The SECURE Act: Top 3 Issues to Consider Now
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.
1: Increases to Permissible Enrollment and Automatic Increase Percentages
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:
- First, the maximum automatic increase percentage is changed from 10% to 15%.
- Second, despite the increase to 15%, participants may not be initially automatically enrolled at more than 10% of eligible compensation and, if enrolled at 10%, their enrollment percentage cannot be increased until after the full plan year following the date their first automatic contribution is made to the plan.2
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:
- The other safe harbor requirements – vesting, employer contributions, and uniformity – have not changed.Of these requirements, administration of the uniformity requirement will be the most challenging if a mid-year change is made.
- Any mid-year change must satisfy the notice requirements and restrictions set forth in IRS Notice 2016-16.
2: New In-Service Qualified Birth or Adoption Distribution
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:
- 10% early withdrawal penalty does not apply
- Distribution is not treated as an eligible rollover distribution, so 20% withholding does not apply
- $5,000 limit is per person, not per family – so spouses participating in the same plan may each take $5,000 –but does apply across all controlled group plans
- Distribution can be repaid to the plan or an IRA and the repayment will be treated as nontaxable
At this point, we advise plan sponsors to note the following:
- Clients are reporting that employees are actively seeking information about this new distribution right.Therefore, consider whether to incorporate this feature into your plan and, if so, reach out to your service providers to inquire about a reasonable implementation timeline.
- Stay tuned, as more guidance is needed in this area, including whether the repayment is a permissible or mandatory provision (e.g., if plans permit the distribution, are they required to permit the repayment?)
3: Administration of New RMD Rules
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:
- Changes to the manner of distribution when participants die before receiving their entire interest.4 This change is effective for distributions with respect to participants who die on or after January 1, 2020 (some delayed effective dates apply). This change only applies to defined contribution plans. Here’s a snapshot:
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.
- Increasing the age used for purposes of determining the required beginning date for a terminated employee from age 70½ to age 72.7 Under this change, distributions to participants who have terminated from employment and have not turned 70½ as of January 1, 2020, do not need to start until the April 1 following the year they attain 72 (rather than 70½). This change applies to all plans subject to Code Section 401(a)(9).
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.
