Secure Act Changes for Plan Sponsors and Participants
Secure Act changes are now a reality for retirement plan sponsors and plan participants. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, passed by Congress late last week, introduced several changes that will impact both retirement plan sponsors and participants. The SECURE Act is the most sweeping piece of retirement savings reform legislation to become law in more than a decade. So, what exactly, does the SECURE Act mean for retirement plan sponsors and participants?
According to a blog post from Drinker Biddle, a national law firm that caters to companies from a variety of industries, including financial services, insurance, healthcare, and more, the SECURE Act is “intended to incentivize employers (particularly small businesses) to offer retirement plans, promote additional retirement savings, and enhance retiree financial security, including several provisions that will impact current plan administration.” While generally positive, the changes brought about by the SECURE Act also raise new administrative challenges and questions for retirement plan fiduciaries”, the post’s authors opined.
Key changes enacted by the SECURE Act include:
Open Multiple Employer Plans (MEPs): The SECURE Act contains several MEP-related provisions, including one that allows employers in unrelated businesses for the first time to create Open MEPs — called “Pooled Plans” — that will be treated as single ERISA plans.
401(k) Eligibility for Part-time Employees: Under the SECURE Act, employers can now extend retirement plan benefits to part-time employees. According to the post’s authors, while this change is positive because it allows part-time employees to make retirement plan contributions, it will also likely introduce new complexities for retirement plan recordkeepers and administrators.
RMD Age Increase: The age at which individuals must begin to take required minimum distributions (RMDs) has changed from 70 1/2 to 72. Additional compliance questions are likely to arise from this, too.
Higher tax credits: Employers who establish a retirement plan will receive tax credits of up to $5,000 (depending on certain factors), up from $500 before. Small employers who add an automatic enrollment to their plans may also be eligible for a $500 tax credit per year for three years.
Safe Harbor 401(k)s: The SECURE Act gives employers more flexibility to add non-elective safe harbor contributions to their plans mid-year. In addition, the notice requirement for safe harbor plans that make non-elective employee contributions has been eliminated. The automatic deferral cap for plans that use an automatic enrollment safe harbor — called qualified automatic contribution arrangements or QACA safe harbor plans — will increase from 10% to 15%.
Drinker Biddle listed the following additional changes to retirement plans due to the SECURE Act:
- Penalty-free retirement plan withdrawals to pay for the cost of a birth or adoption. Participants must still pay taxes on these early withdrawals;
- Lifetime income provisions designed to incentivize employers to offer in-plan annuity options. “The [SECURE] Act also provides for tax-advantaged portability for a lifetime income product from one plan to another or between plans and IRAs to help avoid surrender charges and penalties where the lifetime income product is removed from a particular plan,” according to the authors;
- Another provision of the SECURE Act requires lifetime income disclosures to participants that show their monthly payments should their account balance be used to provide lifetime income from an annuity;
- Nondiscrimination testing relief for some closed defined benefit plans;
- Clarifications on the termination of 403(b) custodial accounts and 403(b) retirement income accounts within church-sponsored plans; and
- An increase in the penalties for failure to file plan returns by the deadline.
In addition, Drinker Biddle pointed out that the SECURE Act also “repeals the maximum age for IRA contributions and eliminates the stretch IRA. As to the latter, non-spouse beneficiaries of inherited IRAs will be required to take their benefits in income on an accelerated basis (as compared with current law) – this will have estate planning implications for individuals and families that should be understood and reviewed.”
Most of the SECURE Act provisions will go into effect on January 1, 2020. Plan sponsors should consider how the SECURE Act impacts their retirement plans, particularly when it comes to administration and compliance requirements. In addition, employers who don’t currently offer a retirement plan benefit should consider taking advantage of the opportunities the SECURE Act now affords them or consider joining an open MEP. Indeed, the SECURE Act will bring about new administrative changes and compliance requirements, and plan sponsors should be ready to address those changes in their own retirement plans.