Key 2020 Benefits Related Limits

The SECURE Act: What It Is And What It Is NOT

As part of a large year-end piece of legislation, the provisions known as the Setting Every Community Up for Retirement Security Act (the “SECURE Act”) were enacted into law. The SECURE Act represents a broadly bipartisan piece of legislation that addresses many retirement related issues. Yet, many retirement related changes that have been discussed over the last few years were not included. Whether some of those changes will eventually be enacted into law remains to be seen.

New law under the SECURE Act

Changes to MRD rules. Several changes have been made to the minimum required distribution (“MRD”) rules that apply to retirement plans and IRAs. Historically, beginning with the year an individual attains age 70½, MRDs have been required in order to avoid a 50% excise tax. (A critical exception for retirement plans (but not IRAs) allows an older worker to defer MRDs until retirement, provided the worker does not own more than 5% of the business and assuming the retirement plan permits continued deferral.) To satisfy the MRD requirement, either the entire account needed to be distributed (and taxed) by the end of the calendar year that contains the fifth anniversary of death or, and if done correctly, MRDs could be paid out over a beneficiary’s life expectancy – the so-called “Stretch IRA,” although the concept also applied to retirement plans.

The SECURE Act made two key changes to the existing MRD rules. First, the age 70½ trigger for MRDs has been raised to age 72, effective for any individual who attains age 70½ after 2019. (Thus, if an individual attained age 70½ in 2019, MRDs must begin for the year 2019 under the old rule.) This change generally applies to all retirement plans (including 401(k), 403(b), profit sharing, money purchase, stock bonus, defined benefit and 457(b) plans) as well as IRAs. Note that no change has been made to the active worker exception referred to in the preceding paragraph. Nor has the age 70½ trigger for qualified charitable distributions been changed (although a tweak to those rules has been made to reduce the $100,000 limit where deductible traditional IRA contributions are made by an individual who has attained age 70½ under another change made by the SECURE Act, discussed further below).

Second, the SECURE Act has generally eliminated the Stretch IRA concept, effective with respect to account owners who die after December 31, 2019 (including beneficiaries of an inherited Stretch IRA), although relief is available for certain grandfathered annuity contracts. Under the SECURE Act, if a decedent’s balance in an IRA or a defined contribution plan is left to an individual, the balance must be distributed by the end of the calendar year that contains the tenth anniversary of death. This is a change to the five-year/beneficiary’s life expectancy distribution rule that was previously in effect. Exceptions to this new rule apply to beneficiaries that are a surviving spouse, disabled or chronically ill, within ten years of age of the decedent or the decedent’s minor children (but once a child reaches the age of majority, distributions must be completed within ten years). Special rules also apply for certain trusts established for the benefit of disabled or chronically ill individuals.

It appears that the five-year distribution rule continues to apply if the beneficiary is an estate or a non-“look through” trust. Presumably, the new ten-year rule (rather than the five-year rule) will apply to look through trusts that otherwise would satisfy the Stretch IRA requirements, but clarification of this point by Treasury will be welcome. Clarification as to the rules that apply to an account owner who dies after 2019 and after his or her required beginning date would also be welcome.

In the right circumstances and to the extent it makes economic sense, it may be possible to mimic the effects of the now eliminated Stretch IRA using a charitable remainder trust. The elimination of the Stretch IRA benefit also affects planning for those with significant retirement plan and IRA assets who may be charitably inclined, and the decision as to whether or not to elect a Roth conversion. (As a reminder, almost all retirement assets can now be converted to Roth.)

Unrelated to the SECURE Act is one other important change to the MRD rules. Back in November, 2019, proposed regulations were issued that update the MRD life expectancies factors (the result of which is to slow down MRDs). These factors, which have not been updated since the early 2000s, are proposed to be effective beginning in 2021. Transition relief (to obtain the benefit of the new tables) will be available to those already receiving MRDs, including pre-2020 beneficiaries of Stretch IRAs.

