Overview of SECURE ACT
The Setting Every Community Up for Retirement Enhancement Act (the "SECURE Act") which was signed into law on December 20, 2019 made significant changes to the rules that apply to employer-sponsored retirement plans like yours as well as IRAs.
These new rules include changes to when distributions are required or permitted, potentially allowing for more employees to participate, relaxing of safe harbor notice disclosures in some cases as well as the expanding the ability to amend to a safe harbor nonelective option, expanding participant disclosures and portability of lifetime income streams, and increasing penalties for late annual reporting. Many of these provisions may impact your plan and some are already effective and may require action on your part to begin operating under the new rules.
Below is a list of key SECURE Act provisions. Click on the provision to get more details, including the effective date and information on whether you should be considering action steps at this point. We will update this overview as more guidance becomes available.
SECURE Act provisions (Click a provision below for more details)
Change to Required Beginning Date for minimum distributions from age 70 ½ to age 72.
The law has now pushed back the date a participant is required to begin receiving minimum distributions from their retirement plan (or IRA) from age 70 ½ to age 72. This new rule is effective for participants who attain 70 ½ after December 31, 2019. Participants who attained age 70 ½ on or before December 31, 2019 are required to use the old rules.
Any participants born after June 30, 1949 are impacted by the change. For example, if a participant were born on July 1, 1949, that participant will attain age 70 ½ in 2020. Under the old law that participant would have been required to take your first required minimum distribution by April 1, 2021 and their second required minimum distribution by December 31, 2021 and then subsequent required minimum distributions by December 31 of each year. Under the new rule, this participant would not be required to take their first minimum distribution until April 1, 2022 since they will attain age 72 in 2021.
The new rules only changed the age for the required beginning date. Non-5% owners, over age 70 ½, and now age 72, who are still working, are not required to take their first required minimum distribution until the April 1 of the year following their termination of employment, unless the plan has made an election requiring distributions when at age 70 ½ (now age 72), regardless of employment status. The delay to after termination date does not apply to 5% owners (own more than 5% of the business).
- 5% Owner born September 5, 1949. Attain age 70 ½ in 2020. Attain age 72 in 2021.
- December 31, 2019 Account Balance - $100,000
- December 31, 2020 Account Balance - $102,000
- December 31, 2021 Account Balance - $99,000
- December 31, 2022 Account Balance - $100,000
- Using current Uniform Life Expectancy Tables
Required Minimum Distribution (RMD) Old Law New Law 2020 RMD $3,773.59 Not required 2021 RMD $3,984.38 $3,984.38 2022 RMD $4,008.10 $4,008.10
Participants affected by this change should be informed as soon as possible so they can discuss the impact with their tax or financial professional.
Long-term part-time employees will be eligible to participate in 401(k) plan if they meet certain requirements.
Under current law, employers can generally exclude employees from participating in a 401(k) plan until they have worked at least 1,000 hours in a 12-month computation period. As a result, many part-time workers, including long term part-time workers, never become eligible to participate in the plan. The SECURE Act changes that by mandating that employers also permit employees who have worked at least 500 hours in at least three consecutive years to participate as well. This change is effective beginning with plan years starting 2021. 2021 is the first year when an employer must start counting 500-hour years so the earliest any part time employee (who isn't already eligible) would be eligible to participate in a 401(k) plan would be 2024.
It should be noted that this change allows impacted employees to make 401(k) salary deferral contributions, it does not obligate the employer to make matching and/or profit-sharing contributions. In addition, plans can exclude the impacted part-time employees from testing calculations. Also, if a plan already permits part-time employees to participate in a 401(k) plan, this law change does not change current elected plan provisions.
Modification of post death required minimum distribution rules for certain beneficiaries.The SECURE Act generally eliminates the ability of the non-spouse beneficiary to take distributions over the life expectancy and replaces it with a 10-year rule with certain exceptions. The 10-year rule provides that distributions must be made to designated beneficiaries within 10 years from the date of the retirement plan participant or IRA owner's death. Certain 'eligible beneficiaries' (surviving spouse, disabled or chronically ill beneficiary, an individual who is not more than 10 years younger than the IRA owner, a child of the owner who has not reached age of majority, but only until they reach the age of majority) are not subject to the 10-year rule. For non-designated beneficiaries (charity, estates), pre-SECURE Act rules continue to apply.
Increased Penalties for failing to file 5500s and 8955-SSAs in a timely manner; Provide withholding notice.
The IRS and DOL both can assess penalties on qualified retirement plans that file late plan returns (e.g. form 5500). Starting in 2020 the SECURE Act will increase by a multiple of 10 the maximum allowed IRS penalties due for forms and notices as follows:
- Failing to timely file Form 5500 can now create a fine of 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 per plan year.
- Failing to file Form 8955-SSA, for terminated vested participants that remain in the plan, can now create a fine for the initial filing of up to $10 per participant per day, not to exceed $50,000, up from a daily penalty of $1 per participant per day, not to exceed $5,000. The daily fines for failing to report an update to Form 8955-SSA are the same as the with the initial filing however the maximum fine for this action has increased to $10,000 which is up from $1,000.
- Failing to provide income tax withholding notices to participants taking distributions from the plan can create a fine of 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.
A separate, annually adjusted DOL penalty of up to $2,194 per day for late filing of Form 5500 was not changed by the SECURE Act.
