In-Depth: 2019 SECURE Act Provisions

Supplement to 2019 SECURE Act In Effect (Barack Ferrazzano Client Alert, January 2020)

Mandatory Provisions

Effective for 2020. The following provisions of the SECURE Act are generally effective for plan years beginning after December 31, 2019:

• Required Minimum Distributions (“RMDs”). Prior to the SECURE Act, distributions from retirement plans and IRAs were required to commence, generally, no later than April 1 of the calendar year following the year in which a participant attained age 70-½ (with exception for certain participants who continued working beyond that age).
  
  • Mandatory Change: The SECURE Act delays the date on which RMDs must commence by providing that, for any participant who turns age 70-½ after December 31, 2019, RMDs will be required to commence after attainment of age 72.
• Post-Death Distributions. In the case of an individual’s death, prior law had varying rules related to retirement plan and IRA distributions including the ability, generally, to make distributions over a beneficiary’s life expectancy.
  • Mandatory Change: With respect to any participant who dies after December 31, 2019, the SECURE Act generally requires that complete distribution from defined contribution retirement plans and IRAs be made by the end of the 10^th calendar year following the year of death. Distributions can still be made over the beneficiary’s life expectancy if the beneficiary is (a) a surviving spouse, (b) a disabled or chronically ill person, (c) a beneficiary no more than 10 years younger than the participant, or (d) a minor child of the participant (generally until the child reaches majority).
• Increased Penalties. ERISA and the Code require retirement plans to file annual returns. Retirement plans satisfy both ERISA and the Code by filing an annual Form 5500. Existing failure to file penalties under ERISA could be as much as $2,200 per day uncapped. Prior to the SECURE Act, failure to file penalties under the Code could be $25 per day up to a maximum of $15,000.
  • Mandatory Change: With respect to annual reports required to be filed after December 31, 2019, the failure to file penalty under the Code has been increased from $25 per day to $250 per day, and the maximum penalty has been increased from $15,000 to $150,000. The ERISA penalties remain unchanged.
• No Credit Cards for Plan Loans. Prior to the SECURE Act, plan sponsors could distribute loans from retirement plans by making use of pre-paid credit cards and other similar devices.
  
  • Mandatory Change: Effective as of December 20, 2019, retirement plans can no longer utilize pre-paid credit cards or other similar devices as tools for distributing plan loans to participants.

Future Effective Dates. The following mandatory provisions of the SECURE Act will become effective on future dates:

• Part-Time Employee Participation. Under current law, part-time employees can be excluded from a 401(k) plan so long as they do not have at least 1,000 hours of service in any 12-month eligibility computation period.
  • Mandatory Change: For plan years beginning after December 31, 2020, long service part-time employees must be eligible to participate in a 401(k) plan after reaching age 21 and completing at least 500 hours of service in each of three consecutive 12-month computation periods. This may require plans to have dual eligibility provisions (for part-time and full-time employees). It should also be noted that plan years beginning prior to January 1, 2021 do not need to be counted for determining whether a part-time employee is eligible.
• Annual Annuity Statements. Under current law, defined contribution retirement plans are not required to offer participants the ability to use their account balances to purchase insurance company annuities. The SECURE Act requires the Department of Labor to issue guidance providing for a standardized approach to explaining to retirement plan participants the potential benefits of an annuity form of benefit.
  
  • Mandatory Change: Defined contribution retirement plans will be required to provide participants with an annual estimate of monthly income that a participant could receive in retirement if an annuity were purchased with the participant’s plan account balance. The annual illustration will be mandatory regardless whether the plan offers an annuity alternative. The annual estimate will be required beginning 12 months after the DOL has issued (a) interim final regulations, (b) a set of assumptions on which to base income estimates, and (c) a model annual disclosure which illustrates lifetime income.

Optional Provisions

The following optional provisions of the SECURE Act become effective at various times. Plan sponsors should consider whether any optional provision could be beneficial to a retirement plan:

• Safe Harbor 401(k) Plan. Current and prior law permits plan sponsors to automatically enroll participants in the “elective deferral” component of a 401(k) plan – referred to as “qualified automatic contribution arrangements” or “QACAs.” Under prior law, the maximum QACA automatic deferral was 10%. Also, prior law required plan sponsors to provide an annual safe harbor notice for QACA or traditional arrangements regardless whether the sponsor’s safe harbor contribution was in the form of a match or nonelective contribution.
  
  • Optional Change: For plan years beginning after December 31, 2019, the maximum deferral under a QACA may be increased to 15% (but only 10% in the first year). In addition, a plan sponsor can adopt a nonelective contribution safe harbor plan with no participant notice requirement and can do so up to 30 days before the end of the plan year. The notice requirement will remain, however, for matching contribution safe harbor plans.
• In-Service Withdrawals – Defined Contribution Plans. For plan years beginning on or before December 31, 2019, there was no special tax relief available for retirement plan or IRA distributions for expenses associated with the birth or adoption of a child.
  
  • Optional Change: The SECURE Act allows defined contribution retirement plans (including IRAs) to permit penalty-free distributions of up to $5,000 for expenses related to the birth or adoption of a child so long as the distribution is made during the one-year period following the birth or date of the adoption. Additionally, the new rule allows such distributions to be repaid to the retirement plan or IRA.
• In-Service Withdrawals – Defined Benefit Plans. Defined benefit retirement plans generally are not allowed to permit distributions before the earlier of actual retirement or normal retirement age. However, for several years such plans have been permitted to allow in-service distributions for employees who continue to work beyond age 62.
  • Optional Change: The SECURE Act permits a plan sponsor to commence in-service distributions to an employee who continues working beyond age 59-½. This change is effective for plan years beginning after December 31, 2019.
• Contributions to IRAs After Age 70-½. Under prior law, contributions to traditional IRAs (as opposed to Roth IRAs) were prohibited after age 70-½.
  • Optional Change: Starting with contributions for calendar year 2020, the age limitation has been removed from traditional IRAs. Note, however, that this new rule does not apply to contributions for calendar year 2019 (which can still be made as late as April 15, 2020). Rather, the new rule applies to post-70-½ contributions being made for 2020 during the contribution period from January 1, 2020 through April 15, 2021.
• Small Employer Tax Credits. Prior to the SECURE Act, small employers were eligible for tax credits of up to $500 per year for three years to cover start-up costs associated with retirement plans.
  • Optional Change: Effective for tax years beginning after December 31, 2019, companies with 100 or fewer employees are eligible for an enhanced tax credit to cover retirement plan start-up costs. The general structure of prior law will remain, but the credit will now be a minimum of $500 and a maximum of $5,000.
• Expanded Access to Multiple Employer Plans ("MEPs"). A MEP allows small employers to join in a centrally administered retirement plan whose sponsor takes on the duties of maintaining and administering the plan. Generally, prior law limited employers so joining in a single plan to those in the same industry, geographic area or having a degree of common ownership or relationship with the same professional employment organization (i.e., a “PEO”).
  • Optional Change: Under the SECURE Act, a new “pooled employer plan” (or “PEPs”) will be available. PEPs will not be limited to employers with common relationships as under prior MEP rules. PEPs will not be available until plan years beginning on or after January 1, 2021.