Posted By: Christopher Ciminera, CPA
Act 2 – The SECURE Act
In Act 1 of our play, Retirement Plan Legislative Update: Act 1 – Bipartisan Budget Act, we covered the Bipartisan Budget Act of 2018. This was positive legislation, but a major change to legislation was yet to come – the Setting Every Community Up for Retirement Enhancement Act, or the SECURE Act. The SECURE Act was signed into law on December 20, 2019 and as you may have known, or as you will soon see, this was significant retirement plan legislation and provides the main portion of our play. The SECURE Act includes provisions that help employers and provisions that help participants. The Act is broken out into four titles, which we’ll cover in two blogs. The first title covers provisions that will expand and preserve retirement savings.
Scene 1 – Title 1 – Expanding and Preserving Retirement Savings
- Section 101 – Multiple Employer Plans (MEP) and Pooled Employer Plans (PEP) – This section expands provisions relating to multiple employer plans. In the past, only employers that had a commonality or relationship that bound the employers together (such as operating in the same industry) could form a multiple employer plan. There are certain benefits of being under one plan such as the possibility of lowering administrative costs, which always made this a structure that others wanted available, but many could not participate in. This section eases the previous restrictions related to MEPs. With this new provision, unrelated employers may participate in pooled employer plans. One negative aspect of MEPs in the past was the so-called “One Bad Apple” rule, which provided that all employers participating in the MEP can face tax consequences if one employer in the group failed to satisfy the tax qualification rules for the MEP. This rule will no longer apply for plans with plan years beginning after December 31, 2020. Additionally, this section now only requires one Form 5500, as well as only one plan audit, which would again reduce administrative costs. As defined in the Act, a pooled plan provider is a person who is designated by the terms of the pooled employer plan as a name fiduciary and is the person responsible for the performance of all administrative duties under the plan.
- Section 102 – Increase in Automatic Enrollment Cap – This section increases the automatic enrollment escalation cap from 10 percent to 15 percent. In the past, a plan with an automatic enrollment escalation feature could increase the deferral percentage by one percent each year up to 10%. With this section, the cap now goes to 15%.
- Section 103 – Safe Harbor Provision – This section makes changes to the 401(k) safe harbor provisions to help facilitate the adoption of safe harbor plans. This section eliminates the advance notice requirement for 401(k) plans that include non-elective contributions (safe harbor notice requirement). It also allows an employer to amend a 401(k) plan to create a safe harbor plan, provided the amendment is made before the 30th day before the end of the plan year and the plan becomes effective before the end of the next plan year. Lastly, this section raises the non-elective safe harbor contribution, which previously was 3%, to 4%.
- Section 104 – Increase in Credit for Small Employer Pension Plan Startup Cost – This section increases the credit limitation for small employer pension plan startup costs. Prior to the act, small employers could claim a tax credit equal to only 50% of eligible startup costs up to a maximum of $500. The SECURE Act increases the credit for startup costs for small employers to the greater of 1) $500 or 2) the lesser of a) $250 multiplied by the number of NHCEs who are eligible to participate in the plan or b) $5,000. This credit may be taken in the first three plan years, so employers can benefit from a potential maximum credit of $15,000.
- Section 105 – Credit for Automatic Enrollment – This section provides credit to an employer that offers automatic enrollment for any taxable year equal to $500 for any taxable year occurring during the period that automatic enrollment was effective. This is a one-time credit, so once you use it in one year you can’t take it again.
- Section 106 – Addition of Eligible Compensation for IRA Purposes – This section adds as eligible compensation for IRA purposes, certain non-tuition fellowships and stipend payments that aid the individual in the pursuit of graduate or postdoctoral study.
- Section 107 – No Maximum Age for Traditional IRA – This section repeals the maximum age to make traditional IRA contributions.
- Section 108 – Repeal of Loans Made Through Credit Cards – This section prohibits qualified employer plans from making loans through credit cards and other similar arrangements, which had been allowed in the past.
- Section 109 – Lifetime Income – This section allows trusts in a defined contribution plan to provide qualified distributions of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity contract on or after the date that is 90 days prior to the date on which such lifetime income is no longer authorized to be held as an investment option under the plan. A qualified distribution is defined as a direct trustee-to-trustee transfer.
- Section 110 – Custodial Accounts on Termination of 403(b) Plan – This section indicates that if an employer terminates the plan under which amounts are contributed to a custodial account under 403(b)(7), the plan administrator or custodian may distribute an individual custodial account in kind to a participant or beneficiary of the plan and the distributed custodial account shall be maintained by the custodian on a tax-deferred basis as a 403(b)(7) custodial account until amounts are actually paid to the participant or beneficiary.
- Section 111 – Church-Controlled Organizations – This section covers some clarification of retirement income account rules relating to church-controlled organizations.
- Section 112 – LT/PT Employees – This section expands coverage in 401(k) plans for long-term employees working more than 500 but less than 1,000 hours of service per year. Until SECURE was enacted, employers could require 1,000 hours of service in a twelve-month period before an employee would become eligible to participate in the plan. Under the new rules, employees that work between 500 hours and 1,000 hours for a consecutive three-year period must be allowed to participate in the deferral feature of the plan. However, employers are not obligated to contribute a match or employer contribution to these Long-Term Part-Time (LTPT) employees. Note that any specific age requirements must still be met. An additional benefit is that an employer may elect to exclude these employees for discrimination testing purposes. This rule is effective for plan years beginning after December 31, 2020; therefore, plan sponsors should be starting to track the hours of these employees in 2021 and will need to allow them to participate in the 2024 plan year if eligible.
- Section 113 – Withdrawals for Birth or Adoption of Child – This section covers penalty-free withdrawals from retirement plans for individuals in the case of birth of a child or adoption. The aggregate amount of the withdrawal cannot exceed $5,000. This applies to an individual and is for one child. As documented in the Act, the qualified birth or adoption distribution is any distribution from an applicable eligible retirement plan to an individual if made during the 1-year period beginning on the date on which a child of the individual is born or on which the legal adoption by the individual of an eligible adoptee is finalized. An eligible adoptee is any individual (other than a child of the taxpayer’s spouse) who has not attained age 18 or is physically or mentally incapable of self-support. This withdrawal may be repaid by the participant.
- Section 114 – Increase to Required Beginning Date Age – This section increases the required beginning date age for mandatory distributions from 70 ½ to 72. This section applies to distributions required to be made after December 31, 2019, concerning individuals who attain age 70 ½ after such date. So, participants born after July 1, 1949, will have an RMD beginning date age of 72, and participants born before July 1, 1949, will have an RMD beginning date age of 70 ½.
This title expanded retirement legislation for the benefit of participants looking for beneficial retirement changes. However, Congress was not done. There were more changes included in the SECURE Act and our next blog will move to Scene 2 which will cover the remaining Titles in the Act.
Photo By: Moktan Productions
