What you need to know about the SECURE Act: Part I – Mandatory provisions
In late 2019, Congress passed and President Donald Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law. The SECURE Act contains a number of provisions that affect individuals as well as employers with respect to their retirement programs.
Some of the provisions are required and some are optional. This article will address the mandatory provisions of the SECURE Act affecting retirement plans and IRAs.
COVERING PART-TIME WORKERS
Under current law, a plan is not required to cover employees who work less than 1,000 hours in a 12-month period. Under the SECURE Act, 401(k) plans will be required to cover employees who complete three consecutive 12-month periods during which they are credited with at least 500 hours of service (part-time employees).
These part-time employees are only required to be covered so they can make 401(k) salary deferrals. The employer is not required to make matching or other contributions on their behalf, including top-heavy minimum contributions.
The part-time employees are not required to be included in discrimination testing.
Once the part-time employees satisfy the normal eligibility requirement for the 401(k) plan, they are to be treated like other participants.
These rules are effective for plan years beginning after December 31, 2020. Plans are not required to count service before January 1, 2021. This effectively means that part-time employees would not become eligible under these new rules until 2024.
SAFE HARBOR NOTICES
Many employers offer what are called Safe Harbor 401(k) plans. By utilizing a safe harbor contribution formula, the specific discrimination testing applicable to 401(k) plans can be deemed satisfied. There are two different types of safe harbor contributions – a matching contribution or a 3% non-elective contribution.
Employers were required to provide notices to participants regarding the safe harbor provisions of the their plan prior to the beginning of the plan year.
The notice as it applies to safe harbor matching contributions make sense because a participant needs to make a 401(k) salary deferral to receive the match. A participant does not have to do anything to receive the 3% non-elective contribution. Effective for plan years beginning after December 31, 2019, the requirement to provide the notice for the 3% non-elective contribution is eliminated. A notice still must be provided for the safe harbor matching contributions.
LIFETIME INCOME DISCLOSURE
In an effort to ensure participants understand the retirement income that might be generated from retirement savings, defined contribution plans are required to include an annual lifetime income disclosure. This disclosure would illustrate the monthly income stream that could be received if the participant’s account balance was provided as an annuity.
The Department of Labor (DOL) is to issue regulations and develop a model disclosure. The disclosure will apply to the participant’s benefit statement furnished more than 12 months after the DOL issues interim final rules, model disclosures, and actuarial assumptions.
Plan fiduciaries, the sponsoring employer, and other persons will be relieved from liability for the disclosures if the annuity disclosures are computed in accordance with the DOL’s assumptions and guidance and included any explanations included in the model disclosures.
PLAN LOANS USING CREDIT CARDS
Effective for plan loans made on or after December 20, 2019, plan loans may not be made through credit cards or similar arrangements.
CLOSED DEFINED BENEFIT PLANS
So called “soft” frozen defined benefit plans have represented a challenge for employers. The plans satisfied the various non-discrimination coverage and minimum participant rules when they were closed to new participants; but if these plans continue to allow existing participants to accrue benefits, they are only partially frozen, hence “soft” frozen. As time goes on and demographics of the plan and the employer change, the frozen plans could violate those various non-discrimination rules.
In order to encourage continued benefit accruals in such plans, the SECURE Act provides such plans relief from these various rules. The relief is effective as of December 20, 2019.
STRETCH IRAS ELIMINATED
Prior to the enactment of the SECURE Act, beneficiaries were permitted to “stretch” distributions of benefits they received on the death of a plan participant or IRA holder over their own life expectancy. Effective for deaths after December 31, 2019, death beneficiaries, with certain exceptions, are required to be paid out by the end of the 10th calendar year following the death of the plan participant or IRA holder.
Beneficiaries who are “eligible designated beneficiaries” can elect within one year of the plan participant or IRA holder’s death to have benefit paid over their life expectancy. An Eligible designated beneficiary includes a surviving spouse, disabled or chronically ill individuals, individuals who are not more than 10 years younger than the plan participant or IRA holder or minor children of the plan participant or IRA holder.
The SECURE Act does not change the current rule which permits a surviving spouse to defer distributions until the plan participant or IRA holder would be required to receive required minimum distributions.
LATE FEES FOR FORM 5500 AND OTHER RETIREMENT PLAN RETURNS
The penalty for failing to file or provide certain retirement plan returns and notices have been increased for returns or notices required to be filed after December 31, 2019.
Failure to file Form 5550 has been increased from $25 a day to $250 per day, not to exceed $150,000.
Failure to file a registration statement for deferred vested participants has been increased from $1 to $10 per participant per day, not to exceed $50,000.
Failure to provide a participant notice regarding rollover availability and tax withholding has been increased from $10 to $100 for each failure, not to exceed $50,000 for all failures in a calendar year.
If you have questions about these mandatory provisions or the SECURE Act in general, please contact one of the attorneys listed below.