The Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act), signed into law on Dec. 20, 2019, will have a wide-ranging impact on tax-qualified retirement plans and individual retirement accounts, through amendments to the Internal Revenue Code of 1986 (the Code) and the Employee Retirement Income Security Act of 1974 (ERISA), and administrative directives to the IRS and the U.S. Department of Labor.

For employer retirement plans, the SECURE Act will necessitate changes to plan documents, administration and employee communications regarding required minimum distributions and the 401(k) eligibility of certain part-time employees.  It also provides greater flexibility for employers in utilizing 401(k) “safe harbors” and satisfying compliance for “frozen” pension plans.  This article discusses these and other key SECURE Act provisions.

I. Protection for Multiple Employer Plans and Compliant Employers from a Participating Employer’s Qualification Failures

Before the SECURE Act, a qualification failure by any participating employer in a multiple employer plan could jeopardize the qualification of the entire plan and adversely impact all participating employers.

The SECURE Act provides that, if a multiple employer plan: (i) is maintained by employers with a common interest other than the plan or by a vendor satisfying the requirements of a “pooled plan provider;” and (ii) contains certain provisions with respect to participating employers that fail qualification requirements, then the other participating employers and the plan as a whole will not face adverse consequences due to such employer’s qualification failures.

Section 413(e) of the Code (a new subsection added by the SECURE Act) defines a “pooled plan provider” as a person designated as a multiple employer plan’s named fiduciary, administrator and responsible party for administrative duties, and registered with the IRS as the plan’s pooled plan provider.

In order for a multiple employer plan and its other participating employers to have this protection from a participating employer’s qualification failures, the plan must provide for: (i) the transfer of all of the noncompliant employer’s assets in the plan and account balances of its employees to a single employer plan sponsored by such employer; and (ii) the noncompliant employer’s full liability for the qualification failure.

Effective Date: Plan years beginning after December 31, 2020.

II. Increase in Maximum 401(k) Plan Automatic Enrollment ADP Safe Harbor Default Contribution Rate.

Before the SECURE Act, the safe harbor for a 401(k) plan satisfying the actual deferral percentage (ADP) test through the automatic enrollment of participants at an elective deferral contribution default rate of at least 3 percent of participant compensation allowed for a maximum default rate of 10 percent of the participant’s compensation.

The SECURE Act increases the maximum automatic enrollment safe harbor elective deferral contribution default rate, beginning with the participant’s second plan year of such automatic contributions, to 15 percent of the participant’s compensation.  (For the participant’s first plan year of such automatic contributions, the maximum default rate is still 10 percent of compensation.)

Effective Date: Plan years beginning after December 31, 2019.

III. Flexibility for 401(k) Non-elective Contribution Safe Harbor Notice Requirements and Plan Amendments

Before the SECURE Act, the safe harbor for a 401(k) plan to satisfy the ADP test for a plan year by employer non-elective contributions of at least 3 percent of compensation for each eligible non-highly compensated employee required that the employer (i) provide a safe harbor notice to all eligible employees before the beginning of the plan year, and (ii) adopt a plan amendment providing for such safe harbor contributions, generally before the beginning of the plan year but no later than 30 days before the end of the plan year.

The SECURE Act: (i) eliminates the notice requirement for the employer non-elective contribution ADP safe harbor; and (ii) extends the time to adopt a plan amendment for such safe harbor contributions for a plan year until the due date for distributing excess contributions (generally, April 15 of the following year); provided, that an amendment adopted after the 30th day before the end of the plan year must provide for a non-elective safe harbor contribution of at least 4 percent of participant compensation, rather than 3 percent.  In effect, this allows employers to amend their way into an ADP safe harbor after discovering that their plan would otherwise fail the ADP test, and effectively caps the cost of ADP compliance at 4 percent of eligible non-highly compensated participant compensation.

Effective Date: Plan years beginning after December 31, 2019.

IV. Repeal of IRA Contribution Age Limit

Before the SECURE Act, individuals were not permitted to contribute to an individual retirement account (IRA) in the year they attained age 70½ or in subsequent years.

