The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law late last month and makes significant positive changes impacting retirement plans. Many of the provisions are effective today, so employers should review these changes and consider whether to make revisions to plan documents and administration procedures.

The key provisions of the SECURE Act include:

Provisions Favoring Small Employers

Pooled Employer Plans created
Under long-standing rules, only employers that share a common interest could form multiple employer plans. Unrelated employers now will be able to join together to participate in a new type of multiple employer plan called a Pooled Employer Plan (PEP), as long as the plan terms meet certain requirements. Among other things, the terms of the PEP must designate a pooled plan provider (PPP) to serve as the plan administrator and as a named fiduciary, and provide that each employer retains fiduciary responsibility with respect to selecting and monitoring the PPP and any other named fiduciary. Any fiduciary responsibility for the investment and management of the PEP's assets may be shifted from employer to an investment advisor through delegation. This provision will be effective for plan years beginning after December 31, 2020. Employers who are considering selling their business in the future should be aware that buyers often require termination of plans before closing. The process of exiting PEPs can be administratively taxing. Employers should weigh such considerations before enrolling in PEPs.

Changes to multiple employer plan rules
The existing "one bad apple" rule—that subjects all employers in a multiple employer plan to plan disqualification, penalties, or excise taxes if one or more employers fail to meet the plan qualification rules—made participating in such plans unappealing, despite the fact they accompany lower administrative costs. Effective for plan years beginning after December 31, 2020, employers participating in either a common interest or a PEP multiple employer plan can avoid the one bad apple rule if their plan document includes provisions contained in the SECURE Act that describe procedures for addressing the failures of participating employers and additionally, in the case of PEPs only, if the employers ensure PPPs perform substantially all their administrative duties. As a result, participation in multiple employer plans will become far less risky.

Credits for small employer retirement plans
Small employers (100 employees or less) have been eligible for tax credits covering 50 percent of qualified costs associated with adopting a qualified retirement plan. The SECURE Act has now increased the maximum tax credit from as much as $500 to $5,000 in order to encourage more small employers to sponsor retirement plans. Small employers are also eligible for a tax credit of up to $500 per year for a period of three taxable years if they add automatic enrollment to a new or existing retirement plan. Both these credits are effective for taxable years beginning after December 31, 2019.

Safe Harbor Plans

Increase cap on qualified automatic contribution arrangements
The maximum payroll contribution cap increases from 10 percent to 15 percent after the end of the participant's first plan year for safe harbor qualified automatic contribution arrangements. This provision applies to plan years beginning after December 31, 2019.

Notice requirement for nonelective safe harbor plans eliminated
Under the old rule, a nonelective safe harbor plan could be adopted only if the employer provided an annual written notice to each participant in the plan informing them of their rights and obligations. The SECURE Act eliminates this annual notice requirement for nonelective safe harbor plans, as long as the plan provides for a nonelective employer contribution of at least 3 percent of compensation, effective for plan years after December 31, 2019. The notice would still be required if the employer elects to make a matching safe harbor contribution.

Changes to safe harbor 401(k) rules
The SECURE Act now permits employers to amend their 401(k) plan mid-year to become a nonelective 401(k) safe harbor plan, as long as the amendment is made at least 30 days before the end of the plan year. Further, the amendment to become a nonelective 401(k) safe harbor plan also may be made by the last day for distributing excess contribution for the plan year, but the employer must make a contribution of at least 4 percent of compensation with respect to each eligible employee. This provision is effective for plan years beginning after December 31, 2019.

Plan Adoption, Eligibility, Rollover, Withdrawals, and Loans

Extended deadline for adopting qualified plans
Under the old rule, qualified retirement plans had to be adopted by the last day of the tax year for them to be effective in that tax year. Now employers that retroactively adopt a qualified retirement plan after the close of a tax year, but before the due date for filing a tax return for that tax year (including extensions) may elect to treat the plan as having been adopted as of the last day of that tax year. This provision is effective for plans adopted for tax years beginning after December 31, 2019.