Changes to IRAs. Beginning in 2020, the rule that prevented an individual with compensation from contributing to a traditional IRA for the years including and after attaining age 70½ has been eliminated. Taxable fellowship and stipend payments to graduate and postdoctoral students, again beginning in 2020, are also now eligible to be treated as compensation for IRA contribution purposes. Special rules that affect IRAs and retirement plans have also been enacted for “difficulty of care” payments to foster care providers.

Retirement plan adoption. Congress continues to provide various incentives to employers to adopt retirement plans. Historically, a new plan (and its related trust) needed to be adopted by the end of the employer’s taxable year – so for a calendar year employer a plan needed to be adopted by December 31 for it to be treated as in effect for that year. The SECURE Act now provides that a new plan may be adopted as late as the extended due date of an employer’s tax return, beginning with plans adopted for taxable years beginning after December 31, 2019. Also effective for taxable years beginning after December 31, 2019, the credit for small employer retirement plan startup costs has been enhanced, and there is a new credit for small employers offering an eligible automatic enrollment arrangement.

Retirement plan changes.

Effective immediately (if not sooner) – Retirement plan loans can no longer be originated using a credit card or similar arrangement.

In addition, Treasury is directed to issue much needed guidance concerning distributions upon termination of a 403(b) arrangement that includes mutual fund investments (a 403(b)(7) custodial account). Final 403(b) regulations, which were generally effective January 1, 2009, introduced the concept of a distribution upon termination of a 403(b) plan. Those regulations, and subsequent guidance in 2011, clarified that distribution of a fully paid individual annuity contract or interest in a group annuity contract would satisfy the requirements of the regulation, but left open what steps were required in order to distribute on plan termination investments in a 403(b)(7) custodial account. As a result of the new law, not only is Treasury directed to provide guidance that an in-kind distribution of a 403(b)(7) custodial account is treated as satisfying the 403(b) plan termination rules, the new guidance is to be effective as of January 1, 2009, thus potentially “curing” any problematic termination situations that may have occurred in the interim.

While on the topic of 403(b) plans, readers are also reminded of the fact that a “remedial amendment period” (during which amendments can be adopted retroactively in order to cure any document requirements) for 403(b) plans is closing – as of March 31, 2020. All employers with a 403(b) plan, but particularly those maintaining an individually designed 403(b) plan document, are urged to take immediate action to ensure that this critical deadline is not missed.

Generally effective for 2020 – Several 401(k) safe harbor changes have been enacted. For employers utilizing the qualified automatic contribution arrangement (“QACA”) safe harbor, the limit on elective deferrals is increased from 10% of compensation to 15% of compensation. The rules around safe harbor plans (including traditional safe harbor arrangements and QACAs) using a nonelective contribution have also been loosened. Specifically, the requirement of an advance notice for nonelective 401(k) safe harbor plans has been eliminated (although notice of elective deferral rights is still required). In addition, a plan can be amended as late as 30 days prior to the end of the year to adopt the 3% of compensation nonelective contribution safe harbor. If an employer is willing to fund a 4% of compensation nonelective contribution safe harbor, the amendment may be adopted even later (including after the end of the plan year).

On the distribution front (but technically not part of the SECURE Act), defined benefit and money purchase pension plans (and certain 457(b) plans) can now allow in-service distributions beginning at age 59½ (down from age 62).

And finally, a new “qualified birth or adoption distribution” type has been introduced for IRAs and most retirement plans (other than defined benefit plans). The new distribution type allows for up to $5,000 for expenses relating to the birth or adoption of a child and if received, the amount distributed is exempt from the 10% early distribution excise tax. The $5,000 limit applies on an aggregated basis but is applied at the individual level, meaning that spouses could each receive a distribution and avoid the 10% excise tax with respect to $5,000, for a total of $10,000. Complicating matters somewhat, the amount received as a distribution may also be repaid. Although a retirement plan is not required to offer this as a distribution option, if it does so it must also permit repayment into a rollover source. Because of the various administrative and recordkeeping complexities associated with this new distribution type, we anticipate Treasury will need to issue guidance before most retirement plans begin to offer this distribution form.

