What is the SECURE Act?

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), became law after passing both the House and Senate with broad bi-partisan support. The SECURE Act implements key retirement legislation reform for plan sponsors and individuals.

“This legislation will help hard-working Americans prepare for a financially secure future by incentivizing small businesses to set up employer-sponsored retirement plans,” said SHRM Chief of Staff Emily M. Dickens, who oversees SHRM Government Affairs. “There is no better way to prepare Americans for retirement than supporting and strengthening employer-sponsored plans.”

SECURE Act Effective Dates

  • Plans prohibited from making loans through credit cards and similar arrangements.
  • Fiduciary safe harbor for selection of lifetime income provider.
  • Modification of defined-benefit plan nondiscrimination rules to protect longer-service participants.
  • Expansion of qualified education expenses that can be paid through 529 plans, effective for distributions made after Dec. 31, 2018.
  • Safe harbor plans using automatic escalation can raise their cap after the first year of participation from 10 percent to 15 percent of compensation.
  • Safe harbor notices are eliminated for plans using the nonelective contribution option, and employers can wait until 30 days before the end of the plan year to adopt the 3 percent nonelective safe harbor.
  • Employers can choose to add the nonelective safe harbor with an amendment by the end of the following year, but the amendment would need to provide 4 percent rather than 3 percent of compensation.
  • In-service distributions from defined-benefit plans and government 457(b) plans can be taken as early as age 59 1/2 rather than starting at age 62.
  • Increase in credit limit for small employer plan startup costs.
  • Small employer automatic enrollment credit.
  • Repeal of maximum age for traditional IRA contributions.
  • Portability of lifetime income options.
  • Penalty-free withdrawals from retirement plans for individuals following birth of a child or adoption.
  • The age for requiring participants to begin taking mandatory distributions rises to 72 from 70 1/2.
  • Increased penalties for failure to file Form 5500 retirement plan returns (applies to returns and notice due dates after this date).
  • Limits on stretch payments to beneficiaries, effective for deaths after 2019.
  • MEP provisions.
  • Non-bargained 401(k) plans can no longer exclude long-term part-time employees from participating if they work at least 500 hours in each of three consecutive years. Service before 2021 will not be counted.
  • Combined annual report for group of plans (IRS and DOL to issue a consolidated Form 5500 no later than Jan. 1, 2022).

Last day of the first plan year beginning after Dec. 31, 2021, or such later date as the Secretary of the Treasury may prescribe:

  • Provisions relating to plan amendments.

More than 12 months after the Secretary of Labor issues interim final rules, the model disclosure and the assumptions on which notices are based:

  • Disclosure regarding lifetime income.

Key SECURE Act Changes for Plan Sponsors

As many of these changes must be implemented in 2020, we have worked to provide a high level summary of the changes below impacting plan sponsors. All of the changes outlined below took effect as of January 1, 2020 unless otherwise noted.

Small-Business Incentives

Many of the provisions of the SECURE Act are aimed to encourage employers to become plan sponsors, including:

  • Increase the business tax credit from the current cap of $500 to up to $5,000 for plan startup costs to make setting up retirement plans more affordable for small businesses.
  • Provide a further $500 tax credit for three years for plans that add auto-enrollment of new hires.
  • Simplify rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans.
  • Give employers additional time to cover their employees with a profit-sharing contribution by extending the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return.
  • Offer a consolidated Form 5500 for certain defined-contribution plans with a common plan administrator to reduce administrative costs.
  • Increased penalties for failure to file retirement plan returns such as Forms 5500, required notifications of changes and required withholding notices.

Multiple-Employer Plans

The SECURE Act allows unrelated small employers to band together in “open” 401(k) multiple-employer plans (MEPs)—also referred to as pooled employer plans (PEPs)—reducing the costs and administrative duties that each employer would otherwise bear alone. Currently, only “closed” MEPs are allowed; participating employers must share common organizational relationships, such as being in the same industry or members of an established trade association.

The act insulates companies in MEPs from penalties if other members violate fiduciary rules—for example, by failing to funnel employee contributions to the plan on schedule. The so-called “one bad apple” liability risk that a negligent member can pose to an entire plan has been a major stumbling block for MEPs and was also addressed in a DOL proposed rule issued in July.

Raised Default Savings Cap

To promote additional savings, the SECURE Act allows automatic-enrollment safe harbor plans to increase the cap on raising payroll contributions from 10 percent to 15 percent of an employee’s paycheck, while giving employees an opportunity to opt out of the increase. The step up is usually made annually either at the beginning of the year or when annual raises are given out.

