Hundreds of articles have been published over the last two weeks about the SECURE Act (“Act”), which was signed into law in late December as part of the most recent budget bill. As you are certainly aware by now, the Act updates certain retirement-related Internal Revenue Code requirements. Many of the recent articles focus on some of the “big ticket” changes – like the new rules that require employers to permit long-term part-time employees to make deferrals to a 401(k) plan if they satisfy certain requirements over a three-year period – but many of those rules will not become effective until 2021 and may not have a practical impact on participants until even later. This article outlines the top three issues we think sponsors of defined contribution plans should be thinking about now.
Type of Plan: Code Section 401(k)(13) (QACA) Safe Harbor
Type of Change: Permissible
Effective Date: January 1, 2020
Plan sponsors with Code Section 401(k)(13) (QACA) safe harbor plans (“QACA Plans”) may increase the initial and maximum automatic enrollment percentages starting this year. As a reminder, prior to the SECURE Act, QACA Plans were (i) required to automatically enroll participants at a minimum of 3% and incorporate annual automatic increases up to at least 6%1 and (ii) permitted to automatically enroll participants – initially or as part of an automatic increase feature – to a maximum of 10% of eligible compensation. The Act did not change the minimum requirements – so plans can still enroll participants at 3% and increase to 6% - but it did make two important changes to the permissible maximums:
Since this change was effective January 1, 2020, plan sponsors with QACAs should consider whether and when to make any changes to plan designs. In making these decisions, remember the following:
Type of Plan: 401(a), 403(a), 403(b), and 457(b) government plans
Type of Change: Permissible (we suspect, but Act is unclear on its face)
Effective Date: January 1, 2020
Starting January 1, 2020, plan sponsors may permit participants to withdraw up to $5,000 within one year of a qualifying birth or adoption, even if they are not otherwise eligible for an in-service distribution.3 The following rules will apply to the distributions:
At this point, we advise plan sponsors to note the following:
Type of Plan: See below
Type of Change: Mandatory, though impact depends on design and administration
Effective Date: See below
The SECURE Act made two big changes to the RMD rules:
Type of Beneficiary | Pre-SECURE Act Rule5 | SECURE Act Rule6 |
Non-Designated Beneficiary | The entire interest must be distributed within five years after employee’s death | No change – five-year rule still applies |
Designated Beneficiary who is not an “Eligible Designated Beneficiary” |
May distribute over the life of the designated beneficiary, subject to certain rules and limitations in the calculation of benefits (all Designated Beneficiaries) |
Life expectancy rule is no longer available The entire interest must be distributed within 10 years after employee’s death |
“Eligible Designated Beneficiary” • Spouse • Child not majority age • Disabled (under 72(m)(7)) • Chronically ill (7702B(c)(2)) • Individual who is younger than participant by 10 years or less |
May distribute over the life of the designated beneficiary, subject to certain rules and limitations in the calculation of benefits (all Designated Beneficiaries) |
May distribute over the life of the eligible designated beneficiary; but shifts to 10-year rule when a minor beneficiary reaches majority If eligible designated beneficiary dies before account is distributed, then interest must be distributed to his or her beneficiary within 10 years of eligible designated beneficiary’s death |
If your plan uses the life expectancy rule, then this change will have a practical impact next year (the year following a death that occurs in 2020). If your plan only uses the five-year rule, then this change will not have a practical impact until 2025.
Although neither of these changes will have an immediate impact on plan administration, we recommend considering whether to adopt these new rules (to the extent they are permissive, which is still not entirely clear) and, if so, how that might impact administration and participant communications now. In both cases, we recommend waiting to amend the terms of the plan until additional guidance/model language is provided.
As noted above, the SECURE Act made many other changes that may apply to your retirement plan. Please consult your advisors with questions and stay tuned for additional guidance as it is released.
1 See Regs. Section 1.401(k)-3(j)(2).
2 See SECURE Act Section 102.
3 See SECURE Act Section 113.
4 See SECURE Act Section 401.
5 See Code Section 401(a)(9)(B).
6 See Code Section 401(a)(9)(H).
7 See SECURE Act Section 114.