Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements | Practical Law

Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements | Practical Law

Congress has passed, and President Trump has signed into law, the Further Consolidated Appropriations Act, 2020, which includes the Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act (Act). The Act includes provisions relating to retirement plans such as multiple employer plans (MEPs), required minimum distributions, frozen defined benefit plans, and lifetime annuity options.

Government Funding Legislation Includes the SECURE Act, Which Changes Retirement Plan Requirements

by Practical Law Employee Benefits & Executive Compensation
Congress has passed, and President Trump has signed into law, the Further Consolidated Appropriations Act, 2020, which includes the Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act (Act). The Act includes provisions relating to retirement plans such as multiple employer plans (MEPs), required minimum distributions, frozen defined benefit plans, and lifetime annuity options.
On December 20, 2019, President Trump signed into law the Further Consolidated Appropriations Act, 2020 (Pub. L. No. 116-94 (Dec. 20, 2019)), which includes the Setting Every Community Up for Retirement Enhancement Act, known as the SECURE Act (Act). The Act makes many changes to the laws governing retirement plans, including:
  • Encouraging employer provided retirement plans, including pooled employer plans.
  • Changes to the automatic enrollment rules for 401(k) plans.
  • Increasing the age for required beginning date and changes to the required distribution rules for designated beneficiaries.
  • Changes to the lifetime income provisions for defined contribution plans, including increased portability of lifetime income options, disclosures regarding lifetime income, and a fiduciary safe harbor for selection of lifetime income providers.
  • Changes to retirement plan administration, including combined annual reports for a group of plans and increases in penalties for failure to file retirement plan returns.
  • Nondiscrimination, coverage, and minimum participation relief for frozen plans.
For a chart that displays summaries and effective dates of the retirement plan-related provisions in the SECURE Act and other parts of the Further Consolidated Appropriations Act, 2020, see the SECURE Act Compliance Dates Chart.
The Appropriations Act also includes changes to other types of employee benefits, which are covered in a separate legal update (see Legal Update, Legislation Repeals ACA Cadillac Tax and Health Insurer Fee).

Multiple Employer Plans

A multiple employer plan (MEP) is a plan that is maintained by two or more employers that are not related and do not have a collective bargaining agreement. The Act addresses two issues that have hindered access to MEPs:
  • How closely related employers must be to participate in a MEP.
  • The "bad apple" qualification problem.

Pooled Employer Plan

Under existing law, the group sponsoring a MEP has to have a particularly close economic or representational nexus to the employers and employees participating in the plan in order to be considered a single plan. The Act creates a new MEP called a "Pooled Employer Plan" that allows unrelated employers to join together to participate in one MEP. The Act amends ERISA to define the Pooled Employer Plans and Pooled Plan Providers, which will administer this type of MEP.

Bad Apple Problem

The Act addresses the "bad apple" problem that exists for MEPs, where the qualification of the entire MEP is at risk based on the actions of one participating employer. Under the Act, the qualification of the MEP will not be affected if certain procedures are followed, including transferring the assets of the violating plan to a separate plan and making the employer liable for any liabilities regarding the plan.
The changes are effective for plan years beginning after December 31, 2020. For more information on MEPs, see Practice Note, Multiple Employer Retirement Plans (MEPs).

401(k) Plan Provisions

Increase in 10% Cap for Automatic Enrollment Safe Harbor After First Plan Year

The Act increases the limit on default automatic contribution rates from 10% to 15% (10% for the first year of participation). This provision is effective for plan years beginning after December 31, 2019.

Rules Relating to Election of Safe Harbor Status

The Act makes the following changes for nonelective 401(k) safe harbor plans:
  • Eliminates the safe harbor notice requirement for nonelective 401(k) safe harbor plans.
  • Permits a 401(k) plan to become a nonelective 401(k) safe harbor plan if amended before the 30th day before the close of the plan year.
  • Permits a 401(k) plan to become a nonelective 401(k) safe harbor plan after the 30th day before the close of the plan year if:
    • the plan is amended to provide a nonelective contribution of at least 4% of compensation for eligible employees; and
    • the amendment is made by the last day for distributing excess contributions for the plan year.
These provisions are effective for plan years beginning after December 31, 2019.

