We are now a few months into 2020 and we should all be feeling more SECURE in our retirement, as a result of the “Setting Every Community Up for Retirement Enhancement Act of 2019” (“SECURE Act”). Below is a brief summary of the key changes that could impact qualified retirement plans, depending on the terms of those plans and the desires of the plan sponsors from a design perspective.
- Change in Required Beginning Date for RMDs for Participants turning 70-½ on or after January 1, 2020
Previously, required minimum distributions (“RMDs”) had to begin upon attainment of age 70-½, unless the individual was still working and was not a 5% or more shareholder of the business. Under the SECURE Act, the required beginning date is pushed out to age of 72 for individuals who turn age 70-½ on or after January 1, 2020. If an individual turned age 70-½ before January 1, 2020, such individual is subject to the old rules and is required to take RMDs for 2020 and later years. This change applies to 401(k) and other defined contribution plans, 403(b) plans and defined benefit plans.
- Life Expectancy Distributions Limited to “Eligible Designated Beneficiaries” for Deaths on or after January 1, 2020
Previously, beneficiaries could elect life expectancy distributions if the participant died before the required beginning date for RMDs (age 70-½ under prior law). Under the SECURE Act, for deaths on or after January 1, 2020, this type of distribution option is available only for “Eligible Designated Beneficiaries”, which includes spouses, children who have not reached the age of majority, individuals who are not more than 10 years younger than the participant, and individuals who are disabled or chronically ill. Plan amounts must be distributed to individuals who are not “Eligible Designated Beneficiaries” based on the 10-year rule (discussed below). For deaths prior to January 1, 2020, the prior rules apply. This change applies to 401(k) and other defined contribution plans.
- Permitted Delay in Complete Distribution of Account When Life Expectancy Option Not Selected (10-year Rule)
Previously, plans had to limit to 5 years the number of years after a participant’s death for a beneficiary to take a complete distribution of the participant’s account (unless a life expectancy distribution was elected). Under the SECURE Act, for participant deaths on or after January 1, 2020, this time period can be extended up to 10 years after the participant’s death (unless a life expectancy distribution is elected for an “Eligible Designated Beneficiary” (described above)). For deaths prior to January 1, 2020, the prior rules apply.
- Expansion of 401(k) Eligibility for Long-Term, Part-Time Employees
Previously, a 401(k) plan could exclude employees from making elective deferrals until they completed a “year of service” which is defined as 1,000 hours of service in a 12-month period. Under the SECURE Act, a 401(k) plan must allow employees with at least 500 hours of service over three (3) consecutive 12-month periods to make elective deferrals. Employers may exclude these long-term part-time employees from non-elective and matching contributions and from all nondiscrimination and top-heavy testing. These changes are effective for plan years beginning after December 31, 2020; however, for purposes of determining whether an employee meets the 3-year/500 hour requirement, years of service beginning before January 1, 2021 are not taken into account. As a result, the earliest a long-term part-time employee would become eligible to make elective deferrals would be January 1, 2024.
- Changes to Safe Harbor 401(k) Plans
- Elimination of Annual Safe Harbor Notice
Previously, if an employer sponsored a 401(k) safe harbor plan, the plan sponsor had to provide employees with a notice of safe harbor status within a reasonable time before the beginning of the plan year. The SECURE Act eliminates this notice requirement for non-elective 401(k) safe harbor plans, effective for plan years beginning after December 31, 2019.. The SECURE Act also allows a 401(k) plan to be retroactively amended to become a non-elective 401(k) safe harbor plan as late as 30 days before the end of the plan year or as late as the end of the following plan year if a non-elective contribution of at least 4% of compensation (rather than 3% of compensation) is provided. This change is effective for plan years beginning after December 31, 2019.
- QACA Safe Harbor Auto-Increase Cap
Previously, a qualified automatic contribution arrangement (QACA) safe harbor 401(k) plan was permitted to automatically include a participant’s elective deferrals up to 10% of compensation. The SECURE Act increases this cap to 15% of compensation, effective for plan years beginning after December 31, 2019.
There are a few other SECURE Act changes that may be worth exploring, such as in-service withdrawals of up to $5,000 for the birth or adoption of a child, which are free from the 10% early withdrawal federal income tax and can be recontributed to the plan in certain circumstances. In addition, defined benefit plans can now permit in-service distributions at age 59-½ instead of age 62.
Third party administrators were required to use good faith efforts to implement the SECURE Act changes operationally by January 1, 2020, while plan sponsors have until December 31, 2022 to execute required amendments to reflect how the qualified plan was administered in operation during this period. If you have any questions on what amendments are required for your qualified plans as a result of the SECURE Act, please reach out to any member of our team.