Note that this type of relief (ability to take a special distribution, exception from the 10% early distribution excise tax and ability to restore the distribution to a retirement vehicle) continues to apply to various types of qualified disaster distributions, and the same legislation that included the SECURE Act included additional disaster relief (allowing distributions of up to $100,000 for certain eligible disasters). These provisions are consistent with prior legislation that has allowed plan participants and IRA owners to access their retirement savings in an emergency, coupled with the ability to restore the amount for the future.

Generally effective for 2021 (sort of) – Long-term employees with at least 500 hours of service beginning on or after January 1, 2021 for at least three consecutive years (and who are over age 21 by the end of the three year period) will be required to be offered the opportunity to make 401(k) deferral contributions, even if they do not complete 1,000 hours of service in a given year. These “long-term part-time” employees are not required to receive matching or profit sharing contributions and can be excluded from top heavy and nondiscrimination testing, but if they receive matching or profit sharing contributions, the plan must credit vesting for each year in which they completed at least 500 hours of vesting service. Because years prior to 2021 are not counted for this purpose, it means that none of these employees will be required to be offered the opportunity to make 401(k) deferral contributions until at least 2024. Beginning in 2021, however, employers will need to be in a position to track hours.

Amendment deadlines – Amendments to retirement plans to reflect these various new rules generally will not be required until the last day of the plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans) unless a later date is established by Treasury. The effective date of any operational changes, however, should be carefully tracked for purposes of ensuring an accurate amendment when the time comes.

“Open” multiple employer plans. The new legislation expands the ability of employers to utilize multiple employer plans (that is, a plan offered to unrelated employers that are not part of a controlled group) that are administered by so-called “pooled plan providers.” These so-called “Open MEPs” should allow smaller employers to share the administrative costs associated with running a retirement plan, including for example by enjoying the benefits of better investment-level fees associated with higher account balances. Historically, such a pooling was not possible under ERISA absent some industry or regional commonalities. Moreover, the “one bad apple” rule increased the risk of these arrangements by disqualifying the entire plan if one employer failed to satisfy the myriad of qualification requirements under the Internal Revenue Code.

The new legislation, not effective until 2021, changes the playing field for these types of plans. That said, there are many questions surrounding the new rules that need to be worked out through regulatory guidance, including determining which vendors can be pooled plan providers, rules around setting compensation for these providers and the allocation of fiduciary responsibilities and administrative costs. While the new rules have the potential to significantly change the retirement plan industry, whether Open MEPs will live up to their promise remains to be seen.

Lifetime income. Several changes have also been made in the area of lifetime income products and information. Changes made by the SECURE Act include allowing these products to be transferred among IRAs and various types of retirement plans (effective beginning in 2020), enhancing disclosure requirements around lifetime income streams, including basing those disclosures on assumptions established by the Department of Labor (effective approximately twelve months following the publication of guidance required to be issued by December 20, 2020) and establishment of a new fiduciary safe harbor with respect to annuity selection (effective immediately). Like Open MEPs, this too is an area that is receiving an enormous amount of attention in the press, but is likely to have little immediate impact until additional regulatory guidance is issued.

What was not included in the SECURE Act

While a significant step forward on various fronts, the SECURE Act did not include several proposals that have been floating around the halls of Congress in one form or another for the last few years. These include:

• A more robust increase to the MRD age (one bill moved the age from 70½ to 72 but would have then increased the age to 75 beginning in 2030);
• A mandate to more frequently update mortality in MRD factors (although as noted, new proposed regulations help with respect to this issue);
• A blanket exception to the MRD rules for smaller balances;
• Allowing use of Rev. Rul. 81-100 (group) trusts for custodial account 403(b)(7) arrangements;
• An increase in the 401(k) catch-up contribution amount;
• A reduction in the MRD 50% excise tax; and
• Treating student debt repayments as a contribution for 401(k) matching contribution purposes.

Keogh Plan Changes – Some Good And Some Bad

As discussed in the preceding article, a qualified plan may now be adopted as late as the extended due date of an employer’s tax return. This is likely to be most relevant to a self-employed individual with his or her own Schedule C business who decides after year-end that some form of qualified plan (profit sharing, money purchase pension and/or defined benefit plan) makes sense for the longer term. Note that this new rule would not allow 401(k) deferrals to be made to a “solo 401(k) plan” after year-end, but that is an issue that can largely be addressed for the first year.

