On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act of 2020, an appropriations law to fund certain federal agencies through September 30, 2020. This law included bipartisan legislation, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, widely considered to be the most significant retirement plan legislation in the U.S. since 2006’s Pension Protection Act.
Here is a high-level summary of select provisions. All are effective as of January 1, 2020, unless otherwise noted.
Annuity Safe Harbor
Despite the Department of Labor (DOL) issuing a safe harbor provision in 2008 for plan sponsors to offer annuities as an in-plan option for defined contribution (DC) plans, the rules still required plan sponsors as fiduciaries to ensure that their selected annuity provider would be financially capable of paying benefits in the future. This uncertainty resulted in few plans including annuities. The new law gives fiduciary protections to plan sponsors that choose an annuity provider in good financial standing with state regulators.
Certain small employers that start a DC plan with automatic enrollment will receive a maximum annual tax credit of $500 for three years.
In the past, plan sponsors with qualified automatic contribution arrangement (QACA) safe harbor plans could use automatic escalation to increase participants’ deferral amounts up to 10% of pay. Under the new law, that maximum is now 15% of pay. (Note: workers can still opt out.)
Contributions to Traditional IRAs
Previously, tax-deferred contributions to traditional IRAs had to end at age 70½, even if the individual was still working. That age limitation is eliminated; contributions can continue as long as there is still wage income. (Note: there have never been age restrictions for Roth IRAs.)
Individuals are required to take a required minimum distribution (RMD) from their tax-deferred retirement account plans (e.g., 401(k) or 403(b) plans, traditional IRAs) as soon as they reach a certain age. Through 2019, that age was 70½. The SECURE Act increases that age to 72.
The distribution of qualified plan loans is no longer allowed through credit cards or similar arrangements.
A 10% penalty exists for workers who take a withdrawal from their qualified retirement plan before age 59½. Now, workers can take an early withdrawal of up to $5,000 from their plan without the 10% penalty, as long as the money is taken within one year of the birth or adoption of a child and the plan sponsor permits it.
Previously, beneficiaries could stretch taxable RMDs over their lifetime. Under the new law, spouse beneficiaries can continue to do this, but non-spouse beneficiaries must take all RMDs by the end of the tenth year after the account owner dies.
A different section of the appropriations law (the Bipartisan American Miners Act of 2019) contains a provision that lowers the permissible age for in-service distributions from a defined benefit pension plan from age 62 to 59½.
Plan administrators will have to tell participants annually in their benefit statements what their account balance would look like as a monthly income stream (e.g., single life or joint and survivor annuity) in addition to their total account balance. The DOL is instructed to determine the assumptions to be used to calculate this stream, and to issue model disclosures. This provision will become effective once the DOL has issued their guidance and models.
The IRS Form 5500 late-filing penalty increases tenfold, from $25 per day up to a maximum of $15,000, to $250 per day up to a maximum of $150,000.
[Related Reading: Investment Management: 6 Things to Know]
New permissible uses for 529 money:
- Registered apprenticeships
- Private elementary, secondary or religious schools
- Student loan repayments (up to $10,000 per person) for the 529 beneficiary and each of their siblings.
This is effective for distributions made after December 31, 2018.
Open Multiple Employer Plans (MEPs) (aka Pooled Employer Plans or PEPs)
Under current law, a retirement plan can be adopted by multiple employers that have a common interest through the MEP’s sponsor (e.g., an association or other type of organization). A new type of plan, promulgated by 2019 regulations, is the association retirement plans (ARP) which will allow unrelated employers in the same industry or geographic region to be a part of the same plan. The SECURE Act allows open MEPs/PEPs, where there does not need to be a connection between the employers. This provision goes into effect January 1, 2021. Note: this type of plan is different from Taft-Hartley collectively-bargained multiemployer plans.
Part-Time Worker Eligibility
Currently, individuals need to work at least 1,000 hours during a calendar year to be eligible to participate in a retirement plan. Beginning in 2021, eligibility to participate is extended to long-term part-time workers who work at least 500 hours annually for three consecutive years. This is effective for plan years beginning after December 31, 2020.
Small-Employer Tax Credit
Previously, small employers with 100 or fewer employees could get a tax credit for starting a qualified plan, a SIMPLE IRA or a SEP, up to a maximum of $500 per year for three years. That maximum limit has been increased to $5,000 per year for three years.
Learn More About the SECURE Act
The SECURE Act contains several other provisions. For more details about the new law, please tune in to the International Foundation webcast, The SECURE Act: What It Means for Your Organization, held live on January 30. Register today!
And watch the Foundation’s Benefits in Transition web page for continuous updates on the SECURE Act and its forthcoming guidance.
Julie Stich, CEBS
Vice President, Content, at the International Foundation
Written by International Foundation of Employee Benefit Plans staff. This does not constitute legal advice. Consult your plan professionals for legal advice.
The latest from Word on Benefits:
- Talking Benefits Podcast: Race, Gender and Social Impacts on Retirement
- PBGC Implements Special Financial Assistance Program for Financially Troubled Multiemployer Pension Plans
- The True Value of Empathetic Leadership
- With an Eye on the Future, Employers Shift Benefit Priorities
- Four Lessons From 2020 Open Enrollment