Participation by Long-Term Employees Working More Than 500 but Less Than 1,000 Hours Per Year

The Act requires that 401(k) plans permit participation by long-term employees working more than 500 but less than 1,000 hours per year in three consecutive years. This provision is effective for plan years beginning after December 31, 2020.

Small Employer Plan Credits

For small employers (those with 100 or fewer employees), the Act:
  • Increases the credit for the costs of establishing a new plan from $500 to up to $5,000 over three years.
  • Includes a new credit for small employers that add an automatic enrollment feature to an existing or new plan. The automatic enrollment credit is $500 for each of the first three years that automatic enrollment is included in the plan.
The changes to both credits are effective for taxable years after December 31, 2019.

Plan Distributions

Plans Prohibited from Making Loans Through Credit Cards and Other Similar Arrangements

Under Section 108 of the Act, qualified retirement plans cannot make loans to participants through a credit card or other similar arrangement. The rule is effective on the date of enactment.

Penalty-Free Withdrawals from Retirement Plans in Case of Birth of Child or Adoption

A new distribution rule will allow participants to take a penalty-free withdrawal of up to $5,000 from a plan following the birth or legal adoption of a child. The distribution option applies to 401(k) plans, 403(b) plans, governmental 457(b) plans, and Individual Retirement Accounts (IRAs). It does not apply to defined benefit plans.
The distribution would be exempt from the 10% penalty on distributions and can be repaid to certain plans. Participants are eligible for the distribution up to one year after the child is born or the adoption is finalized. It is effective for distributions after December 31, 2019.

Increase in Age for Required Beginning Date for Mandatory Distributions

Currently, required minimum distributions from a retirement plan or IRA must start once an individual turns age 70.5. Under the Act, this age is increased to age 72. The change is effective for distributions required to be made after December 31, 2019, with respect to individuals who turn 70.5 after December 31, 2019.

Modification of Required Distribution Rules for Designated Beneficiaries

For defined contribution plans and IRAs, where a participant dies before the distribution of their entire interest, the distributions must now be made by the end of the tenth calendar year following the participant's death. The new requirement does not apply if the beneficiary is an eligible beneficiary (for example, a surviving spouse or minor child).
This change is generally effective for distributions made for employees who die after December 31, 2019. For governmental plans, the change is effective for employees who die after December 31, 2021. It does not apply to qualified annuities that are binding annuity contracts as of the date of the Act's enactment.

Lifetime Income Option

Portability of Lifetime Income Options

The Act permits participants in defined contribution plans, 403(b) plans, and governmental 457(b) plans to take a distribution of lifetime income investment in the form of an annuity if:
  • The lifetime income investment is no longer authorized to be held as an investment option.
  • The distribution is made as a direct rollover to a retirement plan, IRA, or annuity contract.
This provision is effective for plan years beginning after December 31, 2019.

Disclosure Regarding Lifetime Income

The Act requires employers to provide defined contribution plan participants with new lifetime income disclosures that:
  • Include an estimate of the amount of monthly annuity income of the participant's retirement benefit.
  • Are included on the participant's annual benefit statements.
  • Are provided once every 12 months.
The Act directs the DOL to draft a model disclosure. This provision is effective for benefits statements provided more than 12 months after the DOL issues a rule or provides model disclosures.

Fiduciary Safe Harbor for Selection of Lifetime Income Provider

The Act creates a fiduciary safe harbor for the selection of an insurer for providing lifetime income options to participants. Under the safe harbor, a fiduciary would:
  • Satisfy the prudence requirement for the selection of insurers for a guaranteed retirement income option.
  • Be protected from liability for losses that may result to the participant or beneficiary due to an insurer's inability to satisfy its financial obligations under the terms of its contract.

403(b) and Church Plan Provisions

Treatment of Custodial Accounts on Termination of Section 403(b) Plans

The Act requires the Secretary of Treasury to issue guidance on the treatment of custodial accounts upon a 403(b) plan's termination. Specifically, the guidance will allow custodial accounts to be distributed in-kind to participants and beneficiaries and the accounts will retain their tax-deferred status until amounts are actually paid. The guidance will be retroactive for taxable years after December 31, 2008.

