New Law SECUREs Changes to Retirement Plans

Employee Benefits & Executive Compensation
January 7, 2020
 

On December 20, 2019, President Trump signed into law a spending bill that included the passage of the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), providing for significant changes to retirement plans. The following First Alert provides a summary of some of the key provisions of the SECURE Act that plan sponsors should know.

REQUIRED MINIMUM DISTRIBUTION (“RMD”) CHANGES

RMD Beginning Date

What’s the change?

Current rules require participants in any qualified retirement plan to begin receiving minimum distributions from his or her account by April 1 of the calendar year following the year in which the participant attains age 70 ½ or terminates employment (whichever is later). The SECURE Act has increased that age to 72. Plan documents may still require that distributions occur at an earlier time, such as at normal retirement age.

When does it go into effect?

The change to the RMD rules will be effective for any plan participants who turn 70 ½ after December 31, 2019.

What do plan sponsors need to do?

Plan sponsors will need to amend plan documents to reflect the new RMD beginning date (note: plans can still require distributions before this date). Additionally, plan sponsors will need to update any notices providing details on RMDs to ensure that they reflect age 72 as the beginning date.

Stretch RMD Distributions for Beneficiaries

What’s the change?

Currently, plans may allow beneficiaries to stretch distributions over the beneficiary’s life expectancy. The SECURE Act sets out three categories of beneficiaries and imposes certain limitations based on those three categories: designated beneficiaries, nondesignated beneficiaries, and eligible designated beneficiaries. Designated beneficiaries must take distributions to exhaust plan assets within 10 years of the date of the participant’s death. Nondesignated beneficiaries must exhaust the assets within five years of the date of death. A person may be designated as an eligible designated beneficiary if he or she is a surviving spouse, a minor child, a disabled person, a chronically ill person, or any person who is not more than 10 years younger than the participant. An eligible designated beneficiary may spread distributions over the span of his or her lifetime (exception: for minor a child, the 10-year rule begins once he or she reaches the age of majority).

When does it go into effect?

The change to the RMD distribution rules for beneficiaries goes into effect for participants who die after December 31, 2019.

What do plan sponsors need to do?

To the extent that plan sponsors allow for distributions to stretch over a beneficiary’s lifetime, plan sponsors will need to amend their plan documents to satisfy these new requirements. If a plan already requires distributions over a shorter time frame, an amendment may not be necessary. Additionally, plan sponsors may need to update participant notices and have participants fill out new beneficiary designation forms. 

POST CHILDBIRTH OR ADOPTION SPECIAL DISTRIBUTIONS

What’s the change?

Under the SECURE Act, plans may provide for penalty-free distributions of up to $5,000 to assist plan participants with the costs associated with the birth or adoption of a child. For an adoption, the child must be under the age of 18 or physically or mentally incapable of self-support. The distribution must be made during the one-year period following the birth or adoption and may be repaid to the plan by the participant.

When does it go into effect?

Plans may offer distributions for childbirth and adoption expenses any time after December 31, 2019.

What plan sponsors need to do?

Plan sponsors that wish to offer this special distribution option will need to amend their plan documents and update participant notices. In addition, plan sponsors will want to coordinate with their recordkeepers and plan administrators to develop policies and procedures for reviewing and approving distributions.

PART-TIME EMPLOYEES

What’s the change?

Currently, plans may exclude part-time employees who do not complete 1,000 hours of service in a plan year. The SECURE Act requires plans to allow part-time employees who are at least 21 years old and work at least 500 hours in three consecutive 12-month periods to be eligible for elective deferrals. However, plans may exclude these part-time employees from matching or profit-sharing contributions. The SECURE Act provides for special nondiscrimination and top-heavy testing relief to ensure that including these part-time employees for elective deferral purposes does not adversely affect the employers’ nondiscrimination testing results.

When does it go into effect?

Plan sponsors will need to start tracking hours for part-time employees in plan years starting after December 31, 2020, to determine whether or not the 500-hour requirement is met. However, part-time employees will have to meet the 500-hour requirement for three years, and any service during 12-month periods prior to January 1, 2021, are disregarded. So, the earliest that plans will be required to allow these part-time employees into the plan would be the plan year starting after December 31, 2023.

What do plan sponsors need to do?

In the meantime, plan sponsors will need to amend plan documents if part-time employees are currently excluded. In addition, plan sponsors will want to review their payroll systems to ensure the hours for part-time employees are being tracked properly.

LIFETIME INCOME INVESTMENT OPTION CHANGES

Defined Contribution Plan Lifetime Income Disclosures

What’s the change?

The SECURE Act requires that defined contribution plans provide at least annual benefit statements to participants showing an estimate of the monthly income a participant would receive in retirement if the participant chose to purchase a qualified joint and survivor annuity or a single life annuity. These disclosures will be required on an annual basis. The rules, however, do not actually require plans to provide an annuity payment option.

When does it go into effect?

The SECURE Act requires that the Department of Labor (“DOL”) issue further rules (including rules detailing what assumptions can be used in calculating annuity estimates) and safe harbor model disclosures. The requirement to provide such disclosures will not go into effect until one year after the DOL has issued its guidance.

What do plan sponsors need to do?

Plan sponsors do not need to act until after the DOL’s guidance is released. However, sponsors may consider discussing the disclosure requirement with their recordkeepers or administrators to coordinate who will be responsible for providing the disclosures. If a plan is already providing lifetime income disclosures, the content of the disclosures should be reviewed to ensure they meet the DOL’s requirements once available.

Lifetime Income Investment Providers' Fiduciary Safe Harbor

What’s the change?

