Rick Pummill, CLU, QPA, QKA
The Retirement Plan Company
Rick has worked over 30 years in the development, management & administration of qualified retirement plans. Rick earned a Bachelor of Arts degree in Economics from Dartmouth College & received his Chartered Life Underwriter (CLU) designation from the American College and his Qualified Pension Administrator (QPA) and Qualified 401(k) Administrator (QKA) designations from the American Society of Pension Professionals and Actuaries (ASPPA). Rick is an active member of ASPPA and the Dayton, Ohio Employee Benefits Group.
The SECURE Act- it is impacting you now!
The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act is the latest in retirement plan legislation that had drafters working overtime to produce a title that would create a suitable acronym. This SECURE Act was signed into law on December 20, 2019 and is significant in changing retirement plans going forward. A detailed analysis is beyond the scope of this article, but we wanted to give you an overview of some of the more important provisions.
There is a lot here! The major points are listed based upon when they go into effect; first those that are in effect now for most plans and then those effective after 2020.
Effective Now – Years beginning after 12/31/19
Increase in RMD Age.
Under prior law, participants were generally required to begin taking distributions from their retirement plan at age 70½. 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. The provision increases the required minimum distribution age from 70½ to 72 for those individuals who attain age 70½ after December 31, 2019. Those individuals who turned 70½ in 2019 will still have to take their RMD no later than April 1, 2020. This new Act does not change the rule that employees working beyond normal retirement age who are not 5% owners do not trigger RMDs until the calendar year in which they retire.
Modified RMD Rules for Inherited Accounts-
No More “Stretch” IRA. Congress eliminated “stretch” provisions. This was a financial strategy allowing beneficiaries to receive payments based on their lifetime. The Act 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 are generally required to be distributed by the end of the 10th calendar year following the year of the employee or IRA owner’s death. Exempt from this requirement are certain “eligible” beneficiaries: 1) the surviving spouse, 2) minor child who has not reached age 21, 3) disabled or chronically ill individuals, and 4) any individuals not described above who are not more than 10 years younger than the employee or IRA owner (e.g. a sister that is 6 years younger). Although exceptions exist, the stretch provisions can no longer be applied for individuals who die after December 31, 2019.
Distributions for Birth or Adoption.
Participants can now withdraw up to $5,000 for a qualified birth or adoption without the 10% early withdrawal penalty; normal income taxes apply. In addition, the amount may be repaid to the distributing plan or an IRA when desired. The law change does not require employers to permit these distributions. Rather, the change is optional but will ensure that where such distributions are permitted and taken, participants will not be hit with the 10% early withdrawal penalty if received before age 59 ½ like other distributions.
Qualified Disaster Distributions.
Not part of the SECURE Act but in related legislation, a continuation of relief provided to prior federally declared disaster areas. “Qualified Disaster Distributions” – up to $100,000 or enhanced loan benefits – are available for any federally declared disaster area during the period from January 1, 2018 through February 18, 2020. No 10% premature distribution penalty. The distribution can be repaid if desired within a 3 year period to the distributing plan or an IRA; it is treated as a rollover contribution and taxes paid will be refunded.
Retroactive Adoption of New Plan.
An employer will have up to its tax filing due date (with extensions) to adopt a new retirement plan. Previously a plan had to be adopted by the end of the taxable year. The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.
For example, ABC Company with a calendar tax year has a record breaking 2020. When their accountant informs them of the increased taxes in early 2021, ABC wants to know if there is any way to defer some of that income. Under prior law, implementing a retirement plan would not have been a possible answer as the document would have needed to be signed sometime in 2020. With the law change, ABC has the ability to establish a plan anytime prior to its tax filing due date (March 15, 2021 or, with extensions, September 15, 2021). Remember that a 401(k) provision within a plan can only be implemented on a prospective basis because employees can only defer from compensation that becomes available after the adoption of the plan.