Participation by Employees of Non-Qualified Church-Controlled Organizations in Retirement Income Accounts

The Act clarifies that employees of non-qualified church-controlled organizations may participate in Internal Revenue Code (Code) Section 403(b)(9) (26 U.S.C. § 403(b)(9)) retirement income accounts. The clarification is effective before, on, and after the date of enactment of the Act.

SECURE Act Provisions Relating to Plan Administration

Combined Annual Report for Group of Plans

The Act allows all members of a group of plans to file a single annual report (the Form 5500) instead of multiple reports for each plan. The plans eligible are individual account or defined contribution plans that have the same:
  • Trustee.
  • Fiduciary or fiduciaries.
  • Plan administrator.
  • Plan year.
The IRS and DOL are directed to modify the Form 5500 requirements to implement the change by January 1, 2022. These changes will apply to returns for plan years beginning after December 31, 2021.

Plan Adopted by Filing Due Date for Year May be Treated as in Effect as of Close of Year

If a qualified retirement plan is adopted by the tax return filing date for an employer (including any extensions), the employer can elect to treat the plan as adopted on the last day of the taxable year. This is effective for plans adopted for taxable years beginning after December 31, 2019.

Increase in Penalty for Failure to File

The penalty under Code Section 6651(a) (26 U.S.C. § 6651(a)) for failing to file a plan tax return is increased from $330 to $435, effective for returns with due dates after December 31, 2019.

Increased Penalties for Failure to File Retirement Plan Returns

The Act includes a series of penalty increases which apply to returns required to be filed, and statements required to be provided, after December 31, 2019.

Form 5500

The penalties for failing to file a Form 5500 under Code Section 6652(e) (26 U.S.C. § 6652(e)) are increased from $25 to $250 per day. The maximum penalty is increased from $15,000 to $150,000.

Registration Statement (Form 8955-SSA)

The penalties under Code Section 6652(d)(1) (26 U.S.C. § 6652(d)(1)) for failing to file a registration statement (under Code Section 6057(a) (26 U.S.C. § 6057(a))) are increased from $1 to $10 per participant per day. The maximum penalty is increased from $5,000 to $50,000.

Change of Status Notice

The penalties under Code Section 6652(d)(2) (26 U.S.C. § 6652(d)(2)) for failing to file a notification of change of status are increased from $1 to $10 per participant per day. The maximum penalty is increased from $1,000 to $10,000.

Withholding Notice

The penalties under Code Section 6652(h) (26 U.S.C. § 6652(h)) for failing to give participants notice about their right to elect not to have withholding apply to distributions are increased from $10 to $100 per failure. The maximum penalty is increased from $5,000 to $50,000.

Frozen Retirement Plans

The Act provides nondiscrimination, coverage, and minimum participation relief to frozen plans that exclude new hires, if certain requirements are met. The new provisions will allow existing participants in frozen plans to continue to accrue benefits. The rules are effective on the date of enactment, although plan sponsors can elect to apply them retroactively to plan years beginning after December 31, 2013.

Miscellaneous Provisions

The Act also addresses:
  • The repeal of the maximum age for contributions to a traditional IRA.
  • The inclusion in compensation of payments to individuals for the pursuit of graduate or post-doctoral studies for IRA purposes.
  • Special rules for minimum funding standards for community newspaper plans.
  • Difficulty of care payments as compensation for determining retirement contribution limitations.
  • Pension Benefit Guaranty Corporation (PBGC) premiums for cooperative and small employer charity (CSEC) plans.

Practical Implications

Qualified retirement plans will need to be amended to reflect the Act. Under the Act, plans have until the 2022 plan year (or later if provided guidance) to be amended. Practitioners should be on the lookout for more guidance from the IRS and DOL regarding many of the provisions.
Practitioners should be aware that the safe harbor provisions in the Act regarding selecting lifetime income providers do not have an effective date and are effective on the date of enactment.