The SECURE Act provides a plan sponsor with certain fiduciary safe harbors when choosing to provide a lifetime income investment option under its plan. To satisfy the safe harbor, plan sponsors must obtain certain representations from its lifetime income product provider (typically an insurance company). However, plan sponsors will remain liable for fiduciary considerations of the reasonableness of the investment’s fees and expenses. In addition, plan sponsors will be responsible for determining the prudence of the investment option (as these types of products are often more complicated than more traditional mutual fund investment choices).

When does it go into effect?

This safe harbor became effective on the date the law was enacted, December 20, 2019.

What do plan sponsors need to do?

To the extent plan sponsors have or are considering having a lifetime income investment option under their plans, they should continue to consider the prudence of the investment option and the reasonableness of its fees. In addition, any agreement with the insurance carrier providing the lifetime income option should be reviewed to ensure the representations required under the safe harbor are included.

Lifetime Income Investment Portability

What’s the change?

Lifetime income investment options often have penalties, charges and fees associated with withdrawing from or terminating the investment option, making them unattractive investment options for some plans. The SECURE Act addresses this concern by allowing participants to avoid early withdrawal or termination fees by either rolling over the investment product to another qualified plan or IRA or taking an in-kind distribution of the product.

When does it go into effect?

The portability change goes into effect for plan years beginning after 2019.

What do plan sponsors need to do?

If a plan already offers a lifetime income investment option, those plans should be amended to allow for in-kind distributions of lifetime income investments. Plan sponsors might also consider whether or not to amend their plans to allow new employees to roll over any lifetime investment options that they hold in other qualified plans, or, alternatively, whether to specifically exclude these types of rollovers from being allowed into its plan.

PENSION PLAN IN-SERVICE RETIREMENT – BEGINNING AGE

What’s the change?

Current law allows pension plan participants who have reached age 62 to receive in-service benefits prior to actual retirement. The SECURE Act reduces this age threshold for in-service distributions from 62 to 59 ½. However, plans are still allowed to have an in-service distribution age that is higher than 59 ½.

When does it go into effect?

The age reduction for in-service distributions goes into effect for plan years beginning after December 31, 2019.

What do plan sponsors need to do?

Plan sponsors that allow for in-service distributions may consider whether or not they want to lower the age requirement to 59 ½. If a plan sponsor decides to make this change, it will need to amend its plan document and update its participant notices.

SAFE HARBOR PLAN CHANGES

3% Non-Elective Contribution Safe Harbor Plans

What’s the change?

Current law exempts plans from certain nondiscrimination testing requirements if they provide at least a 3% nonelective employer contribution to participant accounts. The SECURE Act makes it easier for plans to satisfy the safe harbor by allowing plan sponsors to make a 3% safe harbor contribution at any time up to 30 days before the end of the plan year. Additionally, plan sponsors may still satisfy the safe harbor after that 30-day period if the amendment to choose safe harbor status is made by the end of the following plan year and the employer nonelective contribution is as least 4%. In addition, the SECURE Act eliminates certain notice requirements that were previously required to satisfy the safe harbor. Note that this change applies only to safe harbor plans that make nonelective contributions and does not apply to safe harbor plans that use matching contributions.

When does it go into effect?

The new safe harbor requirements go into effect for any plan years after 2019. A plan sponsor may choose to be a safe harbor plan up to the 30th day before the end of the plan year (for a 3% nonelective contribution) or up to the end of the following plan year (for a 4% nonelective contribution).

What do plan sponsors need to do?

If a plan sponsor would like to amend its plan to become a safe harbor plan making nonelective contributions, it may do so under the applicable deadlines. Plan sponsors that already maintain safe harbor plans with nonelective contributions will no longer be required to provide annual safe harbor notices to employees.

Increased QACA Safe Harbor Caps

What’s the change?

Under current law, plans with a Qualified Automatic Contribution Arrangement (“QACA”) have an automatic contribution rate that is capped at 10%. The SECURE Act allows the automatic contribution rate to increase up to 15% after a participant’s first year of participation (the cap remains at 10% during the first year).

When does it go into effect?

The increased cap for the automatic contribution rate goes into effect for plan years after 2019.

What plan sponsors need to do?
If desired, plan sponsors may amend their plans to increase the automatic contribution rate to 15% for participants with at least one year of participation in the plan. Plan sponsors would also need to update participant notices and coordinate with their recordkeepers and plan administrators to implement the changes.

NONDISCRIMINATION TESTING RELIEF FOR SOFT-FROZEN DEFINED BENEFIT PLANS

What’s the change?

The SECURE Act provides for nondiscrimination testing relief to certain closed or soft-frozen defined benefit plans. The relief is intended in part to allow participants to continue to accrue benefits without violating certain coverage and nondiscrimination testing requirements. In general, the relief is available to plans that closed before April 5, 2017, or plans that have been in effect for at least five years without any substantial increase in coverage or benefits during the five years prior to the time the plan is closed.

When does it go into effect?

The relief for nondiscrimination testing is effective immediately. Plan sponsors may also apply the relief retroactively to any plan year beginning after 2013.

What do plan sponsors need to do?

A plan sponsor should consider whether any defined benefit plan it maintains qualifies for this relief if it has been closed or will qualify if the plan sponsor intended to close it in the future.

OPEN MULTIPLE EMPLOYER RETIREMENT PLANS

The SECURE Act also allows for significant changes to open multiple employer plans, which Calfee will address in a separate client alert article.

If you have any questions or would like for Calfee to review your plan documents to ensure compliance with the SECURE Act, please feel free to contact any member of our Employee Benefits and Executive Compensation practice group or your Calfee attorney.


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