SECURE ACT: How It Impacts Retirement Plans

By: Kiowa Speck, AIF®, PPC®, Senior Retirement Consultant

On December 20th, President Trump signed into law H.R.1865 – Further Consolidation Appropriations Act, 2020, which included as Division O, the Setting Every Community Up for Retirement Enhancement (SECURE) Act.  The SECURE Act is the most significant retirement policy legislation to impact the industry since the Pension Protection Act in 2006. With the intent to bolster retirement savings, this Act makes several changes to the laws that govern retirement plans, and includes several provisions that will significantly impact the retirement industry.  So, how does the SECURE Act effect your retirement plan?  A summary of several of these key provisions are provided below in the order of the sections in the bill.

TITLE I—EXPANDING AND PRESERVING RETIREMENT SAVINGS

Key SECURE Act provision summary:

Sec. 101 – Multiple Employer Plans / Pooled Employer Plans Permits two or more unrelated employers to become part of a pooled employer plan (PEP). This creates a new Multiple Employer Plan (MEP) that would be expected to allow smaller employers to pool together in a single plan in an effort to save administrative costs.  Under the Act, the qualification of the MEP will not be affected by a “bad apple”, if certain procedures are followed. (Effective for plan years beginning after Dec. 31, 2020)

Sec. 102 – Increase in 10 percent cap for automatic enrollment Safe Harbor after 1st plan year For Safe Harbor Qualified Automatic Contribution Arrangement (QACA) plans, the maximum auto enrollment contribution under auto escalation will increase from 10% in a participants first year of participation to 15% in subsequent years. (Effective for plan years beginning after Dec. 31, 2019)

Sec. 103 – Rules relating to election of Safe Harbor 401(k) status – The Act eliminates the annual notice requirement for nonelective safe harbor plans. The Act also permits a 401(k) plan to elect into the 3% nonelective safe harbor at any time up until 30 days before the close of the plan year. (Notice requirements for safe harbor plans that provide matching contributions were not changed.) (Effective for plan years beginning after Dec. 31, 2019)

Sec. 104 & 105 – Increase in credit limitation for small employer pension plan startup costs and automatic enrollment credit Increases the current $500 tax credit cap (for the plan’s first three years) to the greater of (1) $500 or (2) the lesser of (a) $5,000 or (b) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan. Small employers that adopt automatic enrollment provisions are eligible for an additional $500 credit for three years regardless of when the automatic enrollment provisions are adopted. (Effective for tax years beginning after Dec. 31, 2019)

Sec. 106 – Certain taxable non-tuition fellowship and stipend payments treated as compensation for IRA purposes The term ‘compensation’ now includes any amount which is included in the individual’s gross income and paid to the individual to aid the individual in the pursuit of graduate or postdoctoral study. (Effective for tax years beginning after Dec. 31, 2019)

Sec. 107 – Repeal of maximum age for traditional IRA contributions Eliminates the age restriction on contributions to a traditional IRA.  (Effective for tax after Dec. 31, 2019)

Sec. 108 – Qualified plans prohibited from making loans through credit cards and similar arrangements Prohibits the distribution of plan loans via credit card or similar programs. (Effective immediately for loans after Dec. 20, 2019)

Sec. 109 – Portability of lifetime income options – Permits the transfer or distribution of the lifetime income investment to potentially avoid some or all of the penalties, charges, and fees. Under the Act, participants who invest in lifetime income investment options in their plans, and who are faced with a plan-level decision to eliminate the option, may take a distribution of the investment without regard to any other plan-level restrictions on in-service distributions (such as a prohibition on in-service distributions before age 59½). The distribution would have to be in the form of a direct transfer to another retirement plan (such as an IRA or another qualified plan) or a distribution of an annuity contract. (Effective for plan years beginning after Dec. 31, 2019)

Sec. 110 – Treatment of custodial accounts on termination of section 403(b) plans – Requires the Secretary of Treasury to issue guidance on the treatment of custodial accounts upon a 403(b) plan termination.  Places custodial accounts on par with the annuity contracts which should help to simplify plan terminations. Once issued, the guidance will be retroactive for tax years beginning after December 31, 2008. The Secretary of Treasury has committed to issuing guidance not later than six months from December 20, 2019.

