The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was signed into legislation by the President on December 20, 2019 and is one of the most significant pieces of retirement legislation since the Pension Protection Act of 2006. The act contains 30 provisions designed to help modernize the private retirement system and recognizes the importance of lifetime income as a key driver of overall financial confidence and retirement readiness. Certain provisions of The SECURE Act will be effective January 1, 2020, with other provisions becoming effective for plan years beginning after December 31, 2020 or 2021.
Some of the more significant provisions of The SECURE Act are:
- Changes to 401(k) Safe Harbor Plans: Provides greater flexibility and facilitates plan adoption by eliminating the Safe Harbor notice requirement for plans seeking to satisfy the safe harbors by making specified levels of non-elective contributions and permitting plans to be amended to become non-elective Safe Harbor plans. It also allows for an increase in the cap on the default contribution rate under a qualified automatic contribution arrangement from 10% to 15%.
- Mandate that Employers Allow Long-term, Part-time Workers to Participate in 401(k) Plans: Except in the case of collectively bargained plans, the law requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service (to be applied prospectively beginning with service rendered after December 31, 2020).
- Increase in Age for Required Beginning Date for Mandatory Distributions: Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70 ½. The policy behind this rule is to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. However, the age 70½ was first applied in the retirement plan context in the early 1960s and has never been adjusted to take into account increases in life expectancy. The law increases the required minimum distribution age from 70½ to 72.
- Modifications to Required Minimum Distribution Rules: The law modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death
- Expansion of Section 529 Plans: The law expands 529 education savings accounts to cover costs associated with registered apprenticeships, homeschooling, up to $10,000 of qualified student loan repayments (including those for siblings), and private elementary, secondary, or religious schools.
- Disclosures Regarding Lifetime Income: The law requires that periodic benefit statements provided to defined contribution plan participants include, at least annually, a lifetime income disclosure. This disclosure would provide information to a participant regarding what a projected monthly income stream would look like if the participant’s total account balance was provided as an annuity. This component of The SECURE Act will not take effect until the Department of Labor has issued interim final rules regarding the disclosure, a model disclosure or the assumptions that may be used when preparing the disclosure.
- Permissibility of Multiple Employer Plans (MEPs) / Pooled Employer Plans (PEPs): In order to encourage more employers to provide retirement plan options to employees and to help reduce costs incurred by plan sponsors, the law now allows unrelated small employers to participate in open MEPs or PEPs. PEPs will be treated as one plan, with one Form 5500 filing, and will allow for administrative costs of the plan to be shared amongst all of the contributing employers. The new law also eliminates the potential exposure for plan disqualification if only one of the contributing employers fails to comply with required fiduciary and compliance rules (the “one bad apple” rule).
These changes present a good opportunity to review your retirement plan objectives and design. Please contact your RubinBrown advisor if you have any questions.