The SECURE Act, signed into law on Dec. 20, 2019, contains various provisions that may impact large employer-sponsored retirement plans. In effect, the act will usher in the need for plan sponsors to reevaluate plan features, and some of the act’s provisions will require plan sponsors to amend their plans and administrative processes. The following list summarizes the changes that could apply to large employer-sponsored 401(k) and other retirement plans.
- Increase in QACA Auto Escalation Cap: Effective for plan years beginning after Dec. 31, 2019, the act increases the cap on qualified automatic contribution arrangement (QACA) 401(k) deferrals from 10 to 15 percent. Employers that use the QACA safe harbor to avoid nondiscrimination testing may (but are not required to) increase the cap on automatic enrollment deferrals under their plans.
- 401(k) Nonelective Contribution Safe Harbor: Effective for plan years beginning after Dec. 31, 2019, the act simplifies the 401(k) safe harbor for nondiscrimination testing by: (i) eliminating the safe harbor notice requirement that previously applied to the nonelective contribution safe harbor (going forward, the notice will only apply to the matching contribution safe harbor); and (ii) as long as the plan did not provide for safe harbor matching contributions during the year, permitting a plan to be amended to use the nonelective contribution safe harbor for a plan year at any time before the later of the 30th day before the close of the plan year, or, as long as the nonelective contribution is at least four percent (rather than at least three percent), at any time before the last day for distributing excess contributions for the plan year. In light of this change, companies using the nonelective contribution safe harbor to satisfy the 401(k) nondiscrimination test should review their notice procedures.
- Prohibition on Credit Card Loans: Effective as of Dec. 20, 2019, qualified 401(k) plans are prohibited from making participant loans through the use of credit cards or other similar arrangements.
- Lifetime Income Options: The act does not require 401(k) or other individual account plans to offer “lifetime income options” (annuities), but effective for plan years beginning after Dec. 31, 2019, the act makes it easier for such plans to provide for such options by:
o Creating “portability” for lifetime income options that can no longer be held as an investment option under a 401(k) or other individual account plan by allowing the direct rollover of such options to another retirement plan or IRA or by allowing such options to be distributed in the form of a qualified annuity contract purchased from an insurance company, and
o Creating a fiduciary safe harbor for the selection of an insurance company to provide insurance contracts for annuities under 401(k) and other individual account plans (similar to the safe harbor that currently exists for selection of annuity providers under defined benefit plans).
- Lifetime Income Disclosure: Effective 12 months after the Department of Labor provides final rules, 401(k) and other individual account plans will be required to provide as part of each participant’s quarterly pension benefit statement an estimate of the monthly amount a participant could receive as a single or joint lifetime annuity based on their current account balance.
- Long-term Part-time Employee Participation: Effective for plan years beginning after Dec. 31, 2020, the act requires 401(k) plans to treat long-term part-time employees who work at least 500, but less than 1,000, hours within a 12-month period for three consecutive 12-month periods as eligible to participate. Notably, plan sponsors are not required to make contributions, matching or otherwise, and this class of participants is not considered for the sake of nondiscrimination and top-heavy testing.
- Withdrawals for Adoption or Birth Expenses: Effective for distributions made after Dec. 31, 2019, the act allows (but does not require) plans to let participants withdraw up to $5,000 for qualified adoption and/or birth expenses without paying any early withdrawal penalty. The distributions would be taxable to the participant, but the act allows participants to repay the distributions to another qualified plan or IRA, in which case the distribution and repayment is treated as an indirect rollover. Notably, a plan may permit such distribution even if it otherwise prohibited in-service withdrawals.
- Modifications to Required Minimum Distribution (RMD) Rules:
o Later Age for Required Minimum Distributions: Effective for individuals turning 70½ after Dec. 31, 2019, the act allows qualified plans (both 401(k) and pension plans) to raise the starting age for required minimum distributions from 70½ to 72 years old.
o RMDs for Designated Beneficiaries: Effective with respect to participants who die after 2019, the act makes certain changes to the required minimum distribution requirements applicable to designated beneficiaries of participants who die before commencement of their benefits under qualified 401(k) and pension plans. A designated beneficiary who is not an “eligible” designated beneficiary must begin taking distributions within 10 years of the decedent’s death (instead of five years under the current rule). In addition, the class of “eligible” designated beneficiaries who are exempt from the 10-year rule is limited to include only spouses, minor children and certain other types of designated beneficiaries of the participant. Finally, if a designated beneficiary dies before distribution of the benefit is completed, the distribution must be completed within 10 years to the designated beneficiary’s beneficiary, without exception. Employers will generally have until the last day of the plan year beginning after Dec. 31, 2021 to amend plans to reflect these requirements, as long as the plan is operated consistent with the requirements in the meantime.
- Modification of Nondiscrimination Rules for Frozen/Grandfathered Defined Benefit Plans: Effective Dec. 20, 2019, the act makes it easier for frozen/grandfathered defined benefit plans to satisfy applicable nondiscrimination, coverage testing and participation requirements. The act provides that a defined benefit plan which provides benefits, rights or features to a closed class of participants will not fail nondiscrimination requirements if the class was closed before April 5, 2017; the plan satisfied such requirements for the plan year in which the class was closed and the two succeeding plan years; and no further amendments are made to the class or the benefits provided to the class that discriminate in favor of highly compensated employees.
Benefits provided to closed classes under defined benefit plans can also be aggregated with defined contribution plans for nondiscrimination and coverage testing purposes if the plan satisfies the conditions above or, even if the class was not closed before April 5, 2017, the plan was in effect for at least five years before the class was closed and there was not a substantial increase in coverage or benefits under the plan during the five-year period.
In addition, benefits under a 401(k) or other defined contribution plan that provide “make-whole” benefits (including both employer non-elective contributions and matching contributions) to a closed class of defined benefit plan participants may be tested on a “benefits” basis if requirements similar to the above are satisfied. Closed classes in defined benefit plans that satisfy these requirements will also be deemed to have satisfied the minimum participation requirements in Code section 401(a)(26). Plan sponsors may elect to apply the above amendments retroactively to plan years beginning after Dec. 31, 2013.