Federal agencies, including the Internal Revenue Service (IRS) and Department of Labor (DOL), have been busy issuing guidance on some of the more complex provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act since it was signed into law in December 2019.
In the article “SECURE Act Guidance Shines a Helpful Light for Retirement Plans” in the April issue of Benefits Magazine, author Steven E. Grieb, CEBS, ISCEBS-Fellow, reviews the guidance that has been issued affecting defined contribution (DC) plan administration.
Grieb, who is senior compliance counsel at Gallagher, highlights the following areas.
Qualified Birth or Adoption Distributions (QBADS)
The SECURE Act added an optional rule allowing DC plan sponsors to add a new plan distribution provision for participants who have had a birth or adoption event.
Details:
- Available effective for the 2020 plan year
- Participants have a one-year window to take a distribution of up to $5,000 following the date of birth or adoption.
- If offered by their plan, a distribution of up to $5,000 can be taken by each parent, for a total distribution of $10,000.
- Counts as taxable income but not subject to 10% additional tax for participants under age 59½
- Participants must be allowed to recontribute all or a portion of their distribution, but it is unclear when or whether that recontribution right will expire.
Lifetime Income Disclosures
At least one of the quarterly benefit statements that ERISA requires DC plans to provide to plan participants each year must now include a demonstration of the participant’s account balance converted to a stream of lifetime payments.
Details:
- The disclosure must convert the account into both a single life annuity and a 100% joint and survivor annuity (assuming a spouse of the same age as the participant).
- All DC plans must provide the disclosure even if they don’t offer annuity forms of payment.
- The calculation assumes the participant will retire at age 67, and the rate of earnings equals the ten-year constant maturity Treasury securities yield rate.
- Life expectancy must be based on the Internal Revenue Code’s gender-neutral mortality table.
- Plans must begin making these disclosures in 2022.
New Rules for Safe Harbor Plans
There were a number of changes affecting 401(k) plans that contain a designated employer contribution designed to avoid actual deferral percentage (ADP) and actual contribution percentage (ACP) testing. These plans are commonly referred to as safe harbor plans.
Details:
- IRS has clarified the scenarios under which these plans are required to provide annual participant notices.
- Beginning with the 2020 plan year, plan sponsors have until 30 days prior to the plan year to add a 3% nonelective safe harbor (or until the end of the following plan year if the safe harbor nonelective equals at least 4%).
- The guidance also clarifies in which plan years plan sponsors may deduct their contributions.
- The maximum default deferral amount is now 15% for qualified automatic contribution arrangement (QACA) safe harbor nonelective plans. This increase is optional.
Eligibility Rules for Long-Term, Part-Time Employees
Plans must allow part-time employees to become eligible to make elective deferrals to their DC plans (not employer contributions) when the employee completes three consecutive years with at least 500 hours of service in each year.
Details:
- Years prior to 2021 are not counted, which means no long-term, part-time employees will become eligible for deferrals until 2024.
- Plans must begin tracking part-time employees to see whether they reach the 500-hour standard starting with the 2021 plan year.
- If the part-time participant ever becomes eligible for employer contributions, the employer would need to count years prior to 2021 in which the employee worked at least 500 hours in order to determine when the employee becomes vested in those employer contributions. This may be a challenge for employers that lack the appropriate records.
Tax Credits for Small Plans
The tax credit available for small employers (generally fewer than 100 participants) for expenses related to starting a qualified retirement plan was increased. The law also added a new $500 tax credit for small employers that adopt an eligible automatic enrollment arrangement (EACA).
Details:
- Each company participant in the small plan can receive the credit, even if it’s a multiple employer plan (MEP).
- If the company sponsors more than one plan, the three-year tax credit can be taken only when the company first includes an EACA.
Plan Document Amendment Adoption Deadlines
Plans have until the last day of the first plan year beginning on or after January 1, 2022 to adopt any amendments required as part of the SECURE Act changes.
Future Guidance
“Plan administrators should be working now with their service providers to ensure that steps are being taken to comply with all the required SECURE Act changes such as lifetime income disclosures on participant benefit statements,” Grieb writes. “In addition, they should be actively considering whether they would like to add any optional changes, such as QBADs. Plan sponsors should weigh the guidance issued to date by IRS and DOL in taking those necessary steps.”
There are still some outstanding questions that require official comment, so Grieb recommends that plan administrators keep a cautious eye out for additional guidance coming from IRS or DOL that could directly impact their rights or duties relating to their plan responsibilities.
Learn More: Visit the International Foundation Benefits in Transition webpage to follow the latest guidance on a number of emerging employee benefits issues including the SECURE Act.
Kathy Bergstrom, CEBS
Senior Editor, Publications at the International Foundation of Employee Benefit Plans
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