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How the Secure Act is Changing Retirement

The SECURE Act represents some of the most
significant changes to retirement plan law since the passage of
the Pension Protection Act of 2006, over thirteen years ago. The
provisions of the Act are broad ranging and span many different
effective dates.
Though tax credits have been in place to help offset the cost of
adopting a new retirement plan, the SECURE Act significantly
expands the tax credit for employers. Prior to the SECURE Act,
employers were allowed a tax credit of the lesser of 50% of
expenses or $500 per year for the first three years. Under SECURE,
the amount of the tax credit is now raised to the lesser of 50% of
expenses or $250 times the number of non-highly compensated
employees eligible to a maximum of $5,000. Additionally, if the
new plan enrolls employees into the plan using an automatic
enrollment provision, the employer will get an additional
annual credit for start-up costs of $500 per year. This credit is
also available to existing plans that convert to an automatic
enrollment design and the new credits apply to the first 3 years.
These changes are effective for taxable years beginning after
December 31, 2019.
SECURE provides for a new type of Multiple Employer Plan
(MEP) called a Pooled Employer Plan (PEP). PEPs are intended
to help smaller employers pool together to participate in a
single plan and save on administrative costs. Though a PEP
may have many participating employers, it has a single plan
document, files a single Form 5500 and undergoes a single plan
audit. A PEP is a way for small plans to combine their assets into
a larger pool giving them more buying power and hopefully
lower expense ratios for their participants. MEPs have existed
for some time and a PEP is a type of MEP called an “open MEP.”
Traditional MEPs, or closed MEPs, required that the adopting
employers must share a common organizational relationship
(for example, a dental association might sponsor a MEP for its
members or a Professional Employment Organization for its
clients). In addition to creating PEPs, SECURE also created relief
from the “one bad apple” rule that was the major deterrent for
participating in a MEP. The one bad apple rule simply meant
that if one adopting employer within the MEP had a compliance
failure, all participating employers in the MEP would be painted
with the same brush. SECURE created a remedy for the one bad
apple rule, making MEPs and PEPs a more desirable plan design.
A PEP must be sponsored by a Pooled Plan Provider (PPP),
which is likely to be a financial services company, third-party
administrator, insurance company, recordkeeper, or similar entity.
The PPP must serve as the ERISA section 3(16) plan administrator,
as well as the named fiduciary for the plan. It is expected that
the vast majority of PEPs will retain an ERISA section 3(38)
investment advisor who would be responsible for selecting
and monitoring the plan’s investment menu. Consequently, the
participating employers would only have fiduciary responsibility
for prudently selecting and monitoring the PPP. This is expected
to be very appealing to smaller employers who are concernedabout the potential for fiduciary responsibility and liability. The
PEP provisions are delayed a year and will be effective for plan
years beginning after December 31, 2020. The IRS and DOL are
expected to provide additional guidance in the coming year.
If you have questions regarding this new plan design, please
contact us.
The SECURE Act also has provisions affecting 401(k) plans. These
provisions are effective for plan years beginning after December
31, 2019. Plans that elect to utilize a non-elective contribution
(minimum of 3% of pay to all eligible participants) to satisfy the
safe harbor provision, no longer need to distribute an annual safe
harbor notice. Previously, the opportunity to make an annual
safe harbor election was required to be made prospectively, no
more than 90 days, or less than 30 days prior to the beginning
of the plan year in which they would apply. Under SECURE,
401(k) plans can now be amended mid-year to elect safe harbor
provided that a non-elective contribution formula is used.
These provisions do not apply to those plans utilizing matching
contributions to satisfy safe harbor provisions.
The maximum percentage for automatic enrollment
contributions has increased from 10 to 15% of compensation for
qualified automatic contribution arrangement safe harbor plans.
Previously, part-time workers could be excluded from
participating in a 401(k) plan if they had not worked 1,000 hours
in a 12-month eligibility period. For plan years beginning after
December 31, 2020, the SECURE Act requires employers to
include long-term, part-time workers in 401(k) plans. Eligible
employees must have at least 500 annual hours of service for
three consecutive years and be age 21 or older. However, these
participants can be excluded from safe harbor contributions,
nondiscrimination testing and top-heavy requirements.
Beginning with forms required to be filed after December 31,
2019, SECURE has raised the late filing penalties for Form 5500
from $25 per day to $250 per day, not to exceed $150,000. For
Form 8955-SSA, the penalty for late filing has increased from $1
per day for each day of late filing to $10 per participant per day,
not to exceed $50,000. A Form 8955-SSA is required to be filed
with respect to any plan participant who separated from service
during the year and has a deferred vested benefit under the plan.
Prior to the SECURE Act, Required Minimum Distributions
(RMDs) were required to begin no later than April 1st following
the year in which a participant reached age 70 ½. Starting
with participants obtaining age 70 ½ in 2020, the minimum
distribution age has been raised to 72.
A disaster relief provision will apply to major disasters which
occurred after 2017 through February 18, 2020. Under this
provision, “qualified disaster distributions” of up to $100,000
are exempt from the 10% premature distribution penalty. A
“qualified disaster distribution” is a distribution made to an
individual who suffered an economic loss and whose principal
residence is in a qualified disaster zone during the period of the
disaster (as specified by the Federal Emergency Management
Agency (FEMA)). In addition, the normal participant loan limit of
$50,000 has increased to $100,000 for affected individuals.
SECURE also allows for penalty free withdrawals for expenses
related to the birth or adoption of a child. The lifetime withdrawal
amount is set at $5,000 and is effective for distributions made
after December 31, 2019.
Plans that have allowed the use of credit cards to obtain
participant loans will no longer be allowed to do so coincident
with the enactment of SECURE.
An employer may now set up a new retirement plan after the end
of the fiscal year and treat it as effective for deduction purposes
if adopted no later than the due date of that year’s return. For
example, a plan adopted in February 2021, can be treated as
being effective for 2020 tax year. This provision is effective after
December 31, 2019.
SECURE will require a lifetime income illustration on participant
benefit statements. The legislation requires benefit statements
provided to defined contribution plan participants to include a
lifetime income disclosure at least once during any 12-month
period. The disclosure would illustrate the monthly payments
the participant would receive if the total account balance were
used to provide lifetime income streams. The DOL is expected
to give more definitive direction to the format and content of
the illustrations. Compliance is delayed until 12 months after
additional guidance is provided by the DOL.
SECURE provides a Fiduciary Safe Harbor for selection of Lifetime
Income Providers within a retirement plan. The legislation
provides protection from liability for fiduciaries for any losses
that may result to the participant or beneficiary due to an
insurer’s inability in the future to satisfy its financial obligations
under the terms of the contract. Removing ambiguity about the
fiduciary standard eliminates a roadblock to offering lifetime
income benefit options under a defined contribution plan.
The SECURE Act also increases the portability of annuity
investments by letting employees who take another job or retire
move their annuity to another 401(k) plan or to an IRA without
surrender charges and fees. Portability also comes into play if
the lifetime income investment is no longer authorized to be
held as an investment option under the plan (effective for plan
years beginning after December 31, 2019).
The legislation repeals the prohibition on contributions to a
traditional IRA by an individual who has reached age 70½. As
life expectancy increases, there is an increased number of
individuals continuing employment beyond the traditional
retirement age.