The SECURE Act eliminates this restriction, allowing individuals to contribute to an IRA without a maximum age restriction.  However, the SECURE Act provides that the exclusion from taxable income of qualified charitable distributions from an individual’s IRA after they attain age 70½ is now subject to a reduction equal to the excess of the individual’s total IRA deductions for all years ending on or after attaining age 70½, over the total of all qualified charitable distributions made in prior years.

Effective Date: IRA contributions and qualified charitable distributions in tax years beginning after December 31, 2019.

V. Increase in Required Minimum Distribution Age from 70½ to 72

Before the SECURE Act, qualified retirement plan participants and IRA owners had to begin required minimum distributions (RMDs) by April 1 of the year following the year in which they attained age 70½, with non-5 percent owners allowed to postpone the commencement of RMDs until April 1 of the year following the year of retirement.

The SECURE Act increases the RMD age from 70½ to 72; plan participants and IRA owners must begin RMDs by April 1 of the year following the year in which they attain age 72, with non-5 percent owners still allowed to postpone the commencement of RMDs until April 1 of the year following the year of retirement.

Effective Date: Individuals attaining age 70½ after December 31, 2019.

VI. New RMD Rules upon Death of Participant / IRA Owner

Before the SECURE Act, RMDs upon the death of a qualified employer plan participant or IRA owner were as follows:

• If the participant’s or IRA owner’s death was after their RMD date, death benefits generally had to be distributed at least as rapidly as the participant’s or IRA owner’s benefits were being distributed.
• If the participant’s or IRA owner’s death was before their RMD date, benefits to a non-spouse designated beneficiary generally were payable over such beneficiary’s life expectancy; provided that distributions began within one year after the participant’s or IRA owner’s date of death.
• If the participant’s or IRA owner’s death was before their RMD date, benefits to a surviving spouse beneficiary generally were payable over such beneficiary’s life expectancy; provided that distributions began by the year in which the participant or IRA owner would have attained age 70½.
• If the participant’s or IRA owner’s death was before their RMD date but there was no designated beneficiary, benefits generally had to be distributed within five years after the participant’s or IRA owner’s death.

The SECURE Act provides for RMDs upon the death of a qualified employer plan participant or IRA owner as follows:

• If the participant’s or IRA owner’s death was before or after their RMD date, death benefits to a beneficiary other than an “Eligible Designated Beneficiary” must be distributed within 10 years after the participant’s or IRA owner’s death.
• If the participant’s or IRA owner’s death was before or after their RMD date, death benefits to an “Eligible Designated Beneficiary” must be distributed over such beneficiary’s life expectancy; provided that distributions begin within one year after the participant’s or IRA owner’s death.
• An “Eligible Designated Beneficiary” is: a (i) surviving spouse; (ii) child of the participant or IRA owner who is under the age of majority as of the date of death; (iii) an individual who is disabled as of the participant’s or IRA owner’s death; (iv) an individual who is chronically ill (as defined in Section 7702B(c)(2) of the Code) as of the participant’s or IRA owner’s death; or (v) an individual who is not more than 10 years younger than the participant or IRA owner as of the date of death.

Effective Dates:

• For collectively bargained plans, RMDs for participants who die in calendar years beginning after the earlier of (i) the later of the termination date of the last collective bargaining agreement ratified before December 20, 2019 (without regard to extensions of such agreement after December 20, 2019) or December 31, 2019, or (ii) December 31, 2021.
• For governmental plans, RMDs for participants who die after December 31, 2021.
• For IRAs and plans other than collectively bargained and governmental plans, RMDs for IRA owners and participants who die after December 31, 2019.

VII. Ease in Elective Deferral Contribution Eligibility for Long-Term Part-Time Employees

Before the SECURE Act, employer defined contribution plans, such as 401(k) plans, could exclude from eligibility to participate any employee who had not completed at least 1,000 hours of service during a plan year.

