How the SECURE Act Affects Your Retirement Plan
By Ben Reynolds
- The new law modifies the Required Minimum Distribution (RMD) rules;
- Expands access to retirement plans for more Americans;
- Provides added flexibility for safe harbor plans.
My colleague Michael Hopper recently discussed the impact of the new law on Individual Retirement Accounts (IRAs). I will focus on the provisions for 401(k) plans that may affect your retirement plan and the retirement of your employees.
IMPACTS ON RETIREMENT PLANS
Unless otherwise noted, these provisions are effective for plan years after Dec. 31, 2019.
BEGINNING-DATE AGE INCREASE FOR REQUIRED MINIMUM DISTRIBUTIONS (RMD)
- Participants born after June 30, 1949, are not required to take RMD until the year they reach age 72.
- Distributions continue in 2020 for those participants who were required to begin taking distributions in 2019.
MODIFICATION OF REQUIRED DISTRIBUTION RULES FOR DESIGNATED BENEFICIARIES
For plan participants who pass away after Dec. 31, 2019, spouses and select beneficiaries can continue to extend distributions over their life expectancy; however, new rules may require the balance in the plan to be distributed within 10 years following the year of participant’s death.
LONG-TERM PART-TIME EMPLOYEE ELIGIBILITY – Effective for plan years after Dec. 31, 2020
- Requires plan sponsors to allow employees who work at least 500 hours in three consecutive eligibility periods to participate in the plan.
- May exclude these employees from discrimination, coverage and top-heavy testing as well as receiving employer contributions.
INCREASE IN PENALTY FOR FAILURE TO FILE
- Failure to file a Form 5500 timely increases to $250/day up to $150,000.
- Failure to file a Form 8955-SSA increases to $10/participant/day up to $50,000.
- Failure to provide a withholding notice is now $100/notice up to $50,000.
WITHDRAWALS FOR BIRTH OR ADOPTION OF CHILD
- Participants can be allowed to take a distribution for the birth or adoption of child.
- Distribution must occur within one year after the birth or adoption and not to exceed $5,000.
- The 10% early withdrawal penalty does not apply and the amount can be repaid to the distributing plan or to an IRA as a rollover contribution.
INCREASE IN CAP FOR AUTOMATIC ENROLLMENT SAFE HARBOR AFTER 1ST PLAN YEAR
After the first year of automatic enrollment in plans that utilize the qualified automatic contribution arrangement (QACA) for salary deferrals, a plan can elect to increase the maximum automatic deferral rate from 10% to 15%.
RULES RELATING TO ELECTION OF SAFE HARBOR 401(k) STATUS
- A plan may be retroactively amended to become a Safe Harbor non-elective plan at any time before the 30th day prior to the close of the plan year.
- The plan can make the election no later than the last day of the following plan year if the non-elective contribution is at least 4% of compensation (rather than the 3% Safe Harbor requirement).
SAFE HARBOR NON-ELECTIVE CONTRIBUTION ANNUAL NOTICE
The annual notice requirement for Safe Harbor non-elective contributions has been removed. However, if a plan makes a Safe Harbor matching contribution, the annual notice must continue to be provided to participants.
PORTABILITY OF LIFETIME INCOME OPTIONS
- If the plan determines the need to remove a lifetime income product from the investment options offered to participants, the plan can allow for a participant to take a distribution of the lifetime income option.
- This applies even if a participant does not qualify for a distributable event and only allows for a direct rollover to another qualified plan or IRA during the 90-day period prior to removing the investment option from the plan.
DISCLOSURE REGARDING LIFETIME INCOME – Effective date to be determined
Statements for plan participants must include an annual disclosure of the lifetime income expressed as a monthly amount that a participant could expect to receive.
MULTIPLE EMPLOYER PLANS (MEP), POOLED EMPLOYER PLANS (PEP) – Effective for plan years after Dec. 31, 2020
- Addresses some of the current issues with MEPs.
- Allows two-or-more unrelated employers to participate in a PEP.
- For tax filings after Dec. 31, 2021, MEPs and PEPs will be allowed to have a combined Form 5500 filing as long as certain conditions are met and a plan amendment is not required.
TAX CREDITS AND PLAN ADOPTION FLEXIBILITY
- Increases in the tax credits provided to small employers for the startup of new plans with an additional credit given for including automatic enrollment features.
- Employers may adopt a plan by their tax filing due date of the current year and treat the plan as in effect as of close of the prior year.
ACTIONS TO COMPLY WITH THE NEW LAW
Plan documents will need to be formally amended by the end of the plan year beginning on or after Jan. 1, 2022. For collectively bargained and governmental plans the deadline is Jan. 1, 2024.
Since many of the provisions are effective today, a plan can operate in accordance with these provisions prior to the required plan amendment.
The provisions in the SECURE Act that affect employer-sponsored retirement plans and IRAs are not easily understood – or applied.
Allow our retirement plan professionals to help you and your business navigate these new laws.
We can help you understand and apply changes and provisions such as these.
Senior Vice President