SECURE Act Overview
The “Setting Every Community Up for Retirement Enhancement” Act (SECURE Act) is the largest single pension reform we’ve had in ten years. There are many provisions that touch various parts of the tax code and impact employers and plan sponsors. In this article, we break down the SECURE Act based on provisions that are important now (things you should be aware of today) and provisions that will be important later. Finally, we point out some “untruths” that have been floating around about the SECURE Act.
What’s important now (important provisions effective in 2020)
Revised RMD rules
The required minimum distribution (“RMD”) rules under prior law required a participant with an account balance in a qualified plan or IRA to start taking taxable distributions soon after attaining age 70½. Non-owners can generally delay RMDs until they actually retire from the company (in the case of qualified plan balances). The SECURE Act delays the age for starting RMDs to 72. This applies to anyone who attains age 70 ½ after December 31, 2019.
Elimination of “Stretch” IRA
The old rules on post-death distributions from IRA and qualified plan accounts allowed a non-spouse beneficiary (like a child) to take taxable distributions from an inherited account over their lifetime. The largest “revenue raising” provision (for the government… not YOUR revenue, silly) eliminates the so-called “stretch IRA” and replaces it with a requirement to distribute the entire inherited account within 10 years. The new rule applies to all inherited accounts resulting from deaths after December 31, 2019.
Ability to elect Safe Harbor status for current plan year
A “safe harbor” 401(k) plan is exempt from deferral testing. In a plan that qualifies for safe harbor treatment, highly compensated employees may defer up to their statutory limits ($19,500 in 2020, plus $6,500 age 50 catch-up) without worrying about failing nondiscrimination testing. Prior to 2020, a plan had to elect safe harbor status before the beginning of a plan year. For plan years beginning after December 31, 2019, a plan that is not currently safe harbor may elect to be a safe harbor plan with a three percent nonelective contribution if it’s amended at least 31 days prior to the plan year end (i.e., December 1, 2020 for a 2020 calendar year plan). Under the new rules, if this deadline is missed, a plan may still elect to be a safe harbor with a four percent nonelective contribution by amending prior to the end of the following plan year (i.e., amendment required by December 31, 2021 to make the plan safe harbor for 2020).
Extended deadline to adopt a qualified plan
Prior to the SECURE Act, a qualified plan had to be adopted no later than the last day of a company’s tax year if the company intended to make tax-deductible contributions for that year. Starting with tax years beginning after December 31, 2019 (e.g., calendar tax years ending December 31, 2020), a new qualified plan may be adopted as late as the filing deadline for a company’s tax return. Example: ABC, Inc. is a subchapter S corporation with a tax year ending December 31, 2020. ABC, Inc. may adopt a qualified plan as late as March 15, 2021 for the 2020 tax year, or September 15, 2021 if on extension!
This is important even if you already have a plan. Let’s say you currently sponsor a 401(k) plan. The company taxes are on extension for the year ending December 31, 2020. In April of 2021, after receiving your 2020 data, your TPA determines that you would benefit from adding a cash balance pension plan in 2020. Post-SECURE Act, it is now possible to retroactively adopt the cash balance pension plan for 2020 and make deductible contributions!
Other notable provisions effective in 2020
- Safe harbor automatic enrollment plans may be amended to increase the maximum automatic increase percentage to 15 percent (previously 10 percent)
- An increased employer tax credit is available for start-up plans
- A new small employer tax credit is available for adding an automatic enrollment arrangement
- A plan may allow individuals to take in-service distributions up to $5,000 following the birth or adoption of a child
- Defined benefit plans may allow in-service distributions at age 59½
- Plans that offer certain annuity investments may allow participants to take them as in-service distributions if the plan stops offering annuities as investment options
What will be important later (important provisions effective after 2020)
Open Multiple Employer Plans, aka Pooled Employer Plans, aka PEPs
It’s an idea that has floated around congress for quite a few years; now it is here. The driving concept behind PEPs is unrelated employers coming together into a single plan to lower individual responsibilities and costs, but without sacrificing plan design and features. It is only allowed for 401(k)-type plans. But it is assured to change the defined contribution landscape forever. We will have more information on PEPs as we get closer to the January 1, 2021 effective date for these plans.
What’s not in the SECURE Act (but people might tell you it is)
Here are some rumors we have caught floating around about the SECURE Act.
“All employers must offer a 401(k) plan to employees.”
Our clients have sent us copies of correspondence from sales staff at various companies proclaiming the SECURE Act includes a requirement for all employers to offer a retirement plan. So, why not go ahead and meet with them to get your “required” plan set up? This misconception is likely a mash-up of what people have heard about state-run auto-IRA plans (which are mandatory in some states if you don’t offer another plan) and the requirement that is in the SECURE Act about covering part-time employees in your 401(k) plan (if you happen to have a plan already…). To repeat – There is NO REQUIREMENT in the SECURE Act that employers must establish retirement plans for employees.
“All 401(k) plans must offer annuities as investment options.”
Even though the SECURE Act has a lot of provisions to make it easier to offer annuities in plans, there is no requirement to have them. However, it is going to be required to start showing estimated lifetime income on participant benefit statements 12-months after the DOL issues regulations.
We hope you have found this information helpful. If you have questions, please contact your EGPS plan consultant or sales representative.