The SECURE Act provides that employer defined contribution plans with an employee elective deferral arrangement (such as a 401(k) plan), except collectively bargained plans, cannot exclude from eligibility to make elective deferral contributions an otherwise eligible employee who had completed at least 500 hours of service in each of three consecutive plan years.

Note: this eligibility requirement is applicable to employee elective deferral contributions only, and does not require employer matching or non-elective contributions for such long-term part-time employees.

Effective Date: For employee service in plan years beginning after December 31, 2020, including the determination of the three-consecutive plan year requirement (as a result, an employee in a calendar year plan cannot become eligible under this provision until after December 31, 2023).

VIII. Early Withdrawal Penalty Exception for Births and Adoptions

Before the SECURE Act, the penalty exceptions for pre-age 59½ qualified retirement plan distributions, such as hardship withdrawals, did not include an exception for expenses in connection with the birth or adoption of a child.

The SECURE Act provides that distributions from an “Applicable Retirement Plan” in connection with expenses for the birth of a participant’s or account owner’s child or their adoption of a child will not be subject to the 10 percent early withdrawal (pre-59½ ) penalty; provided that the distribution: (i) is within one year after the child’s date of birth or date of adoption; and (ii) does not exceed $5,000.

An “Applicable Eligible Retirement Plan” generally means an IRA or qualified employer plan, except for defined benefit plans.

A participant or account may recontribute birth or adoption distributions; however, they are not eligible rollover distributions.

Effective Date: Distributions made after December 31, 2019.

IX. Relief from Nondiscrimination Requirements for Closed and Frozen Pension Plans

Before the SECURE Act, defined benefit pension plans that had been amended to exclude new participants (“closed plans”) or cease benefit accruals for any participants (“frozen plans”) generally had no relief from ongoing nondiscrimination requirements.

The SECURE Act provides the following relief, which may be available to closed plans or frozen plans with respect to nondiscrimination, minimum coverage and minimum participation requirements:

• If a closed plan: (i) was not amended during the five-year period immediately preceding the year it became a closed plan by substantially increasing the number of participants covered or the value of their benefits, rights and features (subject to exemption for certain grandfathered plans); and (ii) passes benefits, rights and features testing in the year it becomes a closed plan and in the two plan years immediately following, then it may be deemed to satisfy the benefits, rights and features requirements in subsequent years; provided that it is not amended after the year it becomes a closed plan by changing the group of participants covered or their benefits, rights and features in a way that significantly favors highly compensated employees.
• If a closed plan: (i) was not amended during the five-year period immediately preceding the year it became a closed plan by substantially increasing the number of participants covered or the value of their benefits (subject to exemption for certain grandfathered plans); (ii) passes nondiscrimination and coverage testing in the year it becomes a closed plan and in the two plan years immediately following; and (iii) it is not amended after the year it becomes a closed plan by changing the group of participants covered or their benefits in a way that significantly favors highly compensated employees, then the closed plan may use combined testing with a defined contribution plan of the same employer on a defined benefit basis (which is often advantageous) for nondiscrimination and coverage. However, this combined testing is available only if the defined contribution plan: (i) provides matching contributions; (ii) is a 403(b) annuity plan funded by employer matching or non-elective contributions; or (iii) is an employee stock ownership plan (ESOP).
• If a closed plan: (i) is amended by ceasing all benefit accruals or by providing future accruals to a closed class of participants only; (ii) passed the minimum participation test as of the date it became a closed plan or a frozen plan; and (iii) ) was not amended during the five-year period immediately preceding the year it became a closed plan by substantially increasing the number of participants covered or the value of their benefits (subject to exemption for certain grandfathered plans), then the plan is deemed to pass the minimum participation test.

Effective Date: December 20, 2019.

X. Extended Time for Employers to Adopt New Retirement Plans

Before the SECURE Act, an employer could adopt a qualified retirement plan effective for a tax year no later than the last day of the tax year.

The SECURE Act provides that, subject to other applicable requirements, an employer may adopt a qualified plan effective as of a tax year no later than the due date (with extensions) of the employer’s tax return for the tax year.

