A Guide to the New SECURE Act for Retirement Savings
By Mark Johnson, Ph.D., J.D.
The “Setting Every Community Up for Retirement Enhancement Act” (SECURE) was signed into law on December 20, 2019. The new law represents the most significant changes to 401(k), IRA and other retirement plans in more than a decade.
Allowing people to save longer, coupled with the ability to extend the need to tap into retirement funds, are two key aspects of the new law. Most provisions of the Act took effect on January 1, with the balance becoming effective in 2021. There are 15 different sections within Title I of the Act which will be discussed below.
Title I: Expanding and Preserving Retirement Savings
Section 101: Expand Retirement Savings by Increasing the Auto Enrollment Safe Harbor Cap
Under this provision, the previous 10% qualified automatic contribution arrangement for a retirement plan may now be increased to 15%, except for an employee’s first year of participation.
Section 102: Simplification of Safe Harbor 401(k) Rules
This provision eliminates the safe harbor notice requirement but still enables employees to make or change an election at least once per year. The provision also allows amendments to non-elective status at any time prior to the 30th day before the end of the plan year.
Section 103: Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs
This provision makes it more affordable for small businesses to set up retirement plans. The Act provides smaller employers a start-up retirement plan credit of $250 per non-highly compensated employees who are eligible to participate in a workplace retirement plan. The minimum credit available is $500 and the maximum credit is $5,000.
Moreover, a new era of multiple employer plans (MEPs) is likely underway and not just for small-employers. These MEPs allow unrelated employers to join together to create a single retirement plan for all of their workforces. Such MEPs allow for greater economies of scale, thereby lowering plan costs and possibly reducing employer’s fiduciary liability, depending on the MEP.
It should be noted that these multiple employer plans are not to be confused with multiemployer plans, which are pension plans sponsored by two or more unrelated employers under collective bargaining agreements with one or more unions. Many multiemployer plans are in financial distress.
Section 104: Small Employer Automatic Enrollment Credit
If an employer’s retirement plan includes automatic enrollment, a credit of up to $500 is available to them (the credit is available for 3 years). Further, employers that switch their existing plans to an automatic enrollment system will be eligible for the credit.
Section 105: Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes
This provision does not allow stipends and non-tuition fellowship payments to graduate and postdoctoral students to be treated as compensation nor to be used as the basis for IRA contributions. This provision will allow such students to start saving for retirement and accumulate tax-favored retirement savings.
Section 106: Repeal of Maximum Age for Traditional IRA Contributions
This provision reformed the previous 70 ½ age restriction on IRA contributions and now allows for contributions to be made as long as an employee is still working.
Section 107: Qualified Employer Plans Prohibited from Making Loans through Credit Cards and Other Similar Arrangements
This provision helps preserve retirement savings by prohibiting the distribution of plan loans through credit cards or similar arrangements. This provision ensures that plan loans are not used for routine or small purchases.
Section 108: Portability of Lifetime Income Options
Simply put, if an employee leaves their current employer, they can roll over their lifetime income investment to another 401(k) or IRA. This provision also makes it easier than before for plan sponsors to offer annuities and other lifetime income options to plan participants. Furthermore, the provision provides that 401(k) plan administrators must provide an annual “lifetime disclosure statement” to plan participants. This disclosure statement will show the participant how much money they could get each month if their total 401(k) account balance was used to purchase an annuity.
Section 109: Treatment of Custodial Accounts on Termination of Section 403(b) Plans
Upon guidance from the Treasury, if an employer terminates a 403(b) custodial account, the distribution needed to effectuate the plan termination may be the distribution of an individual custodial account. The individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until paid out.
Section 110: Clarification of Retirement Income Account Rules Relating to Church-Controlled Organizations
This provision clarifies which employees may be covered by retirement plans maintained by church-controlled organizations.
Section 111: Allowing Long-Term Part-Time Workers to Participate in 401(k) Plans
Starting in 2021, this provision will require employers maintaining a 401(k) plan to offer the plan to any employee who has worked more than 1,000 hours in one year, or 500 hours over 3 consecutive years, except in cases of collectively bargained employees.
Section 112: Penalty-Free Withdrawals from Retirement Plans for Individuals in Case of Birth or Adoption
Under this provision, parents may withdraw up to $5,000, penalty-free, from their retirement accounts within a year of birth or adoption for qualified expenses; however, if parents wait longer than a year, they will have to pay a 10% penalty. Furthermore, both parents are each entitled to withdraw $5,000 from their own retirement accounts; a withdrawal is not limited to just one parent. Last, the parents will owe income tax on the withdrawal unless they repay the funds they withdrew.
Section 113: Increase in Age for Required Beginning Date for Mandatory Distributions
Instead of forcing withdrawals (or required minimum distributions – RMDs) upon retired individuals with an IRA or employer-sponsored retirement plan at the age 70 ½, the new provision allows such individuals to be 72 until they must begin to make RMDs.
Furthermore, “stretch” IRAs are eliminated under the Act. Non-spouse IRA beneficiaries can no longer “stretch” RMDs from an inherited account over their own lifetime. Instead, such beneficiaries must receive the IRA funds within 10 years of the IRA owner’s death. There are exceptions to the new 10-year rule for particular non-spouse beneficiaries; including, minors, disabled, chronically ill beneficiaries or beneficiaries that are not more than 10 years younger than the deceased IRA owner.
Section 114: Community Newspapers Pension Funding Relief
This provision provides pension funding relief to community newspaper plan sponsors by increasing the interest rate to calculate those funding obligations to 8%. The provision further provides for an amortization period of 30 years; up from the previously provided 7 years.
Section 115: Treating Excluded Difficulty of Care Payments as Compensation for Determining Retirement Contribution Limitations
This provision will allow home healthcare workers to contribute to a retirement plan or IRA by amending Code sections 415(c) and 408(o) to provide that tax-exempt difficulty of care payments be treated as compensation for calculating the contribution limits to defined contribution plans and IRAs.
There is one provision under the Act which increases the compliance burden for plan sponsors. The SECURE Act provides for an increased daily-penalty in the late, incomplete, or inaccurate filing of an annual Form 5500. The daily-penalty has arisen from $25 to $250, and the maximum penalty has arisen from $15,000 to $150,000 per annual report.
The above summaries are meant to provide a general understanding to Title I of the SECURE Act and do not include all details of each provision. Individuals and corporations should consult with a qualified pension lawyer or financial planner to understand how the SECURE Act will affect their retirement plans.
About Pension and ERISA Expert Mark Johnson
Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP and pension fiduciary liability; retiree medical benefit coverage; third party administrator disputes; individual benefit claims; pension benefits in bankruptcy; long term disability benefits; and cash conversion balances. He can be reached at 817-909-0778 or www.erisa-benefits.com.
ERISA Benefits Consulting, Inc. by Mark Johnson provides benefit consulting and advisory services and does not engage in the practice of law.
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