Who says Congress is too busy with impeachment to legislate. Last week, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted as part of the 2020 Appropriations Legislation that had to be enacted to prevent a government shut down. The President signed the legislation on December 20, 2019. SECURE contains a number of welcomed changes to retirement plan laws. SECURE had previously passed the House by a vote of 417-3 last Summer but then died in the Senate until attached to the must-pass spending bill. The Act contains provisions making it easier for employers to adopt plans and allowing people to keep funds in plans longer, but also has provisions requiring certain part-time employees be allowed to participate in 401(k) plans. Many of these changes are effective next year. Others aren’t effective until plan years beginning after 2020. A prohibition against plans using credit cards to make loans to participants is effective immediately.
Happy New Year! The changes by SECURE that are effective after December 31, 2019 include the following:
Extension of Plan Adoption Date. Beginning next year an employer can adopt a plan by its tax return due date for that year and have it be effective retroactive to the beginning of the plan year. Previously the written plan had to be adopted by the end of the tax year for which it was effective. This change allows employers to close their year and determine if they have the financial resources to adopt the plan.
Increased Tax Credits for Adopting a Plan. For small employers adopting new plans after 2019, the possible tax credit for 50% of the start up costs for the first 3 plan years is increased tenfold from $500 per year to $5,000 annually. Additionally, if a small employer adopts a new plan with automatic enrollment or adds the feature to an existing plan there is another $500 credit available for up to 3 years.
Increase in Age for Required Distributions. SECURE increases the age at which individuals must begin taking distributions from employer plans or IRAs from 70 ½ to age 72.
Elimination of Age Restriction on IRA Contributions. The Act also repeals the prohibition from contributing to a traditional IRA after age 70 ½. By doing so it puts traditional IRAs on the same footing as Roth IRAs that did not have such a restriction.
Penalty-Free Withdrawal for Birth or Adoption. Beginning in 2020, retirement plans can allow for penalty free withdrawals of up to $5,000 for the expenses of giving birth to a child or adopting a child.
Elimination of Beneficiary Stretch. Under current law, upon the death of a participant or IRA owner, a non-spouse beneficiary may elect to stretch the distributions over his or her life expectancy. Beginning next year the entire account balance will have to be distributed within 10 years of the date of death. There is an exception to this rule for surviving spouses, minor children, disabled or chronically ill beneficiaries, and beneficiaries that are not more than 10 years younger than the decedent.
Miscellaneous 401(k) Provisions. Several provisions affect 401(k) plans. These include: eliminating the annual safe harbor notice for non-elective safe harbor plans; allowing traditional 401(k) plans to be amended mid-year to become non-elective safe harbor plans; and the cap on QACA contributions being raised from 10% to 15%.
Wait ’til Next Year! The provisions effective in 2021 include the following:
401(k) Plans to Allow Long-Term Part-Timers to Contribute. For plan years beginning after 2020, 401(k) plans will have to allow any employees who have been credited with at least 500 hours of service for 3 consecutive years to make employee contributions to the plan. Such employees are not required to be eligible for matching or other employer contributions.
PEPs Permitted. SECURE creates a new kind of multiple employer plan (MEP) designed to make it easier for small employers to adopt qualified plans, called a Pooled Employer Plan (PEP). Unlike current MEPs, that require each participating employer file its own Form 5500 return, a PEP need only file one return which means it only needs one financial audit. Additionally, the Act repeals the “one bad apple rule” for PEPs. This means that a qualification failure of one adopting employer will not disqualify the entire PEP.
Conclusion. SECURE is the biggest retirement plan reform legislation since the Pension Protection Act of 2006 and will require guidance from the IRS and DOL to help employers comply. Of course, plans will have to be amended to comply with the new rules. Most plans will have until the end of their 2022 plan year to be amended for the law changes provided they are operated in accordance with the new law when effective. Government plans and collectively bargained plans will have until the end of their 2024 plan year.