2020 – New changes for employer-sponsored retirement plans – Overview of the SECURE Act

January 3, 2020

The Secure Act, (the Setting Every Community Up for Retirement Enhancement Act of 2019) which became law in December 2019, implements the largest number of pension changes for employer-sponsored benefit plans in the last ten years. The changes touch various parts of the tax code impacting employers and plan sponsors. We will break the changes into ones that are important now and changes that will be important later.

Changes effective in 2020 – What’s important now…

1. Revised RMD rules

The required minimum distribution (RMD) rules under prior law required a participant with an account balance in a qualified plan or IRA to start taking taxable distributions soon after attaining age 70 1/2. To reflect increased life expectancy and strengthen retirement savings, the SECURE Act pushes the age at which participants/retirees are required to start drawing on their plan savings to age 72. Non-owners can generally delay RMDs until after they actually retire from the company (in the case of qualified plan balances). This change applies to anyone who attains age 70 1/2 after December 31, 2019.

2. Elimination of the “Stretch IRA”

The old provisions on post-death distributions from qualified plan accounts and IRAs allowed a non-spouse beneficiary (like a child) to take taxable distributions from an inherited account over their lifetime. This change eliminates the so-called “stretch IRA” and replaces it with a requirement to distribute the entire inherited account within ten years. The new rule applies to all inherited accounts resulting from deaths after December 31, 2019.

3. Electing Safe Harbor status for current plan year

A “safe harbor” 401(k) plan does not require participant deferral testing. In a plan that qualifies for safe harbor treatment, highly compensated employees/owners may defer up to their statutory limits (in 2020, $19,500 plus $6,500 if age 50 catch-up) without worrying about passing or failing nondiscrimination testing. Before 2020, a plan had to elect safe harbor status before the beginning of a plan year.

Now, for plan years beginning after December 19, 2019, a plan that is not currently safe harbor may elect to be a safe harbor plan by making a three percent nonelective contribution if it’s amended at least 31 days prior to the plan year end (i.e. by December 1, 2020 for a 2020 calendar year plan). Under the new rules, if this deadline is missed, a plan may still elect to be a safe harbor plan with a four percent nonelective contribution by amending prior to the end of the following plan year (i.e. amending the plan required by December 31, 2021 to make the plan safe harbor for 2020).

4. Deadline to adopt a qualified plan extended

Before the SECURE Act, a qualified plan had to be adopted no later than the last day of a company’s tax year if the company wanted to make tax-deductible contributions for that year. Starting with tax years beginning after December 31, 2019 (i.e., calendar tax years ending December 31, 2020), a new qualified plan may be adopted as late as the filing deadline for a company’s tax return. Example: ACME Inc. is a subchapter S corporation with a tax year ending December 31, 2020. ACME Inc. may adopt a qualified plan as late as March 15, 2021 for the 2020 tax year, or September 15, 2021 if on extension!

This is important even if you already have a plan. Assume your currently sponsor a 401(k) plan and the company taxes are on extension for the year ending December 31, 2020. After receiving and reviewing your 2020 data in April of 2021, your Third Party Administer determines that you would benefit from adding a cash balance pension plan in 2020 with its often very favorable contribution structure. The SECURE Act now makes it possible to retroactively adopt the cash balance pension plan and make the more favorable deductible contributions!

5. Increase in the Qualified Automatic Contribution Arrangement (QACA) auto deferral limit to 15%

For 401(k) plans that have adopted a qualified automatic enrollment feature, the SECURE Act increases the maximum permissible default rate from 10% to 15% for plan years beginning after December 31, 2019. This new 15% automatic enrollment maximum default rate can only apply during plan years following the participant’s first year of participation in the plan. Employers who employ these strong savings strategies for their employees may find this increase a welcome change. Of course, they would need to start working with their plan providers to develop systems that can accommodate the new law.

Other Changes effective in 2020…

• A new small employer tax credit is available for adding the automatic enrollment arrangement mentioned above
• An increased tax credit is available for start-up plans
• A plan may allow individuals to take in-service (while being employed) distributions up to $5,000 following the birth or adoption of a child
• Plans that offer specific annuity investments may allow participants to take them as in-service distributions if the plan stops offering annuities as investment options
• Defined benefit plans may allow in-service distributions at age 59 1/2

After 2020, what will be important later…

Pooled Employer Plans, PEP’s, Open Multiple Employer Plans

The idea that has been proposed for quite a few years is now here. It is only allowed for 401(k)-type plans. The driving important concept behind Pooled Employer Plans (PEPs) is that unrelated employers can come together into a single plan to lower individual employer responsibilities and costs, but without sacrificing plan design and features. This provision has potential to change the defined contribution landscape for many years to come. Check back for more information on PEPs as we get closer to the January 1, 2021 effective date for these plans.

CONCLUSION

The new SECURE Act is a new law that presents many areas where a retirement plan sponsor should pro-actively review, potentially amend, and actively communicate to its participants these changes as it pertains to their existing retirement plan. This article covers only some of them. We are currently applying our expert perspective to reviewing our current client’s retirement plans. Contact us today to explore how we can pro-actively walk through the process with your company’s plan.