These increased penalties apply to filings after December 31, 2019. These significantly higher penalties make timely filing of your 5500 form even more important. Just a reminder, 5500 forms are required by the end of the seventh month after the close of your plan year, e.g. July 31, 2020 for 2019 calendar year plans.
$5,000 Qualified Birth or Adoption Distribution Penalty Free.
The SECURE Act allows up to $5,000 to be distributed penalty-free from a retirement plan (or IRA) as a Qualified Birth or Adoption Distribution (QBOAD). To qualify for this distribution a participant must take a distribution from their retirement account at any point during the one-year period beginning either on the date of birth or the date an adoption of an individual under the age of 18 is finalized.
The law provides that participants who take QBOADs may repay them to the distributing plan provided the participant is still eligible to contribute to the plan and the amount repaid cannot exceed the amount distributed. These repayments will be treated as rollover contributions.
There are many questions remaining to be answered around the administration of these distributions. Among them are:
- What steps must plans take to verify the participant's eligibility to take a QBOAD?
- Are there restrictions on the usage of a QBOAD?
- Who is responsible for determining whether an employee has reached their $5,000 limit since these distributions are permitted from all eligible retirement plans?
- Must plans accept repayment?
- What happens if the participant terminates after receiving a QBOAD?
Employers are not required to offer these types of distributions. While these QBOADs are technically permissible now, the answers to the above questions, among others, will be needed before plans can practically make use of this plan feature.
401(k) Safe Harbor Plan nonelective contribution adoption and notice requirements relaxed.
The rules have been relaxed for notice requirements for certain employers who already have a safe harbor 401(k) plan using a nonelective contribution. Additionally, employers who have a plan without a safe harbor 401(k) provision may amend the plan during the year to add the safe harbor nonelective contribution.
Beginning for plan years after December 31, 2019 the written notice requirement is eliminated for employers who have a safe harbor 401(k) plans and utilize the nonelective contribution option to satisfy the deferral test. Before the change, employers with any safe harbor 401(k) would have to provide a notice to all eligible employees, at least 30 days but not more than 90 days before the next plan year, that provided the type of contribution they would make for the coming plan year as well as other plan information and give employees the opportunity to change their current salary deferral election. Now, only plans that utilize the safe harbor matching contribution option will have to satisfy the notice requirement.
In addition, effective for plan years after December 31, 2019, employers who do not currently have safe harbor 401(k) provisions in their plan can amend to a safe harbor 401(k) with the nonelective contribution option at least 30 days before the end of the year. Alternatively, employers can amend their plan by the end of the following plan year, but the nonelective contribution would need to be at least 4% of each eligible employees' compensation.
Plan benefits statements must include lifetime income disclosure at least once every 12 months.The benefit statements provided to participants in defined contribution retirement plans (e.g. 401(k), profit sharing and money purchase plans), will be required to contain a lifetime income disclosure at least once every 12 months. This disclosure will show the monthly amount that the participant (or beneficiary) will receive if the participant's account balance were used to provide a lifetime income stream, e.g. single life annuity or joint life annuity paid over the life of the participant and after the death of the participant, 50% of the monthly payment is paid over the life of the surviving spouse. The SECURE Act requires the Department of Labor (DOL) to provide these rules by December 20, 2020. If DOL issues the rules later than December 20, 2020, then the required implementation date is 12 months after DOL publishes the final rule.
Limit raised on Automatic Enrollment default rate.
Before the SECURE ACT, the maximum default rate was capped at 10% of an employee's compensation.
For plan years beginning after December 31, 2019, the maximum default rate for the first deemed election year is 10% but is increased to 15% for subsequent years.
Other Provisions Impacting Retirement Plans or IRAs.
Below is a list of some of the other provision included in the SECURE Act that may impact retirement plans or IRAs.
- New $500 credit for plans that adopt (or add) an Eligible Automatic Enrollment Arrangement. The credit can be taken in the year adopted as well as the two following years if the automatic enrollment arrangement stays in place. These types of arrangements require plans to treat participants as though they elected to make salary deferral contributions at a specified percentage of compensation, until affirmatively notified by the participant to do otherwise.
- Beginning in 2020, individuals over age 70 ½ can contribute to IRAs as long as they still have earned income from either wages or self-employment. Deductibility is based upon current rules.
- The SECURE Act added a new section of ERISA that provides plan fiduciaries a Fiduciary Safe Harbor in selecting an annuity provider offering a lifetime annuity as a plan investment option. This safe harbor is designed to reduce potential fiduciary liability as long as certain requirements are met when conducting an annuity provider search.
- A distributable event was created just for participants with a lifetime income investment option to be able to take a distribution of the lifetime income investment if it is no longer authorized to be held under the plan. The distribution must be made through a direct rollover to an IRA or other retirement plan or, in the case of an annuity contract, through direction distribution to the participant.
Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Equitable is the brand name of the retirement and protection subsidiaries of Equitable Holdings, Inc., including Equitable Financial Life Insurance Company (NY, NY); Equitable Financial Life Insurance Company of America, an AZ stock company with main administrative headquarters in Jersey City, NJ; and Equitable Distributors, LLC. Equitable Advisors is the brand name of Equitable Advisors, LLC (member FINRA, SIPC) (Equitable Financial Advisors in MI & TN).
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