Notwithstanding this provision, a qualified retirement plan that provides for employee contributions or elective deferral contributions must be adopted before such contributions or deferrals are made to the plan.

Effective Date: Plans adopted effective in tax years beginning after December 20, 2019.

XI. New Defined Contribution Plan Participant Statement Requirements for Lifetime Income Streams

Before the SECURE Act, defined contribution plan benefit statements to participants were not required to include information on lifetime income payment options.

The SECURE Act requires defined contribution plans to provide participants a benefit statement at least once each 12-month period illustrating benefits in the form of monthly payments for lifetime income streams, including a qualified joint and survivor annuity and a single life annuity.

Effective Date: Defined contribution plan benefit statements issued more than 12 months after the Department of Labor’s release of latest of: (i) interim final rules on lifetime income stream statements; (ii) a model lifetime income stream statement; or (iii) assumptions to be used in converting accrued benefits into lifetime income streams for purposes of such statements.

XII. Increase in Penalties for Retirement Plan Filing and Notice Failures

Before the SECURE Act, penalties were as follows:

• Failure to timely file a Form 5500 was subject to a penalty of $25 per day, up to a maximum penalty of $15,000.
• Failure of a plan with vesting requirements to file an IRS deferred vested participant registration statement was subject to a penalty of $1 for each participant for each day until filed, up to a maximum penalty of $5,000.
• Failure of a plan that terminates or changes its plan name, address or administrator to file an IRS notice of change was subject to a penalty of $1 for each day until filed, up to a maximum penalty of $1,000.
• Failure to notify participants of the right to elect no withholding on distributions was subject to a penalty of $10 for each failure, up to a maximum penalty of $5,000 for all failures in a plan year.

The SECURE Act significantly increases these penalties:

Failure to timely file a Form 5500 is subject to a penalty of $250 per day, up to a maximum penalty of $15,000.

Failure of a plan with vesting requirements to file an IRS deferred vested participant registration statement is subject to a penalty of $10 for each participant for each day until filed, up to a maximum penalty of $50,000.

Failure of a plan that terminates or changes its plan name, address or administrator to file an IRS notice of change is subject to a penalty of $10 for each day until filed, up to a maximum penalty of $10,000.

Failure to notify participants of the right to elect no withholding on distributions is subject to a penalty of $100 for each failure, up to a maximum penalty of $50,000 for all failures in a plan year.

Effective Date: Forms and notices required to be filed or issued, as applicable, after December 31, 2019.

XIII. Increase in Small Employer Tax Credit for Pension Plan Startup Costs and Added Credit for Automatic Enrollment

Before the SECURE Act, employers with up to 100 employees receiving at least $5,000 in annual compensation were eligible for an annual tax credit for up to three years on expenses incurred in establishing and administering a tax-qualified plan covering at least one non-highly compensated employee (Qualified Startup Costs), up to a maximum annual credit of (i) $500 or (ii) 50% of Qualified Startup Costs. There was no separate or additional credit for such small employer including an automatic enrollment feature.

The SECURE Act increases the maximum annual tax credit to the greater of (i) $500 or (ii) the lesser of (A) $250 for each eligible non-highly compensated employee, or (B) $5,000.  In addition, the SECURE Act adds an annual small employer tax credit of $500 for the first three years that the plan includes an automatic enrollment feature.

Effective Date: Plan years beginning after December 31, 2019.

XIV. Prohibition on Employer Plan Loans Through Credit Cards

Before the SECURE Act, IRS practice permitted employer retirement and savings plan loans to participants (e.g. 401(k) loans) through credit cards, although the Internal Revenue Code did not expressly address using credit cards.

The SECURE Act prohibits employer retirement and savings plan loans to participants through credit cards by adding an express provision to this effect in the Internal Revenue Code.

Effective Date: Loans made after December 20, 2019.

Pepper Hamilton will closely monitor developments and guidance from the IRS and the Department of Labor regarding the SECURE Act, and we are prepared to assist plan sponsors and administrators in complying with these new requirements.