The Setting Every Community Up for Retirement Enhancement Act of 2019 or “Secure Act” just became law. The broad-brush purpose of the Act is to redress the lack of retirement savings in the US. Whether it will achieve these ends or just provide planning opportunities for shuffling around money already in the retirement and tax systems remains to be seen.
Whether or not the Act’s objectives are achieved, the Act offers interesting opportunities and challenges for just about everyone. Existing plan sponsors will need to conform plan operations to new requirements and to amend their plans. Employers thinking about becoming plan sponsors will have the opportunity to adopt a new type of pooled plan arrangement and some employers will be able to get new tax credits in connection with the establishment of their plans. Retirement advisors, consultants, financial institutions and other plan service providers will have new business opportunities and will be involved in the lion’s share of communicating the new law to their clients and in implementing the changes.
Much work will have to be done in the coming year to understand the requirements, which are effective on various dates, some of them retroactive to dates as far back as 2013 and earlier. The Act contains more than enough ambiguity to satisfy lawyers who like to puzzle these things and to frustrate plan sponsors and providers who prefer black and white. Over the next year or two we can expect a firehose of clarifying interpretation and guidance from the IRS and DOL.
Consider this post a brief introduction to many of the main features of the Act and the first of many posts on this important new legislation.
I have divided the discussion into three major parts: (1) those things in the Act that encourage small employers to start plans; (2) those that impact employers that already have plans; and (3) those things that have an impact on individuals and participants. There is also a table at the end intended to give you an idea of the effective dates of various provisions.
Things in the Act that encourage small employers to establish plans.
· The Act increases small employer tax credit to up to $5,000 per year for a period of three years.
· Small employers get a credit of up to $500 per year to help defray the costs of new 401(k) and SIMPLE IRA plans that include automatic enrollment. The credit is for three years and employers of existing plans may use the credit when they convert to automatic enrollment.
· Employers may join a new type of retirement arrangement to provide 401(k) plan benefits called a pooled employer plan or PEP that is sponsored by a recordkeeper, TPA, bank, broker-dealer, or RIA. The idea of this arrangement is that it will provide professional management and reduce costs for employers who would otherwise be discouraged from setting up a plan for these reasons.
· The Act eases DOL annual reporting and IRS plan disqualification rules for association and other group plans. One annual return may be filed for the plan for the year rather than one return for each employer participating in the plan. And errors that are the fault of one employer in a group plan arrangement under the old “bad apple” rule will not now impact other employers in the arrangement.
· Plans may be adopted after end of the plan year for which they are established. As long as the employer adopts the plan before the due date (including extensions) of the tax return for the taxable year, the plan is treated as adopted as of the last day of the taxable year. In other words, a calendar year taxpayer could have until as late as October 15 of the year following the year for which the plan is established to adopt a plan.
Things in the Act that impact existing plans.
· The Act increases the automatic enrollment safe harbor cap from 10 to 15 percent.
· The rules for safe harbor nonelective contributions are simplified and are made more flexible. Employers are no longer required to provide a notice to participants. Also, employers may amend their plans to change the plan’s nonelective contribution provisions any time before the 30th day before the close of the plan year. But amendments are allowed after that day if the employer makes a minimum contribution and the amendment is made no later than the last day of the following plan year.
· The Act prohibits the distribution of plan loans through credit cards or similar arrangements.
· The Act permits plans to transfer, trustee-to-trustee, lifetime income investments or annuities to another plan or IRA if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change is intended to allow participants to avoid surrender charges and fees.
· Part-time employees with at least 500 hours of service in three consecutive years must be allowed to participate in 401(k) plans. Employees that are eligible by reason of the new rule do not have to be considered for purposes of nondiscrimination, coverage, and the top-heavy rules. The new requirement does not apply to collectively bargained plans.
· Penalty-free withdrawals from retirement plans in the case of a “qualified” birth or adoption are permitted.
· The required minimum age for mandatory distributions is increased from 70½ to 72.
· Benefit statements for defined contribution plans must provide a lifetime income disclosure at least once during any 12-month period. The disclosure is to illustrate the lifetime monthly payment the participant would receive using the participant’s current total account balance. DOL has been directed to develop a model disclosure.
· The Act provides a safe harbor from fiduciary liability for the selection of lifetime income providers. Plan sponsors have the option of using the safe harbor to satisfy ERISA prudence requirements for the selection of guaranteed retirement income contracts. Use of the safe harbor means the employer will not be liable for losses that result from the insurer’s inability to satisfy its obligations under the contract.
· The Act modifies the nondiscrimination rules for closed plans to permit existing participants to accrue benefits.
· The Act increases penalties for the failure to file annual and other returns.
We’ll finish up this introduction to the Act in our next post with the provisions that impact individuals and with a summary of the various provision effective dates.
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Chuck Humphrey is a former IRS and Labor attorney engaged in the practice of employee benefits law. He is the author of Fiduciary Responsibility eSource and can be reached at email@example.com or 716-465-7505.