (QACA) will increase from 10% to 15% of plan compensation beginning the plan year following the year the employee is automatically enrolled.
Conversion rule for change to Safe Harbor 401(k) plans
For plan years beginning after December 31, 2019, the deadline to convert from a standard 401(k) plan to a Safe Harbor 401(k) plan has been changed to:
- At least 31 days before the close of the plan year, or
- No later than the close of the following plan year provided the employer makes a non-elective contribution of at least 4%
Lifetime income provisions
Annual disclosures
For statements provided 12 months following issuance of DOL guidance, defined contribution plan statements will require a projection of the amount of monthly income participants will receive if their account balance is paid out as a single life or qualified joint and survivor annuity.
Increased portability of lifetime income investments
For plan years beginning after December 31, 2019, distributions from lifetime income investments in defined contribution plans will be allowed if the lifetime income investment is eliminated as an offering, and the distribution is a direct rollover to an IRA or other eligible plan or a distribution of an annuity contract.
Fiduciary safe harbor for selection of annuity providers
Defined contribution plan fiduciaries can now rely on representations from insurers regarding their ability to fulfill the contract and their status under state insurance laws.
This allows employers to offer lifetime income investment options while still abiding by the fiduciary duty of prudence under ERISA.
Testing relief for Defined Benefit Plans
For all plans, or if the sponsor elects, for years beginning after December 31, 2013, partially frozen Defined Benefit Plans can obtain relief from non-discrimination testing and minimum coverage and participation rules (certain requirements must be met).
Reduced minimum age for in service withdrawals from pension and 457(b) plans
For plan years beginning after December 31st 2019, the minimum age for in service withdrawals from pension plans and governmental 457(b) plans has been reduced to 59.5 from 62 and 70.5 respectively.
While this abstract covers some of the main points in the legislation as it pertains to business owners, it is by no means intended to be comprehensive. As always, we encourage you to consult with your own independent tax and legal advisors before taking action on any items outlined herein.
[1] Content derived largely from John Hancock’s white paper, “A look inside the SECURE Act”