What you need to know about the SECURE Act: Part II – Optional 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 potentially optional provisions of the SECURE Act affecting retirement plans and IRAs. To learn about the mandatory provisions, click here for Part I of this two-part series.

REQUIRED MINIMUM DISTRIBUTION (RMD) BEGINNING DATE

Under prior law, RMDs from IRAs and retirement plans were to begin following an individual’s attainment of age 70 ½. The SECURE Act changes that age to 72. This is effective for distributions for individuals who attain age 70 ½ after Dec. 31, 2019.

Although technically optional, we expect plans and IRAs to change the date upon which they begin RMDs until age 72.

IN-SERVICE DISTRIBUTIONS AFTER AGE 59 ½

Defined benefit plans and money purchase pension plans are generally prohibited from making distributions while a participant is still employed by the employer. These plans can make RMDs and in-service distributions after normal retirement age or after attaining age 62. A provision included with the budget bill which includes the SECURE Act permits these plans to allow in-service distributions after age 59 ½. This distribution option may be something employers may wish to consider allowing employees to “phase into retirement.” This change is effective for plan years after Dec. 31, 2019.

WITHDRAWALS FOR BIRTH OR ADOPTION

The SECURE Act created an exception to the 10% early withdrawal penalty for distributions taken prior to age 59½ from retirement plans or IRAs that are used to cover the costs of adoption or childbirth up to $5,000. The distribution must be made within the 1-year period beginning on the date the child is born or the adoption is finalized. The amount distributed may be repaid as a rollover contribution back to the IRA or plan.

INCREASE IN AUTOMATIC ENROLLMENT CAP

Some employers utilize an automatic enrollment feature whereby employees automatically have 401(k) deferrals taken out of their pay unless they affirmatively elect otherwise. Previously, the maximum 401(k) deferral that could be automatically contributed was 10% of pay. Effective for plan years after Dec. 31, 2019, the maximum is increased to 15%. Employers could increase the maximum from 10% to 15%, but are not required to do so.

FIDUCIARY SAFE HARBOR FOR LIFETIME INCOME OPTION

Although the SECURE Act does not require plans to offer a distribution option providing for a lifetime income stream, it does encourage such an option by addressing plan sponsors’ concerns about choosing an insurer to offer one. Under the SECURE Act, plan fiduciaries will have a protection from fiduciary liability regarding the prudence of choosing a particular insurer. The DOL will need to develop the standards and procedures for this safe harbor before it becomes effective.

PORTABILITY OF LIFETIME INCOME OPTION

If a plan offered a lifetime insurance option and now no longer offers it, a Participant may roll the annuity or lifetime income option to another employer’s plan or an IRA in a direct trustee-to-trustee transfer or receive it personally (even if otherwise ineligible to receive a distribution).

TIME TO ADOPT NEW PLAN

Historically, an employer that wished to adopt a plan for a particular taxable year needed to do so by the end of the employer’s taxable year. Effective for tax years starting after Dec. 31, 2019, an employer may adopt a plan by the due date of its tax return, including extensions, and have it be effective as of the beginning of that taxable year.

TAX INCENTIVES FOR THE ADOPTION OF NEW RETIREMENT PROGRAMS

Employers with 100 or less employees receiving at least $5,000 in compensation can receive a tax credit for establishing a new 401(k), 403(b), SIMPLE IRA, or SEP-IRA. The credit would be equal to the greater of $500 or the lesser of $5,000 or 250 times the number of rank and file employees. Solo plans are not eligible for the credit. This is effective for tax years after Dec. 31, 2019.

AUTOMATIC ENROLLMENT TAX CREDIT

Under the SECURE Act, Employers with 100 or less employees receiving at least $5,000 in Compensation, can receive a tax credit of $500 for adding an automatic enrollment feature for their 401(k) Plan. The credit is available for the year the automatic enrollment feature is added and the next two years. This is effective for taxable years beginning after December 31, 2019.

ADOPTING NON-ELECTIVE SAFE HARBOR PLANS MID-YEAR

Safe Harbor 401(k) Plans have often presented challenges because they were difficult to adopt late in an employer’s tax year. The SECURE Act will permit employers to adopt a safe harbor plan mid-year. The safe harbor must be the 3% non-elective type of safe harbor Plan and it must be adopted prior to the 30th day before the end of the plan year retroactive to the beginning of the plan year.

An employer may amend after that date provided a non-elective contribution of 4% of compensation rather than the normal 3% contribution is contributed to eligible participants for the plan year.

MULTIPLE EMPLOYER PLANS

The concept of unrelated employers sharing plan documents, administration, and investment has been around for some time. The DOL had begun to accept the concept with some reluctance and had for a while insisted that there be some nexus between the employers such as all being co-employers in a Professional Employer Organization (PEO). The SECURE Act specifically authorizes unrelated employers without a specific nexus to join a Multiple Employer Plan (MEP) sponsored by a “pooled plan provider.”

Such MEPs are likely to be established by financial service companies, third party administrators, insurance companies, or similar organizations with an interest in the retirement plan world.

The SECURE Act eliminates the so-called “one bad apple” rule where a failure by one employer could taint the entire MEP.

These rules are effective for plan years after December 31, 2020.

FILING CONSOLIDATED FORM 5500S

In order to ease administration and reduce costs, defined contribution plans of a controlled group of related employers that share the same trustee, named fiduciary, plan administrator, plan year, and investment options, may opt to file one consolidated Form 5500.

The DOL and IRS are to develop the forms, regulations, or other guidance such that beginning for plan years after Dec. 31, 2021, consolidated returns can be filed.

IRA CONTRIBUTIONS AFTER AGE 70 ½

Recognizing that more and more people continue to work after what has been the traditional retirement age, the SECURE Act permits individuals who have attained age 70½ to make IRA contributions. As with younger IRA contributors, an individual may not make deductible contributions if he or she is an active participant in a retirement plan.

TERMINATION OF 403(B) PLANS

One of the perennial problems for tax-exempt employers was how to terminate 403(b) plans with custodial accounts. Because the individuals with those accounts have been deemed to be partially sponsoring these programs, there was no easy way to distribute those accounts except by going person to person and encouraging them to take a distribution.

The SECURE Act will permit custodial accounts to be distributed in-kind to participants – effectively converting those 403(b) accounts to IRAs. The IRS is tasked to issue guidance sometime in 2020.

SECURE ACT PLAN AMENDMENTS

Many of the provisions of the SECURE Act, whether they are mandatory or optional, will require amendments to a retirement plan. An employer may operate in accordance with the provisions and amend by the end of the 2022 plan year, or later if the IRS extends the deadline.