The SECURE Act Changes to Retirement Plans
January 27, 2020
On December 20, 2019 President Trump signed into law the Setting Every Community Up For Retirement Enhancement Act of 2019 (the “SECURE Act”). This law has made significant changes to retirement planning and accounts by amending the IRS Code and ERISA law. Plan sponsors should understand the different provisions of the SECURE Act, some of which became effective on January 1, 2020.
First, previously a participant was generally required to begin taking annual “required minimum distributions” (“RMDs”) from their retirement plan beginning no later than April 1 of the year following the year that they attain age 70½ or, if still working, the year in which they retire. The SECURE Act delays the RMD age from age 70½ to age 72 and applies equally to individual retirement accounts (“IRAs”). The law is not retroactive and only applies to those who attain age 70½ after December 31, 2019.
Second, part-time employees may gain coverage. Under the IRS Code’s eligibility rules, many 401(k) plans have excluded employees 21 or older who work less than 1,000 hours in a year from all plan participation, including the ability to make their own salary deferral contributions. The SECURE Act restricts the ability of plan sponsors to exclude this type of part-time employee by requiring the inclusion of “long-term part-time employees” in 401(k) plans.
A long-term part-time employee is one who is at least 21 years old and performs work for at least 500 hours of service over three consecutive years to contribute to a 401(k) Plan. The rules relating to employer contributions are not changing, so employers will not be required to make employer contributions for these long-term part-time employees (although they will be free to do so). The SECURE Act does permit these employees to exclude part-time employees in the non-discrimination analysis. However, employers need to review their plan documents to ensure that plan policies are compliant.
Also new in the SECURE act is the allowance for penalty-free distributions for birth or adoption-related expenses of up to $5,000. The distribution must be made up to one year following the birth or finalization of the legal adoption of a child. Generally, the adoption must be of a child under age 18, but adoption of older children also is permitted if the child is physically or mentally incapable of self-support. Taxes are not forgiven so the distribution must take tax planning into account.
Especially helpful for employees is that the SECURE Act expands Section 529 plans definition of qualified higher education expenses to include student loan payments and costs of apprenticeship programs, leaving more options for families. 529 plan account owners may now withdraw up to $10,000 tax-free for payments toward qualified education loans. However, there is no double-dipping when it comes to federal education tax benefits. Any student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction. The $10,000 limit is a lifetime limit that applies to the 529 plan beneficiary and each of their siblings. For example, a parent with three children may take a $10,000 distribution to pay student loans for each child, for a total of $30,000.
Further, the SECURE Act contains two provisions designed to encourage plan sponsors and plan participants to consider lifetime annuity investment and distribution options under defined contribution plans. Require plan sponsors to include a “lifetime income disclosure” on a participant benefit statement at least annually, even if the plan does not offer annuity distribution options. The lifetime income disclosure will be an estimation of the monthly payments a plan participant and their beneficiaries would receive if benefits were paid in the form of a qualified joint and survivor annuity or single life annuity. A model notice is being developed by Department of Labor to be published by December 2020.
A second annuity provision provides a fiduciary safe harbor to encourage the plan sponsors to make an annuity option available. To qualify for the safe harbor relief, the plan fiduciary needs to ensure that the selected annuity provider represents that, for the prior seven years and on an ongoing basis, it: (1) operates under a license or authority of a state insurance commissioner to offer guaranteed retirement income contracts; (2) files audited financial statements in accordance with state laws; and (3) maintains financial reserves that satisfy all the statutory requirements of all states where the annuity provider conducts business.
The SECURE Act for defined benefit pension plans also lowered the initial age for distribution to age 59½ from age 62.
There are a few other technical provisions that were also included such as eliminating the requirement that a non-elective safe harbor plan notify participants of such safe harbor status prior to the beginning of the plan year and permitting the adoption of a non-elective safe harbor plan design at any time during a plan year. It will be important for employers to review the impact of these changes and any updates necessary for plan documents with plan administrators and legal counsel.