On December 20, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (The SECURE Act
) as part of a government spending bill. The Act has the potential to impact many facets of the retirement savings landscape.
The Act includes new opportunities for participants to save for retirement. Plan sponsors will also have additional options in plan design; however, they will come with changes in administration of plans including tracking eligible employees and plan testing.
The following is a summary of important SECURE Act provisions:
- Multi-employer and Pooled Employer Plans: The Act provides guidance for the structure of these Multi-Employer plans. This will allow plan sponsors to enter a pooled arrangement, hopefully at a low cost, particularly for small businesses.
- Increasing the Auto-Enrollment Safe Harbor Cap: The Act increases the cap on auto-enrollment and auto-escalation features from 10 to 15 percent of compensation.
- Changes to Safe Harbor elections and some contributions: The Act provides more flexibility for non-elective Safe Harbor contributions, provided the contribution is at least 4% of compensation.
- Increased portability of Lifetime Income Options through use of “qualified plan distribution annuities”: The Act aims to make use of annuity products easier by increasing portability, particularly through the easing of surrender charges and other obstacles facing participants if they leave the plan.
- Allowing long-term part-time employees to participate in 401(k) plans: The Act will allow part-time employees, defined as those with at least 500 hours of service for three consecutive years, to participate in retirement plans.
- Allowing withdrawals from retirement plans for expenses related to a birth or adoption without a penalty: Distributions, up to a maximum of $5,000 will be allowed, without penalty, for expenses related to birth or adoption.
- Increasing the age for beginning Required Mandatory Distributions (RMD): The age for RMDs will increase from 70 ½ to 72.
- Disclosure Regarding Lifetime Income: Plan sponsors will be required to provide a “Lifetime Income Disclosure” estimating a lifetime income stream based on specific criteria.
- Lifetime Annuity Provider Fiduciary Safe Harbor: This provision is designed to enhance lifetime income options for participants. It provides guidance for the due diligence (both upfront and ongoing) for the selection of an annuity provider.
- Increased penalties for non-compliance: Penalties for failing to file Retirement Plan Returns and Notifications of Changes are being increased.
Other less substantive changes which may affect some Plan Sponsors and/or individual retirement savings vehicles:
- Increases to several tax credits for small businesses setting up new 401(k) plans: Provisions apply to both plan setup and automatic enrollment credits.
- Changes to Compensation Rules for IRA contributions: The Act would change compensation definitions for IRA contributions to include stipend and non-tuition fellowship payments. This is specific to post-graduate and doctoral students.
- Repeal of the Maximum Age for traditional IRA contributions: Section 219(d) of the Internal which imposes a maximum age of 70 ½ for IRA contributions will be repealed.
- Changes to nondiscrimination rules: Primarily focused on defined benefit plans and testing across plan types (DB and DC).
As the Department of Labor (DOL) and Internal Revenue Service (IRS) provide more guidance on these provisions, we will continue to provide updates on the impact they will have on both participants and plan sponsors.