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The SECURE Act: Ground-Breaking Changes for Retirement Plans

By Randy Cook & Christine Moehl, Employee Benefits & Executive Compensation Attorneys 

Late in 2019, Congress enacted the Setting Every Community Up for Retirement Enhancement Act, popularly known as the SECURE Act. The SECURE Act is one of the most significant pieces of retirement plan legislation in decades. The changes made under the SECURE Act were generally put in place in order to encourage employers to offer retirement plans to their employees, as well as to incentivize employees to save for their own retirement. Below is a summary of some of the major components of the legislation:

  • RMD Age Increased. The age at which required minimum distributions (RMDs) must commence has been raised from age 70-1/2 to age 72. This change applies to individuals who turn age 70-1/2 after December 31, 2019; those who turned 70-1/2 before that date must continue to take their RMDs under the old rules.
  • Post-Death RMDs Accelerated. Under prior rules a non-spouse beneficiary of a retirement plan account or IRA could stretch out their RMDs over their life expectancy. Under the SECURE Act, beginning January 1, 2020, distributions to non-spouse beneficiaries must be completed within 10 years of the death of the participant. Exceptions are made for disabled beneficiaries, beneficiaries who are no more than 10 years younger than the participant, and beneficiaries who are minor children (until they reach majority). Surviving spouse beneficiaries may continue to stretch out RMDs under the old rules.
  • No Maximum Age Limit on IRA Contributions. In recognition of the fact that people are working and living longer, the rule barring individuals over age 70-1/2 from making Individual Retirement Account contributions is eliminated effective January 1, 2020. Participants in 401(k) plans have always been allowed to continue making contributions regardless of age.
  • Penalty-Free Withdrawals for Birth or Adoption. Prior to the SECURE Act, there was no special tax treatment for retirement plan distributions made following the birth or adoption of a child. Effective January 1, 2020, retirement plans are allowed (but probably not required) to permit in-service distributions of up to $5,000 for eligible child care and adoption expenses incurred within one year of birth or adoption. Such distributions are not subject to the 10% early withdrawal penalty and, at the option of the participant, may be repaid to the plan.
  • Penalty-Free Withdrawals for Natural Disasters. Under the SECURE Act, retirement plans may (but are not required to) offer qualified disaster distributions to participants who live in a presidentially-declared disaster area. The distributions are capped at $100,000 per disaster and are exempt from the 10% early distribution penalty tax. Participants who take a qualified disaster distribution may spread the taxes on the distribution over three years and, at the option of the participant, may repay the distribution to the plan within three years.
  • Coverage of Long-Term, Part-Time Employees by 401(k) Plans. Under current rules, employers are allowed to exclude from coverage in their 401(k) plans any employees who work less than 1,000 hours in a 12-month period. Under the SECURE Act, employers who sponsor 401(k) plans must allow employees who work at least 500 hours per year for three consecutive years to begin making salary deferral contributions. These long-term, part-time employees are not required to receive employer contributions to the plan. Employers who sponsor 401(k) plans must start tracking their part-time employees’ hours in 2021, and must start covering these employees in 2024.
  • Changes to Safe Harbor 401(k) Plans. Prior to the SECURE Act, employers who sponsored safe harbor 401(k) plans and who satisfied the safe harbor requirement by making 3% nonelective contributions (as opposed to matching contributions) had to provide an annual Safe Harbor notice to the plan participants at least 30 days before the start of each plan year. Effective January 1, 2020, an annual Safe Harbor notice is only required for 401(k) plans that have a Safe Harbor match. In addition, employers are now permitted to convert their non-Safe Harbor 401(k) plans into Safe Harbor 401(k) Plans after the end of the plan year provided that the Safe Harbor nonelective contribution they make for the prior plan year is at least 4% of compensation.
  • QACA Safe Harbor Auto-Escalation Cap Increase. Prior to the SECURE Act, a qualified automatic contribution arrangement (QACA) was permitted to auto escalate a participant’s deferral election up to 10% of compensation. Effective January 1, 2020, the 10% cap is increased to 15%.
  • Increased Tax Credits for Small Employers. Under the SECURE Act, the tax credit for small employers who adopt a new retirement plan is increased from $500 to up to $5,000 depending on how many non-highly compensated employees are covered under the plan. In addition, the SECURE Act encourages small employers to adopt automatic enrollment in their 401(k) plans by providing a $500 tax credit for the first three years that auto-enrollment is in effect.
  • Retroactive Adoption of New Retirement Plan. Under prior rules, if an employer wanted to adopt a qualified retirement plan for a particular tax year it had until the last day of its tax year to sign plan documents. Under the SECURE Act, the deadline for retroactively adopting a qualified plan is the due date for the employer’s tax return, with extensions.

The SECURE Act provides for an extended remedial amendment period, which means that although plan sponsors must operate their plans in compliance with the mandatory provisions in the SECURE Act immediately, plan documents do not have to be amended for the SECURE Act until the last day of the first plan year that begins on or after January 1, 2022.

 

Randy Cook and Christine Moehl are attorneys in the Employee Benefits & Executive Compensation practice group. Christine is also a member of the Agri-Business, Health and Non-Profit industry groups. The information in this article is not intended to provide legal advice. For professional consultation, please contact Randy at rcook@sglaw.com or Christine at cmoehl@sglaw.com at Saalfeld Griggs PC.  503.399.1070. © 2020 Saalfeld Griggs PC