CareersThe SECURE Act became law on December 20, 2019. Retirement plan sponsors, fiduciaries, and third party administrators must understand and implement several changes in pension law that affect employee stock ownership plans (ESOPs), 401(k) plans, and simplified employee pension plans (SEPs). Walter Haverfield is providing this summary of key provisions to our valued clients and business partners. We are ready to help you understand and implement these changes.
Common Plan Changes.
The SECURE Act makes several changes that apply to all retirement plans as set forth, below.
- Increases the credit for small start-up costs incurred by employer pension plans.
- Creates a new credit to defray the start-up costs of plans with automatic enrollment.
- Prohibits plans from making loans through credit cards and other similar arrangements.
- Permits penalty-free withdrawals from retirement plans for birth or adoption.
- Increases the age at which required minimum distributions (RMDs) must start from 70½ to 72 (for individuals who have not reached age 70½ as of December 31, 2019).
- Changes the permitted distribution periods for beneficiaries.
- Requires annual “lifetime income disclosures,” which must illustrate the monthly payments if a participant used his or her account balance to provide lifetime income as an annuity.
How Does the SECURE Act Affect 401(k) Plans?
The Act permits long-term part-time workers to participate in 401(k) plans. Previously, employers could exclude part-time workers with fewer than 1,000 hours of service per year. Now, plans must include a dual eligibility requirement: 1,000 hours of service in any one year (or other 12-month period specified in the plan) or 500 hours of service for each of three consecutive years. Service in years before 2021 need not be taken into account.
The Act changes the automatic enrollment safe harbor cap and the safe harbor plan notice requirements. The Act increases the automatic enrollment safe harbor cap on elective deferrals from 10% of employee compensation to 15%. Automatic enrollment permits employers to automatically deduct elective deferrals from an employee’s wages. The Act also eliminates the safe harbor notice requirement for plans that satisfy the safe harbor by providing non-elective contributions. The requirement that employees be entitled to make or change an election at least once per year continues to apply.
The Act also requires that inherited pension benefits generally must be distributed within 10 years of the participant’s death. This does not apply to surviving spouse beneficiaries, chronically ill beneficiaries, beneficiaries who are not more than ten years younger than the participant, or beneficiaries who are children of the participant and have not reached the age of majority. Such beneficiaries generally may receive distributions over the life or life expectancy of the participant, except that the 10-year distribution rule will apply to minor children when they reach the age of majority for any undistributed amounts.
Penalty-free withdrawals on birth or adoption, the prohibition on plan loans through credit cards, the new age for beginning required minimum distributions, and the lifetime income disclosure requirements all apply to 401(k) plans.
How Does the SECURE Act Affect ESOPs?
The Act’s new hours of service requirements do not apply to ESOPs. Plan sponsors may still exclude part-time workers who do not work 1,000 hours of service in a year from participation in their ESOPs.
The Act also requires that inherited pension benefits generally must be distributed within 10 years of the participant’s death. This does not apply to surviving spouse beneficiaries, chronically ill beneficiaries, beneficiaries who are not more than ten years younger than the participant, or beneficiaries who are children of the participant and have not reached the age of majority. Such beneficiaries generally may receive distributions over the life or life expectancy of the participant, except that the 10-year distribution rule will apply to minor children when they reach the age of majority for any undistributed amounts.
Penalty-free withdrawals on birth or adoption, the prohibition on plan loans through credit cards, the new age for beginning required minimum distributions, and the lifetime income disclosure requirements all apply to ESOPs.
How Does the SECURE Act Affect SEPs?
SEPs, otherwise known as SEP IRAs, are essentially traditional IRAs that permit employer contributions. Therefore, the SECURE Act’s IRA provisions apply. The Act repeals the maximum age for IRA contributions. Previously, individuals could not contribute to their IRA once they reached age 70½.
The Act’s new hours of service requirements do not apply to SEPs, so plan sponsors may still exclude part-time workers who do not work 1,000 hours of service in a year from participation in their SEPs.
The Act also requires that inherited pension benefits generally must be distributed within 10 years of the participant’s death. This does not apply to surviving spouse beneficiaries, chronically ill beneficiaries, beneficiaries who are not more than ten years younger than the employee, or beneficiaries who are children of the employee and have not reached the age of majority. Such beneficiaries generally may receive distributions over the life or life expectancy of the employee, except that the 10-year distribution rule will apply to minor children when they reach the age of majority for any undistributed amounts.
Penalty-free withdrawals on birth or adoption, the prohibition on plan loans through credit cards, the new age for beginning required minimum distributions, and the lifetime income disclosure requirements all apply to SEPs.
Effective Dates.
The effective dates for SECURE Act provisions vary by tax, calendar and plan years, with some modifications taking effect in 2020, and others in 2021. The effective dates for major provisions are listed below.
- Effective December 20, 2019, the date the Act became law.
- Prohibition on making loans through credit cards and similar arrangements
- Effective for plan years beginning after December 31, 2019.
- 401(k) automatic enrollment safe harbor cap increase
- Elimination of safe harbor notice requirement
- Distribution on birth of child or adoption
- Effective for tax years beginning after December 31, 2019.
- Increase in credit limit for small employer plan startup costs
- Small employer auto-enrollment credit
- Repeal of maximum age for IRA contributions
- Penalty-free withdrawals for birth or adoption
- Increase in age for required minimum distributions
- Effective for plan years beginning after December 31, 2020.
- New hours of service requirements for 401(k) plans
- Effective for benefit statements furnished more than one year after the DOL issues guidance.
- Lifetime income disclosures
Plan Amendments.
Retirement plans must comply in operation with SECURE Act provisions by the effective dates specified above, however, plans will not be considered out of compliance, provided that the plan documents are amended, consistent with operation of the plan, to incorporate these provisions by the last day of the first plan year beginning on or after January 1, 2022.
Other Provisions.
The SECURE Act has a number of other provisions, including annuity forms of payment and distribution, a safe harbor for selection of an annuity provider, changes to multiple employer plans, relief for certain frozen or closed defined benefit plans, funding relief for certain “community newspaper plans,” the ability to adopt a plan effective for the preceding taxable year, and increased penalties for certain failures with respect to Form 5500 filings.
Additional Information.
As to ESOPs:
175 S. Third Street, Suite 290
Columbus, OH 43215
614-246-2152
As to all Plans:
1301 E. Ninth Street, Suite 3500
Cleveland, OH 44114
216-928-2888
1301 E. Ninth Street, Suite 3500
Cleveland, OH 44114
216-619-7841