On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law. The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers. Whether you currently offer your employees a retirement plan (or are planning to do so), you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).
Some of the SECURE Act provisions are required to be (or can be) operationally implemented immediately by employers who sponsor and maintain tax-qualified retirement plans, such as 401(k) plans, cash balance plans or traditional defined benefit (DB) pension plans, and 403(b) plans. This article focuses attention on those more immediate provisions.
- Credit card loans prohibited. Effective December 20, 2019, making new plan loans through any credit card or similar arrangement is prohibited. Any such loans will be treated as taxable distribution.
- Increased age for required minimum distributions (RMDs). Under prior law, RMDs from tax-qualified retirement plans, 403(b) and 457(b) plans generally had to start no later than April 1 of the calendar year following the later of (i) the year in which an employee attains age 70 ½ or the calendar year in which the employee retires (but 5-percent owners could not use this retirement rule). SECURE changed age 70 ½ to age 72 for RMDs for individuals who attain age 70 ½ after December 31, 2019.
If an individual attained age 70 ½ in 2019 and if they have terminated employment or are a 5-percent owner, RMDs must still begin by April 1, 2020, (and continue annually thereafter) in accordance with prior law. Similar changes apply to traditional IRAs (without regard to employment status).
Employers should confirm that their plan administrator will immediately update all retirement plan distribution paperwork describing the RMD rules to reflect the new law.
Employees who were expecting to begin RMDs when they reached age 70 ½ in 2020 or later may want to reconsider their options.
- “Stretch” beneficiaries eliminated for defined contribution (DC) plans. Under prior law, if payments to a non-spouse designated beneficiary under a DC plan (including 403(b) plans) began within one year after the participant’s death, such payments could be made ratably over the beneficiary’s life expectancy (i.e., potentially stretched out over decades), but if the payments did not begin by that time, they had to be paid out in full within five years after the participant’s death.
Under the new law, for participant deaths that occur after December 31, 2019, all distributions generally must be paid within 10 years from the date of death. But the new 10-year payout rule does not apply to payments made to the participant’s surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill individual (or trusts for the benefit of such individuals), or any individual who is not more than 10 years younger than the deceased participant, so long as the payments begin within one year after the participant’s death (but for surviving spouses, the payments are not required to begin until the deceased participant would have attained age 72). In addition, if such “eligible designated beneficiary” dies before receiving all payments owed to them, the remaining amount must be paid out within 10 years after the eligible designated beneficiary’s death.
- Fiduciary safe harbor. Effective December 20, 2019, DC plan fiduciaries can use a new ERISA fiduciary safe harbor to reduce uncertainties when offering an annuity to plan participants. If plan fiduciaries satisfy the safe harbor, they are deemed to have met ERISA’s prudence standard for selecting an insurance carrier for the DC plan’s annuity option and will not be liable for losses if the insurer cannot satisfy its obligations under the annuity contract.
When an employer selects an annuity provider for its retirement plan, the employer is an ERISA fiduciary, which means that the employer must act solely in the best interests of plan participants and beneficiaries when making its decision.
For DC plans, the new safe harbor clarifies that employers are not required to select the lowest cost contract. Rather, the employer can consider the value, features and benefits of the contract and attributes of the insurer (such as its financial strength) in considering the cost of the annuity contract.
The safe harbor also clarifies that employers are not required to review the appropriateness of the annuity after the contract has been purchased.
The new safe harbor does not apply to cash balance or other DB plans.
- Nondiscrimination testing relief for closed DB plans. The SECURE Act included long-awaited nondiscrimination testing relief for DB plans that are closed to new participants. The relief applies to plans that were closed as of April 5, 2017, or that have been in operation but have not made any increases to the coverage or value of benefits for the closed class for five years before the freeze can now meet nondiscrimination, minimum coverage, and minimum participation rules by cross-testing the benefits with the employer’s DC plans.
When are plan amendments needed? Generally, conforming plan amendments (retroactive to the first day as of which the new rules apply) will not be required any earlier than the last day of the first plan year beginning in 2022 (or later for certain collectively bargained and governmental plans). Additional guidance from the IRS is expected on plan amendment deadlines.
If you have questions about how to bring your company’s retirement plan into compliance with the SECURE Act, please give us a call at (858) 558-9200.