By Pension and Benefits Editorial Staff
On December 20, 2019, President Donald Trump signed a bipartisan, year-end government spending and tax package just hours before federal funding was set to expire. The government funding measure includes the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), which makes substantial changes to retirement saving rules. On December 17, 2019, the House passed by a vote of 297-120 the $1.4 trillion spending package, and then, on December 19, 2019, the Senate passed the measure by a vote of 71 to 23.
The amendments were approved in a stand-alone bill in the House in May but remained stalled in the Senate.
The sweeping rule changes generally apply to tax years beginning after 2019.
The following are among the major provisions of the Act.
MEPs. The SECURE Act, effective for plan years beginning after December 31, 2020, expands multiple employer plans (MEPs) by establishing a new class of MEP service provider that will be able to create and offer an open MEP called a Pooled Employer Plan (PEP). These individual account plans will provide benefits to the employees of two or more employers and can be structured as a 401(k) or another qualified plan, or as an IRA-based plan.
A pooled plan provider will be a person who is designated by the terms of the plan as a named fiduciary, as the plan administrator, and as the person responsible to perform all administrative duties (including conducting proper testing with respect to the plan and the employees of each employer in the plan) which are reasonably necessary for the plan.
Mandatory lifetime income disclosure. The legislation requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure will illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity. The Secretary of Labor is directed to develop a model disclosure.
Fiduciary safe harbor for selection of lifetime income provider. The SECURE Act creates a fiduciary safe harbor that will protect plan sponsors in the selection of insurers for guaranteed retirement income contracts. In the event the fiduciary receives certain assurance from the insurer regarding compliance with state insurance requirements, the fiduciary will be shielded from liability for any losses that may be incurred by a participant or beneficiary due to the insurer’s failure to satisfy its financial obligations under the contract.
IRA contributions and distributions. The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70½.
Plan participants are generally required to begin taking distributions from their retirement plan at age 70½. The Act increases the required minimum distribution age from 70½ to 72.
The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the new rules, effective for distributions made with respect to plan participants and IRA owners who die after December 31, 2019, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority 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.
The 10-year period applies regardless of whether the plan participant or IRA owner dies before or after reaching the required beginning date. Thus, the change will severely limit, if not eliminate, the use of a so-called “stretch IRAs” as an effective planning tool. Limited exceptions are authorized.
Protection of accrued benefits under closed plans. The SECURE Act modifies the nondiscrimination rules to permit existing participants in closed plans to continue to accrue benefits.
Dual eligibility requirements accommodate part-time workers. Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. The requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.
The rule change will only affect 401(k) cash or deferral arrangements. In addition, employers with collectively bargained plans will not be required to implement the 500-hour track.
Safe harbor 401(k) plan notice and amendment requirements relaxed. The Act eliminates the annual notice requirement for the 3 percent non-elective contribution safe harbor. In addition, plan amendments to nonelective status will be allowed at any time before the 30th day before the close of the plan year. Amendments after that time (until the last day of the following plan year) will be allowed if a nonelective contribution of at least 4 percent of compensation was made for all eligible employees for the plan year.
Automatic enrollment contribution increased. Under a qualified automatic contribution arrangement, an eligible employee, absent a contrary election, is treated as having elected to have the employer make elective contributions in an amount equal to a “qualified percentage” of compensation, not to exceed 10 percent. The SECURE Act increases the default maximum applicable to safe harbor qualified automatic contribution arrangements from 10 percent to 15 percent of an employee’s compensation.
Increased assistance for plan start-up costs. The employer credit for qualified small employer pension plan start-up costs under Code Sec. 45E is increased from 50 percent of qualified start-up costs to the greater of $500, or the lesser of (1) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan or (2) $5,000. In addition, a new $500 credit is allowed per year to an eligible employer for three consecutive years if it adds an automatic enrollment feature to a qualified employer plan.
Church plan employees. The SECURE Act clarifies that individuals eligible to participate in a tax-favored retirement income account maintained by a church include those participating in plans maintained by church-controlled organizations. Thus, those eligible to participate in the plan include: duly ordained, commissioned, or licensed ministers, regardless of the source of their compensation; employees of a tax-exempt organization that is controlled by or associated with a church or a convention or association of churches; and certain employees who have separated from service with a church, a convention or association of churches.
Prohibition on plan loans through credit cards. The SECURE Act prohibits plans loans executed through credit cards or similar arrangements. The restriction, which has long been advocated in the retirement plan community as well as at IRS, may help discourage plan participants from treating their retirement accounts as readily accessible savings accounts.
Increased reporting penalties. The penalties assessed for failure to file Form 5500 and other required reports will be significantly increased. Specifically, the Form 5500 penalty will be increased from $25 to $250 per day, not to exceed $150,000. The failure to file a registration statement will be $10 per participant, up to $50,000. The failure to file a required notification of change will similarly result in a penalty of penalty of $10 per day, not to exceed $10,000 for any failure. Finally, the failure to provide a required withholding notice will result in a penalty $100 for each failure, up to $50,000 for all failures during the calendar year.
Source: P.L. 116-94.
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