Broad retirement legislation — the Setting Every Community Up for Retirement Enhancement (SECURE) Act — is heading for the president’s signature after clearing the Senate on Dec. 19 and the House days earlier. The legislation is included in a year-end government spending package and essentially mirrors the version passed by the House in May. Key provisions include broad nondiscrimination testing relief for closed defined benefit (DB) plans, approval of “open” defined contribution (DC) multiple-employer plans, relaxed auto-enrollment rules and incentives for lifetime income options in DC plans. Other reforms aim to help individuals save more for retirement.
Enactment of the SECURE Act caps off several years of advocacy efforts by a broad range of stakeholders — including Mercer, which helped educate lawmakers about the importance of the reforms and the value of the employer-based retirement system. After winning overwhelming House approval in May, the legislation had stalled in the Senate for reasons unrelated to the measure’s core reforms.
Many of the bill’s reforms are effective starting in 2020 (or even retroactively), so plan sponsors should quickly review which provisions might be affected and what, if any, plan amendments and systems changes must be implemented. Some clarifications from regulators will be needed in the months ahead.
Closed plan testing relief. The law includes permanent nondiscrimination testing relief for closed DB plans and significantly broadens the temporary IRS relief first granted in 2014, renewed every year since then (most recently in Notice 2019-49) and expanded on a temporary basis in Notice 2019-60. Among other changes, the law:
The relief is available immediately, but plan sponsors can elect to apply it as early as plan years beginning after Dec. 31, 2013.
Open MEPs. Employers of all sizes will be able to join together to create more affordable DC plans through "open" multiple-employer plans (MEPs) using a "pooled plan provider." A pooled plan provider is a person designated as the plan administrator and named fiduciary in the plan document who is responsible for performing all administrative duties. Before serving as pooled plan providers, individuals will have to register with IRS and the Department of Labor (DOL) and acknowledge in writing their plan administrator and fiduciary status. They also will have to ensure that everyone handling plan assets or serving as a fiduciary is bonded as required under ERISA.
Other changes will provide relief from two current rules for MEPs:
These provisions are effective for plan years beginning after Dec. 31, 2020.
More time to retroactively adopt retirement plans. Employers of all sizes will have more time to retroactively adopt a new stock bonus, pension, profit-sharing or annuity plan — but not a 401(k) plan. The deadline to adopt one of those plans will be the extended due date of the employer’s federal income tax return for the tax year in which the plan becomes effective. Employers meeting that deadline can treat the plan as having been adopted as of the last day of that tax year.
This provision is effective for plans adopted for taxable years beginning after Dec. 31, 2019.
Updated safe harbor DC plan rules. The law makes major changes to existing safe harbor rules for DC plans:
These provisions are effective for plan years beginning after Dec. 31, 2019.
Reduced Pension Benefit Guaranty Corporation (PBGC) premiums for CSEC plans. PBGC premiums for cooperative and small-employer charity (CSEC) plans will be rolled back to $19 per participant for flat-rate premiums and $9 per $1,000 of unfunded vested benefits for variable-rate premiums. This provision is effective for plan years beginning after Dec. 31, 2018. Most CSEC plans have already paid their 2019 premiums, so those plans will be eligible for a refund.
Lifetime income encouraged in DC plans. Several reforms aim to encourage more lifetime income options in DC plans:
Converting 403(b) custodial accounts into individual retirement accounts (IRAs). If an employer terminates a 403(b) plan with amounts held in a custodial account, those accounts can be distributed in kind to each participant or beneficiary of the plan. The distributed accounts will be held by the custodian and receive 403(b) treatment until the amounts are actually paid to the participant or beneficiary.
The law requires the Treasury Department to issue guidance within six months of date of enactment authorizing this treatment. That guidance will be retroactively effective for taxable years beginning after Dec. 31, 2008.
Plan loans via credit cards barred. The act prohibits plans from making participant loans via credit cards or similar arrangements. This provision is effective for loans made after the date of enactment, which is expected to be Dec. 20, 2019.
Expanded coverage of long-term part-time workers. Sponsors of noncollectively bargained 401(k) plans will have to let part-time workers voluntarily contribute to the plan if they have completed at least 500 hours of service per year for three consecutive 12-month periods. Employers won’t need to make nonelective contributions for these workers or match their contributions. Employers can exclude these employees from nondiscrimination testing and won’t have to provide them with top-heavy minimum benefits.
This provision is effective for plan years beginning after Dec. 31, 2020. However, service during 12-month periods beginning prior to 2021 is disregarded.
Penalty-free withdrawals for birth or adoption of a child. Individuals can take up to $5,000 as a penalty-free early withdrawal from their qualified retirement plan savings to help pay for childbirth or adoption expenses — with repayment permitted at a later date. This provision is effective for distributions made after Dec. 31, 2019.
Consolidated Form 5500 for similar DC plans. By Jan. 1, 2022, IRS and DOL will have to implement a consolidated Form 5500 for similar DC plans. Plans eligible for consolidated filing must have the same trustee, named fiduciary (or named fiduciaries), administrator, plan year and investments or investment options for participants and beneficiaries. The group can include a DC plan not subject to Title I of ERISA — such as a governmental or church plan — if the same person carries out each specified function for all plans in the consolidated filing. This provision is effective for plan years beginning after Dec. 31, 2021.
Pension funding relief for community newspaper plans. The act provides pension funding relief for community newspaper plan sponsors by increasing the interest rate to calculate those funding obligations to 8% and extending the period for amortizing any shortfall from seven to 30 years. The relief is available only to plans in which no participants received an accrued benefit increase after Dec. 31, 2017. This provision is effective for plan years ending after Dec. 31, 2017.
Clarification of church plan requirements. The law clarifies which individuals may be covered by plans maintained by church-controlled organizations. This provision is effective on the date of enactment, which is expected to be Dec. 20, 2019, and applies retroactively for all plan years.
Reforms designed to help individuals save more for retirement will:
Taken together, the act’s array of changes will cost approximately $16.3 billion over 10 years, according to the Joint Committee on Taxation’s projection for a substantially similar bill passed by the House Ways and Means Committee earlier this year. Several retirement-related provisions are intended to offset that cost.
Shorter "stretch" IRAs. Most nonspouse beneficiaries in DC plans and IRAs — but not DB plans — will have to complete payouts within 10 years after the IRA owner’s death. This provision generally applies to distributions with respect to employees who die after Dec. 31, 2019. Collectively bargained plans and governmental plans have delayed effective dates. The 10-year rule does not apply to certain commercial annuity contracts in effect as of the date of enactment, which is expected to be Dec. 20, 2019.
Higher penalty for failure to file. The act raises the penalty for failing to file a tax return from $330 to $435 (or, if less, 100% of the tax due). This provision applies to returns for which the due date (including extensions) is after Dec. 31, 2019.
Stiffer penalties for failure to file retirement plan returns. The penalties for failing to file certain retirement plan returns will increase sharply:
These provisions apply to returns, statements, notifications and notices required to be filed or provided after Dec. 31, 2019.
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