Delayed Required Distributions

The SECURE Act allows retirees to delay taking required minimum distributions (RMDs) until age 72, up from the current age of 70 1/2, for participants in 401(k) and other defined-contribution plans, defined-benefit pension plans, and for individual retirement account (IRA) holders. RMDs are the minimum amount participants must withdraw from their retirement accounts each year, set by actuarial tables.

Part-Time Employee Participation

The SECURE Act requires employers to include long-term part-time workers as participants in 401(k) plans except in the case of collectively bargained plans. Eligible employees will have completed at least 500 hours of service each year for three consecutive years and are age 21 or older. However, these participants can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements. Previously, part-time workers could be excluded if they haven’t worked 1,000 hours in a 12-month eligibility period.

The new 500-hour, long-service provision does not apply to 403(b) plans.

In-Plan Annuities

To address the 401(k) plan “annuity conundrum,” the SECURE Act creates a safe harbor that employers can use when choosing a group annuity to include as an investment within a defined-contribution plan, with new provider-selection rules.

The SECURE Act also increases the portability of annuity investments by letting employees who take another job or retire move their annuity to another 401(k) plan or to an IRA without surrender charges and fees.

Annual Disclosure of Projected Income

The SECURE Act will require plan sponsors to annually disclose on 401(k) statements an estimate of the monthly payments participants would receive if their total account balance were used to purchase an annuity for the participant and the participant’s surviving spouse.

Limit on ‘Stretch’ Plans

The SECURE Act imposes a 10-year distribution limit for most nonspouse beneficiaries to spend down inherited IRAs and defined-contribution plans. Before passage of the act, withdrawals from inherited accounts could be stretched over the life of beneficiaries to mitigate taxes.

Disaster Relief

Plans may offer qualified disaster distributions to participants who lived in a presidentially declared disaster area. The distribution would be subject to a lifetime cap of $100,000 per disaster across all plans in the plan sponsor’s controlled group. Qualified disaster distributions are exempt from the 10 percent penalty for distributions taken before age 59 1/2, and participants receiving qualified disaster distributions are permitted to spread taxes on the distribution over three years. Participants can also repay all or a portion of their disaster distribution to the plan that issued it within three years, or can roll it over to another eligible retirement plan, such as an IRA.

Penalty Increases

IRS penalties have increased for forms and notices due after 2019 as follows:

  • Failing to timely file Form 5500 can be assessed up to $250 per day, not to exceed $150,000 per plan year. Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.
  • Failing to file Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000, up from a daily penalty of $1 per participant, not to exceed $5,000.
  • Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for the calendar year, up from $10 for each failure, not to exceed $5,000.

Relief for Frozen Pension Plans

The SECURE Act addresses long-standing issues affecting pension plans that are frozen to exclude new hires.

If certain conditions are met, the SECURE Act modifies these nondiscrimination rules to permit older, longer-service and generally higher-paid employees to continue to accrue benefits under a defined-benefit plan, even though younger, shorter-service and generally lower-paid employees do not accrue these benefits.

Other Notable Defined-Contribution Plan Changes

The SECURE Act will additionally:

  • Expand 529 education savings plans to include student loan repayments and the costs of apprenticeship programs under the definition of qualified higher education expenses. Student loan interest paid for with tax-free 529 plan earnings is not eligible for the student loan interest deduction.
  • Prohibit the distribution of plan loans through savings plan credit cards so that funds are not easily available for routine or small purchases.
  • Permit employers to add a safe harbor feature to their existing 401(k) plans once the year has started if they contribute at least 4 percent of employees’ pay instead of the regular 3 percent. This flexibility will help employers to correct failed ADP/ACP or top-heavy tests by shifting to a safe harbor plan and making a 4 percent nonelective contribution to participants.
  • Convert custodial accounts from terminated 403(b) plans into IRAs.
  • Eliminate the age limit for traditional IRA contributions. Those who are still working can continue to contribute to a traditional IRA, regardless of their age, instead of eligibility to contribute ending at age 70 1/2.
  • Allow exception to the 10 percent penalty for birth or adoption. New parents can now withdraw up to $5,000 from a retirement account within a year of a child’s birth or adoption without the 10 percent penalty those younger than 59 1/2 would normally owe. The distribution, which is still subject to tax, can be repaid to a retirement account.