Finally SECURE: Opportunities in the 2019 SECURE Act for Plan Sponsors

On December 19, 2019, Congress passed the Further Consolidated Appropriations Act of 2020 (the Act), which the President signed into law shortly thereafter. This year-end spending bill included the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) and a number of other new rules impacting health and welfare plans.

The SECURE Act is the most significant piece of retirement plan legislation in more than a decade. The SECURE Act includes a number of changes to existing retirement plan rules that are designed to make it easier for employees to save for retirement. The SECURE Act aims to help employees achieve retirement security by ensuring that more workers have access to a retirement plan, are able to save enough money to maintain their standard of living in retirement, and do not outlive their retirement savings.  In addition, the Act includes a number of important new rules impacting health and welfare plans.

The following summarizes the most significant changes for plan sponsors:

Provisions Designed to Encourage Employer-Provided Retirement Plans

The SECURE Act includes provisions that encourage employers to adopt retirement plans for their employees and to expand access to existing plans. In particular, the SECURE Act:

• Broadens eligibility rules for long-term, part-time employees. Currently, an employer may require its employees to complete 1,000 hours of service during a 12-consecutive-month period to begin participating in its retirement plan. This can result in certain long-term, part-time employees being excluded from plan participation. As a result, the SECURE Act requires employers to permit long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods to participate in their plans (other than collectively bargained plans). However, an employer will not be required to make matching or nonelective contributions on behalf of such employees and may continue to impose an age-21 requirement.

• Allows small, unrelated employers to adopt “open” multiple employer plans. Existing Department of Labor (DOL) rules require employers that band together to create a multiple employer plan (MEP) to share an economic nexus and commonality of interests completely unrelated to providing benefits. Although the DOL issued regulations this summer that expand the types of employer groups, associations and organizations that can establish MEPs, the regulations still require some commonality of interest among employers participating in the MEP. The SECURE Act goes further, and permits small employers with no commonality of interest to adopt “open” MEPs administered by what the SECURE Act refers to as “pooled plan providers.” This change is designed, at least in part, to allow small employers to reduce the administrative cost of providing benefits by leveraging the size of a larger group of employers participating in the plan. The SECURE Act also eliminates the so-called “one bad apple” rule by including provisions designed to protect employers participating in a MEP from penalties that result from another member’s violation of certain plan and regulatory rules.

• Increases the income tax credit for costs paid or incurred by small employers in connection with establishing a retirement plan. The SECURE Act increases the annual start-up credit for small employers that adopt a new retirement plan from $500 to up to $5,000.

• Creates a new income tax credit for small employers that add automatic enrollment. The SECURE Act also creates a new income tax credit of $500 per year for up to three years for small employers that add automatic enrollment to their plan.

Provisions Designed to Promote Additional Savings and to Ensure Financial Security to and Through Retirement

The SECURE Act also includes provisions designed to increase retirement readiness by closing the gap between what employees are and should be saving for retirement, and helping employees understand the amount of money needed to retire. For example, the SECURE Act:

• Increases the percent cap on automatic enrollment contributions to safe harbor plans. Currently, safe harbor 401(k) plans that include a qualified automatic contribution arrangement (QACA) may not automatically enroll or escalate employee contributions above 10% of the employee’s eligible compensation. The SECURE Act raises this 10% cap on automatic contributions to 15% after the employee’s first plan year of participation.

• Requires lifetime income disclosure statements. The SECURE Act requires employers to provide defined contribution plan participants with information illustrating the amount of monthly payments a participant would receive if the participant’s total defined contribution plan account balance was used to provide lifetime income through an annuity.

• Permits retirees to delay required minimum distribution (RMD) payments until age 72. Under current law, RMD payments must generally start by April 1 of the calendar year following the later of the calendar year in which an employee reaches age 70-1/2 or terminates employment. The SECURE Act increases the age at which RMD payments must begin from age 70-1/2 to age 72.

• Enhances rules regarding lifetime annuity options under defined contribution plans. The SECURE Act includes provisions designed to encourage defined contribution plan sponsors to offer in-plan annuity options that provide lifetime income during retirement by creating a new fiduciary safe harbor for employers that include such options in their defined contribution plans. The SECURE Act also permits participants to roll over lifetime income investments to an IRA or other retirement plan as needed.

Other Changes Impacting Retirement Plan Administration

The SECURE Act includes a number of other changes that will impact retirement plan administration. Specifically, the SECURE Act:

• Simplifies certain nonelective 401(k) plan safe harbor rules and notice requirements. The SECURE Act eliminates the safe harbor notice requirement for safe harbor plans that satisfy the safe harbor plan rules by making nonelective contributions to their employees. The SECURE Act also provides additional flexibility to add or amend safe harbor nonelective contributions to plans mid-year.

• Provides nondiscrimination testing relief for certain closed or “frozen” defined benefit pension plans. Many employers have closed their defined benefit plans to new participants, but permit existing participants (or groups of participants) to continue to earn benefits under the plan. Because new employees can no longer enter the plan, closed plans can become discriminatory if the attrition rate of non-highly compensated employees outpaces the attrition rate of highly compensated employees. The SECURE Act includes testing relief that will make it easier for closed pension plans to satisfy certain nondiscrimination testing requirements.

• Modifies certain rules regarding RMD payments made following a participant’s death. The SECURE Act changes the post-death RMD rules to require that all distributions after death (other than distributions to certain types of beneficiaries) be made by the end of the tenth calendar year following the year of the participant’s death. This rule will apply to defined contribution, but not defined benefit, plans.

• Prohibits plan loans through credit cards or similar arrangements. This is effective for loans made after the date of enactment.

• Increases penalties for failure to timely file certain plan returns. The SECURE Act significantly increases the penalties for failure to timely file (i) a plan’s Form 5500, (ii) the registration statement for deferred vested benefits (Form 8955-SSA) and (iii) the notification of certain changes in a plan’s registration information. The SECURE Act also increases penalties for failing to timely provide a required withholding notice.

• Permits penalty-free withdrawals for birth or adoption. The SECURE Act allows penalty-free withdrawals from defined contribution plans of up to $5,000 within one year of the birth or adoption of a child to help cover related expenses. Under certain conditions, plans may allow such distributions to be repaid to the plan.

• Modifies rules related to the treatment of 403(b) custodial accounts upon termination. The SECURE Act directs the Secretary of Treasury to issue guidance that will provide that, if an employer terminates a 403(b) custodial account, the account can be distributed in-kind to a participant or beneficiary. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out.

Clarifies that employees of certain church-related organizations may be covered under a 403(b) plan that consists of a retirement income account.

Health and Welfare Changes

Lastly, the Act includes a few significant changes affecting health and welfare plans:

• Repeals the Medical Device Tax. The Act eliminates the medical device tax, a 2.3% excise tax on certain devices such as pacemakers, which was part of the Affordable Cart Act (ACA).

• Repeals the Health Insurance Providers Tax. The Act eliminates the annual health insurance tax (HIT) on insurers of fully insured plans that was part of ACA.

• Repeals the Cadillac Tax. The Act eliminates the excise tax on high-cost employer-sponsored health coverage (the “Cadillac tax”) enacted as part of ACA, but continually delayed.