The
SECURE Act, signed into law on Dec. 20, 2019, contains various provisions that may
impact large employer-sponsored retirement plans. In effect, the act will
usher in the need for plan sponsors to reevaluate plan features, and some
of the act’s provisions will require plan sponsors to amend their plans and
administrative processes. The following list summarizes the changes that
could apply to large employer-sponsored 401(k) and other retirement plans.
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Increase in QACA Auto Escalation Cap: Effective for plan years beginning after Dec. 31, 2019, the
act increases the cap on qualified automatic contribution arrangement
(QACA) 401(k) deferrals from 10 to 15 percent. Employers that use the
QACA safe harbor to avoid nondiscrimination testing may (but are not
required to) increase the cap on automatic enrollment deferrals under
their plans.
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401(k) Nonelective Contribution Safe Harbor: Effective for plan years beginning after Dec. 31, 2019, the act
simplifies the 401(k) safe harbor for nondiscrimination testing by: (i)
eliminating the safe harbor notice requirement that previously applied
to the nonelective contribution safe harbor (going forward, the notice
will only apply to the matching contribution safe harbor); and (ii) as
long as the plan did not provide for safe harbor matching contributions
during the year, permitting a plan to be amended to use the nonelective
contribution safe harbor for a plan year at any time before the later
of the 30th day before the close of the plan year, or, as long as the
nonelective contribution is at least four percent (rather than at least
three percent), at any time before the last day for distributing excess
contributions for the plan year. In light of this change, companies
using the nonelective contribution safe harbor to satisfy the 401(k)
nondiscrimination test should review their notice procedures.
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Prohibition on Credit Card Loans: Effective as of Dec. 20, 2019, qualified 401(k) plans are prohibited
from making participant loans through the use of credit cards or other
similar arrangements.
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Lifetime Income Options: The act does not require 401(k) or other individual account plans to
offer “lifetime income options” (annuities), but effective for plan
years beginning after Dec. 31, 2019, the act makes it easier for such
plans to provide for such options by:
o Creating “portability” for lifetime income options that can no longer be
held as an investment option under a 401(k) or other individual account
plan by allowing the direct rollover of such options to another retirement
plan or IRA or by allowing such options to be distributed in the form of a
qualified annuity contract purchased from an insurance company, and
o Creating a fiduciary safe harbor for the selection of an insurance
company to provide insurance contracts for annuities under 401(k) and other
individual account plans (similar to the safe harbor that currently exists
for selection of annuity providers under defined benefit plans).
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Lifetime Income Disclosure: Effective 12 months after the Department of Labor provides final
rules, 401(k) and other individual account plans will be required to
provide as part of each participant’s quarterly pension benefit
statement an estimate of the monthly amount a participant could receive
as a single or joint lifetime annuity based on their current account
balance.
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Long-term Part-time Employee Participation: Effective for plan years beginning after Dec. 31, 2020, the act
requires 401(k) plans to treat long-term part-time employees who work
at least 500, but less than 1,000, hours within a 12-month period for
three consecutive 12-month periods as eligible to participate. Notably,
plan sponsors are not required to make contributions, matching or
otherwise, and this class of participants is not considered for the
sake of nondiscrimination and top-heavy testing.
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Withdrawals for Adoption or Birth Expenses: Effective for distributions made after Dec. 31, 2019, the act allows
(but does not require) plans to let participants withdraw up to $5,000
for qualified adoption and/or birth expenses without paying any early
withdrawal penalty. The distributions would be taxable to the
participant, but the act allows participants to repay the distributions
to another qualified plan or IRA, in which case the distribution and
repayment is treated as an indirect rollover. Notably, a plan may
permit such distribution even if it otherwise prohibited in-service
withdrawals.
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Modifications to Required Minimum Distribution (RMD) Rules:
o Later Age for Required Minimum Distributions: Effective for
individuals turning 70½ after Dec. 31, 2019, the act allows qualified plans
(both 401(k) and pension plans) to raise the starting age for required
minimum distributions from 70½ to 72 years old.
o RMDs for Designated Beneficiaries: Effective with respect to
participants who die after 2019, the act makes certain changes to the
required minimum distribution requirements applicable to designated
beneficiaries of participants who die before commencement of their benefits
under qualified 401(k) and pension plans. A designated beneficiary who is
not an “eligible” designated beneficiary must begin taking distributions
within 10 years of the decedent’s death (instead of five years under the
current rule). In addition, the class of “eligible” designated
beneficiaries who are exempt from the 10-year rule is limited to include
only spouses, minor children and certain other types of designated
beneficiaries of the participant. Finally, if a designated beneficiary dies
before distribution of the benefit is completed, the distribution must be
completed within 10 years to the designated beneficiary’s beneficiary,
without exception. Employers will generally have until the last day of the
plan year beginning after Dec. 31, 2021 to amend plans to reflect these
requirements, as long as the plan is operated consistent with the
requirements in the meantime.
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Modification of Nondiscrimination Rules for
Frozen/Grandfathered Defined Benefit Plans: Effective Dec. 20, 2019, the act makes it
easier for frozen/grandfathered defined benefit plans to satisfy
applicable nondiscrimination, coverage testing and participation
requirements. The act provides that a defined benefit plan which
provides benefits, rights or features to a closed class of participants
will not fail nondiscrimination requirements if the class was closed
before April 5, 2017; the plan satisfied such requirements for the plan
year in which the class was closed and the two succeeding plan years;
and no further amendments are made to the class or the benefits
provided to the class that discriminate in favor of highly compensated
employees.
Benefits provided to closed classes under defined benefit plans can
also be aggregated with defined contribution plans for
nondiscrimination and coverage testing purposes if the plan satisfies
the conditions above or, even if the class was not closed before April
5, 2017, the plan was in effect for at least five years before the
class was closed and there was not a substantial increase in coverage
or benefits under the plan during the five-year period.
In addition, benefits under a 401(k) or other defined contribution plan
that provide “make-whole” benefits (including both employer
non-elective contributions and matching contributions) to a closed
class of defined benefit plan participants may be tested on a
“benefits” basis if requirements similar to the above are satisfied.
Closed classes in defined benefit plans that satisfy these requirements
will also be deemed to have satisfied the minimum participation
requirements in Code section 401(a)(26). Plan sponsors may elect to
apply the above amendments retroactively to plan years beginning after
Dec. 31, 2013.
For further information, please contact any of the authors of this article
or any other member of the McGuireWoods
employee benefits team.