It is worth noting that this rule does not permit participants to make retroactive elective deferrals.

Long-term part-time employees eligible for 401(k) plans
Some part-time employees who work less than 1,000 hours per year may need to be eligible for 401(k) plans starting with plan years beginning after December 31, 2020. Part-time employees who have provided at least 500 hours of service per 12-month period over three consecutive 12-month periods and have attained the age of 21 by the end of the third year will need to be allowed to participate in 401(k) plans. When calculating the hours of service, only service completed beginning January 1, 2021 will be counted, so the earliest an employee may be eligible to participate under this provision is January 1, 2021. Accordingly, amendments to plan documents reflecting this change will be required by December 31, 2020.

Employers are not required to make nonelective or matching contributions for such employees and may exclude such employees for purposes of coverage, top-heavy, and discrimination testing.

Withdrawals for birth of child or adoption
Participants now may make an early withdrawal of up to $5,000 from qualified retirement plans (excluding defined benefit plans) to cover childbirth or adoption expenses without being subject to an early withdrawal penalty. The withdrawal must be within a year of a child's birthdate or adoption date. Adoptions must be of individuals who have not reached age 18 or are physically or mentally incapable of self-support. Penalty-free withdrawals are not available for adoption of a child of taxpayer's spouse. Participants who receive these distributions have the option to make contributions in the amount of the distributions at a later date. This provision is effective for distributions made after December 31, 2019.

Prohibition on making loans through credit cards
Qualified retirement plans may no longer make loans through credit cards or any other similar arrangement. This provision applies to loans made after December 20, 2019.

Lifetime Income

A new fiduciary safe harbor for selecting annuity providers
Annuities provide a guaranteed source of income to participants over their lifetime typically in the form of periodic payments. Individuals who purchase annuities may take comfort in knowing that they will have some level of guaranteed income protection during their retirement years. Many employers have been reluctant to offer annuity products as an option because annuities increase fiduciary liability exposure, either 1) in the event the annuity provider selected falters in the future or 2) with the inability to adequately monitor and oversee the annuity provider.

The SECURE Act may soon change that attitude, because it now provides a new fiduciary safe harbor to employers who add an annuity product to their plan. Such an employer will not be subject to fiduciary liability following the distribution of any benefit, or the investment by or on behalf of a participant or beneficiary, for any losses that may result to the participant or beneficiary, due to an insurer's inability to satisfy its financial obligations under the terms of such contract, if when selecting an annuity provider the fiduciary:

• engages in an objective, thorough, and analytical search for purpose of identifying insurers from which to purchase contracts;
• considers the financial capability of the insurer to satisfy its obligations which is determined by the written representation from the insurer identified more thoroughly in the SECURE Act;
• considers the cost (including fees and commissions) of the contract offered by the insurer in relation to the benefits and product features of the contract and administrative services to be provided under the contract; and
• on the basis of such consideration, concludes that at the time of selection, the insurer is financially capable of satisfying its obligations under the contract and the relative cost of the contract is reasonable.

To satisfy this safe harbor, a fiduciary is not necessarily required to choose the lowest cost contract. This safe harbor is effective December 20, 2019.

Once an employer decides to include annuities on its menu of plan investments, as with other investment offerings, employers will need to prepare advance notices on the investment changes, and materials to educate participants about the annuity products. Given the complex nature of annuities, employers may find that participants struggle to understand the benefit provided by annuities. Additionally, annual annuity valuations furnished by annuity carriers will need to be rolled into Form 5500 before filing. Employers will also need to consider keeping precise records of all annuity carriers who have had a relationship with the plan, for more extended periods beyond the required six years by ERISA. It is not uncommon for retired participants to reach out to their former employers directly for information about their annuity carrier. A good record will allow employers to quickly respond to such requests especially when such annuity carrier's contract with the plan expired decades ago.

