The Setting Every Community Up for Retirement Security Act, or the SECURE Act, was approved by Congress as part of a broader 2020 fiscal year appropriations bill, and was signed into law by President Trump on December 20. The most far-reaching retirement legislation passed by Congress since the Pension Protection Act of 2006, the SECURE Act incentivizes employers to offer defined contribution (DC) plans, promotes lifetime income options, and improves retirement plan design and administration. While some of the provisions of the SECURE Act will not go into effect until later years, most changes are effective for taxable years beginning after December 31, 2019.
Among the most significant reforms included in the legislation are provisions that remove barriers to unrelated small businesses and employers to join together and participate in “open” multiple employer plans (MEPs), also referred to as “pooled employer plans” (PEPs). These changes, which will go into effect in 2021, are expected to lower the costs and administrative burdens associated with sponsoring retirement plans for small employers.
The SECURE Act also provides a new tax credit of up to $500 per year for small employers (100 or fewer employees) to offset the startup costs for new 401(k) plans or SIMPLE IRA plans that include automatic enrollment. In addition, the legislation increases tax credits for small employers that offer new retirement plans from $500 per year currently to up to $5,000 per year for the first three years.
For DC plan participants and individual retirement account (IRA) owners, the legislation raises the age at which required minimum distributions must be taken from 70½ to 72. The SECURE Act also repeals the age limit for contributions to IRAs, and requires non-spouse beneficiaries of inherited IRAs and certain other qualified plans to receive their benefits over a period of just 10 years, rather than stretching the required minimum distributions over the beneficiary’s life expectancy.
Moreover, the SECURE Act enhances automatic retirement plan features by permitting DC plan
sponsors to automatically enroll employees in a plan at a 6% rate of salary contribution, up from a limit of 3% currently. The legislation also includes a safe harbor for employers to increase employee contributions to the retirement plan to a maximum of 15% of an employee’s annual pay, up from a current cap of 10%. In addition, the legislation prohibits the distribution of DC plan loans through credit cards or similar arrangements, and provides penalty-free distributions from retirement plans of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.
Whereas under current law 401(k) plan sponsors may exclude part-time employees from participation if the employees do not complete 1,000 hours of service in a year, the SECURE Act requires plan sponsors to allow any part-time employee who has worked at least 500 hours in each of the immediately preceding three consecutive 12 month periods to make elective contributions. However, 401(k) plans will not be required to provide matching or other employer contributions to part-time employees, and special nondiscrimination relief is provided.
The SECURE Act also includes several provisions designed to encourage DC plan sponsors to provide lifetime income options, by, for example, reducing fiduciary exposure for plan sponsors that offer participants annuities within the plan, and allowing DC plans to make direct trustee-to-trustee transfers of lifetime income investments to another retirement plan or IRA. The legislation will further require that retirement plan statements include a lifetime income disclosure at least once a year that estimates how much monthly income participants could expect to receive if their total account balance were used to provide a lifetime income stream.