Keogh plans (which for this purpose include plans that cover solely the business owner and his or her spouse, or a partner only plan – none of which are subject to ERISA) are required to file a Form 5500-EZ or Form 5500-SF once assets exceed $250,000 and for the plan’s final year (without regard to asset size). The Internal Revenue Service can impose a late filing penalty of $25 a day, up to $15,000 a year. While the Internal Revenue Service penalties on a late filed Form 5500 are generally waived if an employer uses the Department of Labor’s Delinquent Filer Voluntary Compliance (“DFVC”) program (and satisfies any other applicable requirements including filing any required Forms 8955-SSA), DFVC is not available to Keogh plans since they are not subject to ERISA.

After years of requests, the Internal Revenue Service formalized a delinquent filing program for these types of plans, the goal of which (like DFVC) is to bring employers back into the compliance system. Under the program, for a fee of $500 per delinquent return (capped at $1,500 per plan), employers can avoid potentially larger late payment penalties if the various requirements of the program are satisfied.

The SECURE Act substantially raises the Internal Revenue Service penalties on late filed plans – from $25 per day with a cap of $15,000 per year to $250 per day with a cap of $150,000 per year, beginning with any required 2020 filing. Accordingly, employers that might meet the requirements for the Internal Revenue Service’s penalty relief program (or DFVC in the case of a plan subject to ERISA) are encouraged to confirm compliance and, if not in full compliance, utilize one of these programs as applicable.

Proposed Changes to Reimbursement of Individual Health Insurance Arrangements

Effective January 1, 2020, new forms of health reimbursement arrangements (“HRAs”) allow employers to reimburse premiums for certain health insurance arrangements, including individual health insurance policies and Medicare, without violating certain Affordable Care Act requirements. (For a history of the guidance on the reimbursement of individual health insurance policies, please see our earlier advisories here, here and here.) These new arrangements, which are available to all employers of all sizes, provide new health care alternatives that satisfy the so-called pay or play mandates under Obamacare and have the potential to significantly shift the cost and funding of employer sponsored group health plans.

Under the new guidance, two types of HRA arrangements, Individual Choice HRAs (“ICHRAs”) and Excepted Benefit HRAs (“EBHRAs”), are available. ICHRAs allow for the reimbursement of premiums for individual coverage and Medicare, provided certain enrollment, opt-out, nondiscrimination, notice and substantiation requirements are met. ICHRAs can be offered to certain specified “classes” of employees and there is no cap on the dollar amount that can be reimbursed, but if an ICHRA is offered to a class of employees, group health plan coverage generally cannot be offered to that class. Importantly, offering an ICHRA will generally satisfy the pay or play mandates under Obamacare, and the employee-paid portion of coverage can be funded with pre-tax dollars through an employer’s cafeteria plan.

EBHRAs allow for the reimbursement of premiums for “excepted benefits,” such as limited scope dental and vision, long-term care, short-term limited duration insurance (“STLDI”) and COBRA. Only a limited amount ($1,800 per year, indexed annually for inflation) can be reimbursed under an EBHRA, and group health plan coverage must be offered by the employer to any employee who is offered an EBHRA. EBHRAs must also be made available to all “similarly situated employees.”

While these new HRA arrangements have complex and strict compliance requirements, we believe they offer employers much needed flexibility in designing employee health arrangements and in controlling costs. Please contact a member of the Employment and Benefits Practice Group. if you wish to learn more.

Training Reminders

A variety of training requirements apply in the employment and benefits realm. For example, so-called “covered entities,” which potentially picks up employer sponsored self-insured health arrangements (such as HRAs and health care flexible spending accounts), are required to provide training with respect to protected health information (“PHI”) under HIPAA. In addition, other employment and/or benefits training is often encouraged by regulators, or viewed as a best practice, even where not required. In Massachusetts, for example, employers are encouraged to conduct anti-discrimination and sexual harassment training annually. And employees responsible for plans subject to ERISA, such as 401(k) plans, often benefit from fiduciary training and operational compliance reviews.