Sec. 111 – Clarification of retirement income account rules relating to church-controlled organizations Clarifies individuals that may be covered by plans maintained by church-controlled organizations. (Effective immediately for plan years beginning on, or after, Dec. 20, 2019)

Sec. 112 – Qualified cash or deferred arrangements must allow long-term, part-time employees to participate Requires that 401(k) plans permit participation by long-term, part-time employees who work at least 500 hours in three consecutive 12-month periods (and have reached age 21). The Act provides for nondiscrimination and top-heavy testing relief, as no employer contributions are required for these employees. (Effective for plan years beginning after Dec. 31, 2020)

Sec. 113 – Penalty-free withdrawals for individuals in case of birth or adoption – Permits a penalty-free withdrawal of up to $5,000 from a plan following the birth or legal adoption of a child.  This new rule applies to 401(k) plans, 403(b) plans, government 457(b) plans, and IRAs. (Does not apply to defined benefit plans.)  The Act also permits the repayment of the withdrawal to the retirement account. (Effective for distributions made after Dec. 31, 2019)

Sec. 114 – Increase in age for required minimum distributions – With the increase in life expectancies, the Act adjusts the required minimum distribution (RMD) age from 70½ to 72. Effective for individuals turning 70½ after December 31, 2019.

Sec. 115 – Special rules for minimum funding standards for community newspaper plans – permits certain frozen “community newspaper plans” to elect to apply alternative funding rules to the plan and other plans sponsored by members of the controlled group. (Effective for plan years ending after Dec. 31, 2017)

Sec. 116 – Treat difficulty of care payments as compensation for determining contribution limitations – Permits qualified foster care payments excludable under the Code section 131 “difficulty of care” exemption to be treated as compensation for purposes of making contributions to a defined contribution plan (as after-tax contributions) or IRA. (Applies to IRA contributions after Dec. 20, 2019.  415(c) changes shall apply to plan years beginning after December 31, 2015)

Other SECURE Act provisions include: 

TITLE II—ADMINISTRATIVE IMPROVEMENTS

Sec. 201. Plan adopted by filing due date for year may be treated as in effect as of close of year.
Sec. 202. Combined annual report for group of plans.
Sec. 203. Disclosure regarding lifetime income.
Sec. 204. Fiduciary safe harbor for selection of lifetime income provider.
Sec. 205. Modification of nondiscrimination rules to protect older, longer service participants.
Sec. 206. Modification of PBGC premiums for CSEC plans.

TITLE III—OTHER BENEFITS

Sec. 301. Benefits provided to volunteer firefighters and emergency medical responders.
Sec. 302. Expansion of section 529 plans.

TITLE IV—REVENUE PROVISIONS

Sec. 401. Modification of required distribution rules for designated beneficiaries.
Sec. 402. Increase in penalty for failure to file.
Sec. 403. Increased penalties for failure to file retirement plan returns.
Sec. 404. Increase information sharing to administer excise taxes.

TITLE V—TAX RELIEF FOR CERTAIN CHILDREN

Sec. 501. Modification of rules relating to the taxation of unearned income of certain children.

TITLE VI—ADMINISTRATIVE PROVISIONS

Sec. 601. Provisions relating to plan amendments.

In total, the legislation includes nearly 30 provisions, many of which are designed to make it easier for small- and mid-sized businesses to provide a retirement plan and for employees to save for retirement. In addition to the SECURE Act provisions, the appropriations act includes several other measures affecting retirement plans, including disaster-related plan withdrawals. 

If you’re looking to dive deeper into this Act, please select any of the above provision titles or quick links, and you will be taken directly to the corresponding SECURE Act section. If you have any questions, please contact Kiowa Speck, AIF®, PPC®, Senior Retirement Consultant, at kspeck@enzafinancial.com or by phone at 216-393-1816.