Employers also should be aware that standard tax rules such as the early withdrawal penalties and required minimum distributions continue to apply. Annuities may be used to satisfy the minimum distributions requirements, as long as certain conditions are met. Upon disbursement, the full annuity payments will generally be subject to income tax if the contract was purchased with before-tax money while only the earnings portion of the payment will be taxed if after-tax money was used.

Additionally, employers may find that spousal consent, which is required before payments in a form other than qualified joint and survivor annuity (QJSA) may be released to a married participant, will also add another layer of administrative complexity if they decide to include annuities in the plan. For the consent to be valid, it must, among other things, be in writing and witnessed by a plan representative or notary public. Employers bear the burden of verifying the consent, and, if an invalid consent is used to approve distributions, employers may wind up making additional payments to the spouse and paying penalties for breaching their fiduciary duties in relation to the invalid consent. In the event a consent is required but is not obtained, employers will need to hold the distributions until consent is received from the spouse, which again, increases the administrative complexity for a plan. In the absence of a spousal consent, the distribution is required to be in the form of a QJSA. This outcome may cause dissatisfaction among participants who prefer a different form of payment.

Before the annuity start date, plans also must provide a QJSA notice that lays out the alternative forms of distributions available under the plan. The notice must contain a description of the forms of distribution, eligibility conditions, the financial effect of electing the alternative form of benefit, and any other material features of the alternative form of benefit.

Changes to portability for lifetime income options
The SECURE Act also allows participants to move their annuity from one defined contribution plan to another in a trustee to trustee transfer if it is no longer authorized to be held as an investment option under the plan thereby allowing participants to avoid surrender charges and early distribution penalties. This provision is effective for plan years beginning after December 31, 2019.

Lifetime Income Illustrations
As part of the pension benefit statements, defined contributions plans must provide disclosures setting forth the amount of monthly payments the participant would receive if the participant's account balance were used to provide a qualified joint and survivor annuity. The Department of Labor (DOL) will develop a model lifetime income disclosure and prescribe assumptions which may be used in converting participant account balances to annuity equivalent. This provision applies to pension benefit statements furnished more than 12 months after the latest of the DOL's publication of interim final rules subject to this provision, the model lifetime income disclosure, or assumptions on which the disclosure must be based.

Required Minimum Distributions

Increase in age for required minimum distributions
The SECURE Act increases the age at which qualified retirement plans must begin making minimum distributions to plan participants from 70 1/2 to 72. The rule applies only to individuals who reach age 70 1/2 after Dec. 31, 2019.

Mandatory distributions begin the year after the year in which an individual turns 72 years old. Employers should consider whether they need to amend their required minimum distribution plan provisions, policies, and accompanying communications.

Changes to the post-death required minimum distribution
Under current rule, when a plan participant dies with a balance in his or her retirement account, the designated beneficiary is allowed to receive distributions over the span of his or her life expectancy. The SECURE Act now requires the plan to make distributions to designated beneficiaries within 10 years of the participant's death beginning with distributions with respect to participants who die after December 31, 2019. This 10-year distribution rule does not apply to designated beneficiaries who are surviving spouses, minor children, chronically ill or disabled individuals, and not more than 10 years younger than the participant.

Reporting Requirements

Consolidated Form 5500
All members of a group of plans will become eligible to file a consolidated Form 5500 for plan years beginning after December 31, 2021, provided all plans in the group: are individual account plans or defined contribution plans; have the same trustee, the same one or more named fiduciaries, the same administrator, and the same plan year; and provide the same investment or investment options to participants and beneficiaries.

Increased penalties for failure to file retirement plan returns
The SECURE Act increases the IRS penalties for:

• failure to timely file a Form 5500 to $250 per day, not to exceed $150,000
• failure to file Form 8955-SSA to $10 per day per participant, not to exceed $50,000
• failure to provide notification of change of status to $10 per day, not to exceed $10,000
• failure to provide income tax withholding notice to $100 for each failure, but the total amount for all failures during any calendar year not to exceed $50,000

This change applies to returns, statements, notifications required to be filed, and notices required to be provided, after December 31, 2019.