SECURE ACT CHANGES THAT AFFECT YOUR 401(K) by Carol Buckmann
Secure Act changes seem to be on track to enact new rules many plan sponsors would prefer to see. It has been a long time since Congress passed a comprehensive pension bill. Despite the general gridlock in Washington, hopes are high that Congress will soon pass a new pension law called the SECURE Act, which has already been approved by the House of Representatives and has bipartisan support. The bill awaits Senate approval.
Big SECURE Act Changes Anticipated for 401(k) Plan Administration. The SECURE Act changes would alter the way 401(k) plans operate in significant ways by changing the rules affecting coverage, distributions and participant disclosures and by opening up the market for multiple employer plans (MEPs) covering unrelated employers. All sponsors of 401(k) plans will need to understand their impact. Here are some of the significant changes to expect if this law is enacted—
- Part-Time Employees Must Be Eligible to Contribute. Long term part-time employees must be covered beginning in 2021 if they are age 21 or older and worked at least 500 hours in 3 consecutive 12 month periods. However, employer contributions are not required for these employees even if the plan is top heavy.
- Distribution Rules Modified and New Withdrawal Event Created. The age at which required minimum distributions (RMDs) are required is increased from 70 ½ to 72. Most non-spouse beneficiaries must receive death distributions within 10 years following the participant’s death. In addition, plans are permitted to make penalty-free distributions of up to $5000 on the birth or adoption of a child.
- New Flexibility for Non-Elective Safe Harbor Plans. Currently, a plan sponsor that wants to preserve the option of making nonelective safe harbor contributions in the next plan year must send participants a “maybe notice” to that effect prior to the beginning of the plan year. The SECURE Act eliminates this notice requirement and changes the election rules. The SECURE Act permits a plan sponsor to elect before 30 days prior to the end of the plan year whether to make the safe harbor non-elective contribution that is less than 4% of the pay of eligible employees. An election to make a nonelective safe harbor contribution may even be made after the end of the plan year if the sponsor will contribute at least 4% of pay for all eligible employees.
- Increased Maximum Contribution for Auto Escalation Safe Harbor Plans. The maximum permissible contribution increases from 10% of pay to 15% of pay.
- New Disclosure of Projected Retirement Income. Annual benefit statements for participants will be required to include a projection of the monthly income their accounts could produce as a potential spur to retirement savings. There would be no fiduciary liability if the Department of Labor assumptions and guidance were followed in preparing the projections.
- Annuity Safe Harbor for Fiduciaries. A deterrent to adoption of lifetime income options has been the fear that plan fiduciaries could have liability if they chose an insurer that ended up in precarious financial condition. The Act creates a new safe harbor that fiduciaries could follow to eliminate this liability exposure.
- Open Multiple Employer Plan (MEP) Option. Smaller plan sponsors are always looking for options that decrease their fiduciary responsibilities. A long-awaited provision of the Act would permit unrelated employers to participate in pooled employer plans (PEPs) with professional management by registered pooled plan providers (PPPs) who serve as “named fiduciaries” of the plans. PEPs would be eligible for simplified annual reporting. The Act also removes a disincentive to participate in these plans called the “one bad apple rule.” That current IRS rule provides that a qualification problem of one adopting employer can be treated as a problem of all employers in the MEP. Adopting employers of PEPs or MEPs with a business connection would not be subject to the one bad apple rule. Instead, the offending employer’s portion of the plan would be spun off from the MEP.
Changes Are Generally Not Effective in 2019. The SECURE Act changes are generally effective in 2020. However, some changes, including the new rules for PEPs, would not be effective until 2021.
Many of these changes will be welcomed by 401(k) plan sponsor because they provide them with increased flexibility. Fingers are crossed that Congress will finally move forward and enact them. Plan sponsors should also monitor whether the final law contains any changes to these provisions
Carol Buckmann a founding partner at Cohen & Buckmann PC, has practiced at major law firms in the areas of employee benefits and executive compensation for over 30 years. Carol frequently blogs, writes articles and is quoted in the media about current employee benefit issues.