New SECURE Act includes Significant Retirement Plan Changes

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019, encompassing nearly 30 provisions intended to encourage adoption of employer-sponsored plans and lifetime income options, alter plan distribution rules, as well as ease administrative requirements. A number of the provisions are effective in January 2020. Some of the key provisions are listed below:

1. Increased Tax Credits for Small Businesses

Small businesses are eligible to receive a tax credit for retirement plan start-up costs up to $5,000. Additional tax credits for $500 a year for three years will be available if the plan offers automatic enrollment. Eligible employees will be automatically enrolled in the plan and will have to elect out if they do not want to participate. Automatic enrollment increases both plan participation and savings rates among employees. This is effective for adopted plans during taxable years beginning after December 31, 2019.

2. Expansion of Multiple-Employer Plans

The Act allows unrelated small businesses to share the administrative and financial responsibilities of establishing and preserving a retirement plan. It also protects employers from the breach of someone else’s administrative and fiduciary duties. The Act provides a new type of Multiple Employer Plan, called a Pooled Employer Plan (PEP). The PEP will file a single 5500 and only require one audit for the combined plan. The new provisions are anticipated to make smaller plans more cost effective by obtaining lower overall plan fees through pooling assets with other employers. This provision is effective for plan years beginning after December 31, 2020, with the 5500 consolidation anticipated to be effective for plan years beginning after December 31, 2021.

3. Plan Adoption Date

The Act allows an employer to adopt a qualified plan after the close of the taxable year as long as it is adopted before the deadline for filing the employer’s tax return for the taxable year. This is effective for plans adopted for taxable years beginning after December 31, 2019.

4. Expansion of Plan Eligibility to Long-Term, Part-Time Employees

The SECURE Act expands employee coverage to individuals that have worked at least 500 hours per year for the past three consecutive years. The provision offers nondiscrimination testing relief, as no employer contributions are required for these employees. For vesting, a year of service is defined as a 12-month period in which the part-time employee works at least 500 hours of service. The eligibility of this additional group of participants may require some plan sponsors to have audits of their plans, since these participants will be included in the eligible count and could raise the total above the 100-participant threshold. This rule is effective for plan years beginning after December 31, 2020.

5. Increase on Limit of Automatic Enrollment Rate

The automatic enrollment safe harbor previously imposed a 10 percent limit on the default automatic contribution rate. The Act increases the limit to 15 percent (10 percent in the participant’s first year of participation). The provision is effective for plan years beginning after December 31, 2019.

6. Nonelective 401(k) Safe Harbor Changes

The Act makes the following changes relating to nonelective 401(k) safe harbor plans:

• Eliminates the safe harbor notice requirement
• Permits the amendment of a plan to become a nonelective safe harbor plan at any date before the 30^th day and the close of the plan year
• Permits the amendment of a plan to become a nonelective 401(k) safe harbor plan after the 30^th day and the close of the plan year, if the plan provides for at least four percent of compensation contribution. The amendment must be adopted by the close of the following plan year
• Effective for plan years after December 31, 2019

7. Annuities and Lifetime Income Options in Retirement Plans

The SECURE Act includes several provisions that encourage employers to offer guaranteed lifetime income options in their retirement plans. The legislation simplifies some compliance and fiduciary rules by providing a safe harbor provision for annuities. It also requires a plan sponsor to provide plan participants with an annual disclosure that estimates the monthly payment an employee will receive at retirement. It is effective for benefit statements furnished more than 12 months after the latest DOL’s publication of an interim final rule or model disclosures.

8. Eliminate “Stretch” IRAs

The SECURE Act requires beneficiaries to completely withdraw inherited IRAs and retirement plans within 10 years and pay the resulting tax liability. The 10-year rule does not apply to some beneficiaries, such as surviving spouses, disabled individuals, minors, and those who are not more than 10 years younger than the account owner. Since retirement accounts make up the largest share of many Americans’ net worth, the loss of “stretch” may encourage wealthier Americans to consider other and more comprehensive estate planning strategies for their retirement assets. It is effective for distributions by reason of a participant’s death after December 31, 2019.

9. Child Birth or Adoption Withdrawals

The Act permits individuals to take penalty-free withdrawals up to $5,000 from their qualified defined contribution, governmental 457(b), and IRA for expenses related to the birth or adoption of a child for up to one year following the birth or legal adoption. It is effective for distributions after December 31, 2019.

10. Delay the Start of Required Minimum Distributions (RMDs)

Currently, plan participants and IRA owners must begin taking distributions at age 70½. The SECURE Act delays RMDs until age 72. This provision recognizes that life expectancy has increased since the first RMD rules were created in 1986. This provision is effective for individuals turning 70 ½ after December 31, 2019.

11. Repeal of Age Limitations for IRA Contributions

The legislation recognizes that more Americans are living longer and working past normal retirement age. As a result, the SECURE Act permits those over age 70½ with earned income to contribute to a traditional IRA, effective for contributions made for taxable years beginning after December 31, 2019.

The SECURE Act is one of the most comprehensive retirement plan reforms in over a decade and brings with it many changes. Plan sponsors should consider how the SECURE Act will impact the administration of their plans. Small business employers may want to consider their ability to participate in a multiple-employer benefit plan, due to changes with the Act. Most provisions of the Act will go into effect on January 1, 2020. Consult your Sikich tax advisor for more information.