Note: if a plan is adopted after the normal 5500 due date will the DOL make an accommodation? Until they do, perhaps employers wanting to take advantage will want to adopt no later than the end of the 7th month of the plan year and immediately file for an extension of the 5500.
Safe Harbor Nonelective Notice Eliminated.
The safe harbor notice requirement is eliminated for nonelective contributions for both traditional safe harbor plans and also the QACA plan design. But, the legislation still requires the notice for safe harbor matching plans and those plans which have a combined safe harbor nonelective contribution along with an additional matching contribution that is designed to meet the ACP safe harbor test. If you did supply a notice in November of 2019, no worries, there are no negative consequences for doing so.
Increased Ceiling for QACA Deferrals.
For plans using the QACA feature, the safe harbor escalation limit increases from 10% to 15%. Although plans are not required to escalate up to the new limit, the change is intended to assist plan sponsors who want to help participants attain retirement readiness.
Mid-Year Adoption of Safe Harbor Status.
Prior to the SECURE Act, a safe harbor nonelective contribution 401(k) plan generally had to be in place by the first day of the plan year. The bill permits plan sponsors of a 401(k) plan to convert into a safe harbor 401(k) plan with nonelective contributions at any time during the plan year or even during the following plan year! This is not applicable to a traditional safe harbor match plan. If the conversion is not done earlier than the 30th day before the close of the plan year (December 2 for a calendar year plan), (1) the required nonelective contribution is increased from 3% to 4% of compensation for all eligible employees for that entire plan year, and (2) the plan must be amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of following plan year. This change does not require a notice to employees.
For example, a plan with a calendar plan year finds out in the middle of 2020 that it is failing a mid-year ADP test, badly. HCEs will not be happy with refunds after year end and a traditional QNEC correction is cost prohibitive. Up to the end of November 2020, the plan sponsor may adopt the 3% non-elective safe harbor feature to control costs of permitting HCEs to defer as desired. After November 30, 2020, the plan sponsor may still add the non-elective safe harbor feature, but the contribution must be 4% instead of 3%. Taking the example a step further, the plan doesn’t find out until testing season (March 2021) that it massively failed the 2020 ADP test. The plan sponsor can adopt the non-elective safe harbor feature with a 4% contribution in March of 2021 to resolve the failed ADP test for the 2020 plan year.
Increases existing tax credit.
Increases the credit for small employers (100 employees or less) for a new plan by changing the calculation of the flat dollar amount limit on the credit to the greater of: (1) $500, or (2) the lesser of: (a) $250 for each employee of the eligible employer who is not a highly compensated employee and who is eligible to participate in the eligible employer plan maintained by the eligible employer, or (b) $5,000. Therefore, if the number of nonhighly compensated employees is 20 or more the credit is $5,000. The credit applies for up to three years. This credit claimed cannot exceed 50% of the startup costs paid or incurred during the taxable year for which the credit is taken. The plan must cover at least one nonhighly compensated employee in order to claim the credit.
Creates a new tax credit.
Congress provides up to $500 per year (up to three years) of an additional tax credit to employers to defray startup costs for new 401(k) plans that include automatic enrollment. The credit is available to small employers (100 employees or less) and is in addition to the plan start-up credit currently allowed. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.
Increasing Penalties for Form 5500, 8955-SSA and Withholding Notices.
In order to offset lost revenue from this Act, it significantly increases penalty amounts for late filers. For the 5500: $250 per day not to exceed $150,000 (instead of $25 and $15,000). For the 8955-SSA: $10 per day not to exceed $50,000 (instead of $1 and $5,000). Plan Administrators are required to provide payees with the notice of a right to elect no withholding on other than eligible rollover distributions. The penalty for failure to provide this notice timely has been raised to $100 for each failure up to a maximum of $50,000 (instead of $10 each and $5,000). The increases apply to forms required to be filed after December 31, 2019. It is now more important than ever to file these forms timely!
No More Credit Card Participant Loans.
Participant loans are no longer available through credit cards. They will now be treated as distributions. If plan sponsors were operating in this fashion, they should stop immediately.
