Posted by Tyler Starr, CPA
The passing of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act) at the end of 2019 included significant changes impacting qualified retirement plans. In fact, the retirement plan industry has not seen such extensive changes in one act since the passing of the Pension Protection Act in 2006. President Trump signed the SECURE Act on December 20, 2019, with most provisions containing effective dates of January 1, 2020. Luckily, plan sponsors have until December 31, 2022 to adopt a retroactive amendment to reflect the operational changes of most provisions. Some notable changes included in Title I of the SECURE Act, which is titled “Expanding and Preserving Retirement Savings,” are outlined below.
- Increase in 10% cap for automatic enrollment safe harbor after 1st plan year – A Qualified Automatic Contribution Arrangement (QACA) is a safe harbor plan that includes an automatic enrollment feature that automatically enrolls any eligible employee that fails to make an affirmative enrollment election at a specified deferral rate. The plan’s default deferral rate must start at no less than 3% and increase at least 1% annually to no less than 6%, but the automatic escalation of the deferral rule can be higher. The SECURE Act modifies the automatic enrollment safe harbor to raise the automatic escalation cap from 10% to 15% of pay. This increase could help plan sponsors that want to encourage increased employee contributions and retirement savings. This is effective for plan years beginning after December 31, 2019.
- Ability to implement nonelective safe harbor provision mid-year – Previously, the IRS has limited the ability of a 401(k) plan sponsor to implement safe harbor provisions during the plan year. The SECURE Act permits plan sponsors to switch to a safe harbor 401(k) plan with nonelective contributions at any time before the 30th day before the close of the plan year. Amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, which would be the close of the following plan year. This provision allows plan sponsors greater flexibility in implementing a safe harbor plan. This is effective for plan years beginning after December 31, 2019.
- Long-term part-time employee eligibility for 401(k) plans – Under the old law, employers generally may have excluded part-time employees who work less than 1,000 hours per year. Except in the case of collectively bargained plans, the SECURE Act will require employers to have a dual eligibility requirement in which an employee must complete either one year of service (1,000 hours) or three consecutive years of service with at least 500 hours. The SECURE Act does not mandate that employers provide these part-time employees with employer contributions or count them for purposes of nondiscrimination testing. This applies to plan years beginning after December 31, 2020, and service beginning before January 1, 2021 shall not be considered.
- Increase in age for required minimum distributions – Under the previous minimum required distribution rules, participants who have terminated employment were generally required to begin taking distributions from their retirement plan at age 70-1/2. The SECURE Act raises the age to 72 for individuals who reach age 70-1/2 after December 31, 2019. One of the most common failures for qualified retirement plans is the failure to timely make required minimum distributions. The required age was originally implemented to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plan for estate planning purposes to transfer wealth to beneficiaries. The age 70-1/2 was first applied in the early 1960s and has never been adjusted to consider increases in life expectancy. Even with the added delay, plan sponsors should be diligent in reviewing their required minimum distribution processes as the rules continue to be a major issue in Department of Labor investigations and IRS audits.
Additional provisions included in Title I of the SECURE Act include eliminating the safe harbor notice requirement for nonelective contributions and allowing penalty-free withdrawals for individuals in case of birth or adoption expenses up to $5,000. These provisions are effective for plan years after December 31, 2019. The SECURE Act also prohibits the issuance of plan loans through credit cards or similar arrangements, which applies to loans made after the date the SECURE Act was enacted.
Overall, the provisions adopted in Title I of the SECURE Act provide more opportunity for employees to expand and preserve their retirement savings. The SECURE Act will require action on the part of plan sponsors to make any necessary administrative changes, notify participants of any changes to the plan, and to make retroactive amendments by the deadline. Plan sponsors should discuss these changes with their retirement plan professional to ensure compliance.