On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, 2020 (the “Appropriations Act”) that includes the “Setting Every Community Up for Retirement Enhancement Act of 2019” (the “SECURE Act”). The SECURE Act contains 27 provisions which are intended to modernize and expand the availability and effectiveness of retirement plans (including Individual Retirement Accounts or IRAs).
Unfortunately, due to the number of provisions in the SECURE Act, this Article will be limited to provisions with a significant impact on retirement plans and/or IRAs. Unless otherwise stated, the effective date for the provisions described herein will be plan years beginning after December 31, 2019.
A major factor cited for the limited availability of retirement benefits to employees of small employers are the costs associated with establishing and maintaining qualified retirement plans. Section 101 of the SECURE Act permits the establishment of a “pooled employer plans” (i.e., individual account plans established to provide benefits to the employees of two or more employers). Pooled employer plans should be more cost efficient due to a “pooled plan provider” as a named fiduciary/plan administrator who provides most of the administrative and disclosure functions for the plan.
“Pooled employer plans” are a variation of multiple employer plans which are intended to expand the availability of retirement benefits to the employees of small employers. It will be interesting to see whether the “pooled employer plan” approach will significantly increase plan participation among such employees. Due to the numerous issues that will likely arise in implementing pooled employer plans, the effective date for those provisions are plan years beginning after December 31, 2020.
In an attempt to address the previously referenced high costs associated with establishing and maintaining a qualified plan, Sections 104 and 105 of the SECURE Act increase the tax credits available for small employer pension plan start-up costs and adopt a new tax credit for small employer automatic contribution arrangements. See amendment to IRC Section 45E and new IRC Section 45T.
An additional issue adversely effecting retirement security is the relative lack of guaranteed lifetime payout options within the defined contribution regime. Sections 109 and 204 of the SECURE Act are intended to expand the use of lifetime income options under defined contribution plans.
In relevant part, Section 109 defines “lifetime income investments” as a non-uniformly available investment option with a feature which guaranties a minimum level of income annually (or more frequently) for at least the remainder of the life of the employee or the joint life of the employee and the employee’s designated beneficiary. The remainder of Section 109 increases the portability of lifetime income investments by expanding the rules applicable to distributions and transfers of such investments.
Significantly, Section 204 provides a safe harbor under the Employee Retirement Income Security Act (“ERISA”) in connection with the selection of a lifetime income provider. Under this safe harbor, the care, prudence and due diligence requirements of the ERISA Section 404 fiduciary duty rules will be satisfied if the process for the selection of a guaranteed retirement income contract satisfies the elements listed in this Section. While Sections 109 and 204 are not directly coordinated and do not address all the issues that arise with respect to utilizing annuities and similar products in retirement plans, these sections remove a number of impediments to offering lifetime distribution options from retirement plans.
The SECURE Act also includes provisions to address the lengthening of life expectancies with the associated longer working careers. Section 114 of the SECURE Act delays the age at which required minimum distributions (“RMDs”) must begin by raising the starting age from 70 1/2 to 72 (effective for persons turning 70 1/2 after January 1, 2020). In addition, Section 107 of the SECURE Act eliminates the maximum age limitations for making contributions to IRAs.
Unfortunately, in order to generate additional revenues, the SECURE Act contains a provision dealing with the RMDs with respect to inherited retirement plan benefits/IRAs. With respect to distributions arising from deaths occurring after December 31, 2019, Section 401 shortens the distribution period of inherited retirement plan and IRA benefits from the applicable beneficiaries’ life expectancy to 10 years.
This 10 year distribution period is subject to several exceptions (most notably a spouse inheriting retirement benefits still qualifies for distributions over the inheriting spouse’s remaining life expectancy). The 10-year distribution provision has been referred to as the “elimination of the stretch IRA”. A side effect of the shorter distribution period for inherited IRAs may be the need for certain retirees to revisit their estate plans.
Additional SECURE Act sections worth noting in passing include:
(a) Sections 102 and 103 which provide greater flexibility to safe harbor 401(k) plans by permitting a higher automatic enrollment safe harbor (15% rather than 10% after the first plan year) and modifying the disclosure and amendment requirements for non-elective contribution safe harbor plans.
(b) Sections 110 and 111 that clarify (a) the treatment of certain custodial accounts upon the termination of a section 403(b) plan (guidance issued under Section 110 to be retroactive to years beginning after December 31, 2008); and (b) 403(b) plan coverage of persons providing services to church-controlled organizations (effective on enactment of the Appropriations Act).
(c) Section 112 which expands the coverage rules under 401(k) plan for certain part time workers who have completed three consecutive years of working over 500 hours a year (effective for plan years beginning after December 31, 2020);
(d) Section 113 which permits penalty-free withdrawals of up to $5,000 in the case of child birth or adoption;
(e) Section 203 which requires lifetime income disclosures in participant benefit statements (effective 12 months of the release of interim final rules, a model disclosure or the applicable assumption);
(f) Section 205 which codifies relief from the nondiscrimination rules for certain defined benefit plans which have been closed to new participants (effective on date of enactment of the Appropriations Act, but permitting an early election to years beginning after December 31, 2013); and
(g) Sections 402 and 403 which increase the penalties for failure to file certain retirement plan returns (i.e., Form 5500s, registration statements, required notifications of change).
In summary, the SECURE Act contains a laundry list of provisions that should modernize and expand the availability and effectiveness of retirement plans. While a substantial amount of attention has been given to given to the delay in the start of RMDs and the shortening of the distribution period for inherited retirement benefits (inherited IRAs), the introduction of “pooled employer plans” and the removal of certain impediments to lifetime payout options may have the greatest impact.