Defined Benefit and Money Purchase Plan In-Service Distributions.
While not initially part of the SECURE Act, these changes are being used to offset lost revenue from other law changes. The age for in-service withdrawals from these plans may be reduced (if employer elects) from 62 to 59 ½. The decision to lower the age is up to the plan sponsor. There is no requirement to either lower the age or allow in-service distributions at all.
Effective Later – Plan Years after 12/31/20
MEPs and PEPs.
Pooled Employer Plans (formerly known as Open MEPs) will finally be permitted. This topic has been in the news since 2012. You may not have heard much about this type of plan, but you are sure to in the next few years. The legislation allows two or more unrelated employers to join a pooled employer plan. The “one bad apple rule” (where a single participating employer who breaches its responsibility to adhere to governmental regulations may cause the entire plan to be in jeopardy) is eliminated with further guidance promised. This was a major hurdle to making these plans viable. Only a designated Pooled Plan Provider (PPP) can sponsor a PEP. The PPP 1) must be a named fiduciary, 2) be responsible as the ERISA Section 3(16) plan administrator, 3) responsible to perform all administrative duties, 4) must register with the DOL/IRS, 5) have ERISA bond limits increased to $1 million and 6) cannot impose unreasonable restrictions on exiting the plan. Each adopting employer maintains responsibility for selection and monitoring of the PPP or any other named fiduciary and if not delegated to another fiduciary is responsible for the investment management of plan assets attributable to its employees. IRS and DOL have the authority to audit the pooled plan provider for Code and ERISA compliance. Effective for plan years beginning after 12/31/20.
Eligibility for Part-Time Employees.
Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) deferral provision to have a dual eligibility requirement under which an employee must complete either 1) a maximum one year of service requirement (with the 1,000-hour rule) or 2) three consecutive years of service where the employee completes more than 500 hours of service. This will expand coverage. In the case of employees who are eligible solely by reason of the latter new rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules and any employer provided contributions. Years prior to January 1, 2021 are not required to be taken into account. Consequently, the earliest an employee can be eligible to defer under this new standard is January 1, 2024 if service prior to 2021 is ignored. Effective for plan years beginning after 12/31/20.
The Act directs the IRS and DOL to provide rules for the filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing must be 1) defined contribution plans, 2) have the same trustee, 3) the same fiduciary (or named fiduciaries) under ERISA, 4) the same plan administrator, 5) using the same plan year, and 6) providing the same investments or investment options to participants and beneficiaries. The change will potentially reduce aggregate administrative costs. This change should be helpful for related employers who have separate plans for each of their companies within the group. Effective for plan years no later than those beginning after December 31, 2021.
Lifetime Income Projection.
The Act requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosures at least once during any 12-month period. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity. The Secretary of Labor is directed to develop a model disclosure. Disclosure in terms of monthly payments will provide useful information to plan participants in correlating the funds in their defined contribution plan to lifetime income. Plan fiduciaries, plan sponsors, or other persons will have no liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance that include the explanations contained in the model disclosure. Applies to participant benefit statements furnished more than 12 months after DOL issues interim final rules, the model disclosure and assumptions; therefore it is unknown at this time when that might occur.
There are other provisions in this legislation that are not mentioned here – we tried to include those of most interest to our readers. Finally, we often get questions about the required plan amendments to incorporate the above changes. The plan amendments are not expected to be required until the end of the 2022 plan year for most plans (later for union and governmental plans). Additional IRS guidance is needed to be 100% certain. But for those required items, the plan must be operated in compliance with those provisions. We hope you feel as we do, there are many positive changes that finally have become law.
- eRISA Update by TRI Pension Services January 31, 2020
- Summary of SECURE Act and other provisions in the Further Consolidated Appropriations Act, 2020 by Technical Answer Group (TAG)
- Key Secure Act Provision and Effective Dates by National Association of Plan Advisors January 2020