SECURE Act Offers Numerous Changes Intended to Enhance Retirement Plan Savings

By Jason W. Douthit - Bullard Law

December 26, 2019

On Friday, December 20, President Trump signed into law the end-of-year appropriations (spending) bill that includes the much lauded, bipartisan-supported SECURE Act of 2019.  In case you are wondering, SECURE is an acronym that stands for Setting Every Community Up for Retirement Enhancement.  The Act contains several provisions that are intended to increase retirement savings and security.

Some of the more interesting (in my opinion) SECURE Act provisions that will impact employer-sponsored retirement plans, including 401(k), 403(b), 457(b), and pension plans, are:

Increased Cap on Auto Enrollment Escalation.  Currently, 401(k) plans may include provisions that automatically set up employees to make contributions at a given rate unless the employee opts out.  The maximum automatic deferral rate is 10 percent.  Under the SECURE Act, the maximum rate is being increased to 15 percent.  The increase may be made effective for plan years beginning January 1, 2020 or later.
 
401(k) Safe Harbor Requirements.  The SECURE Act eliminates the safe harbor notice requirement and allows a plan to be amended to include safe harbor contributions for a given plan year if the plan is amended to permit such contributions by the end of the following plan year and the safe harbor contribution is at least 4%.

Fiduciary Safe Harbor for Selecting Annuity Providers.  There has been a big push within the retirement plan industry to offer 401(k) participants the option to invest in annuity contracts that will guarantee income throughout retirement.  However, 401(k) plan fiduciaries have been hesitant to offer such contracts out of fear of fiduciary liability.  The SECURE Act offers fiduciaries a safe harbor method for selecting annuity providers, which should result in an increase in annuity products offered for 401(k) plan investment.

Treasury Regulations Regarding Custodial Accounts for Terminated 403(b) Plans.  The Treasury Department is directed to issue guidance regarding in-kind distributions of custodial accounts under terminated 403(b) plans.

Part-Time Employees Participating in 401(k) Plans. Prior to the SECURE Act, employers could limit participation in their 401(k) plans to employees who had been employed for at least one year and had worked at least 1,000 hours during the year. Under the SECURE Act, employees who have worked at least 500 hours each year for three years would generally be eligible to participate in the Plan.

Penalty-Free Withdrawals for Childbirth and Adoption Expenses.  Withdrawals from 401(k), 403(b) and pension plans by employees prior to age 59 ½ (unless rolled over into another retirement plan) are typically subject to a 10% excise tax.  Under the SECURE Act, employees may withdraw up to $5,000 to pay for expenses related to qualified births and adoptions without penalty.

Required Minimum Distributions Beginning Date.  In general, retirement plan distributions must begin by the time a retired employee reaches 70.5 years of age (technically, the first payment is due by April 1 of the year following the year in which that age is attained).  Under the SECURE Act, the age at which the first required minimum distribution is triggered is changing from 70.5 to 72 years.

Deadline for Adopting a New Plan.  In prior years, employers who wished to adopt a new retirement plan (i.e., execute the documents required to create the new plan) typically had to do it by the end of their current fiscal year in order to receive a deduction for contributions to the plan for that fiscal year.  Under the SECURE Act, employers may adopt the plan up until the tax filing deadline (with extension if obtained) for the fiscal year and still receive a deduction for contributions to the plan for that fiscal year.

Multiple Employer Plans—Eased Compliance Requirements for 401(k) Plans.  The costs associated with starting and administering a 401(k) plan can be prohibitive for many employers.  Moreover, many employers are intimidated by the administrative burdens associated with sponsoring a retirement plan.  The SECURE Act will enable employers to join a pooled 401(k) plan that is administered by a single third party.  Due to economies of scale, multiple employer 401(k) plans are expected to reduce the costs and burdens otherwise experienced by smaller employers who offer single employer 401(k) plans to their employees.  

If you have any questions about the SECURE Act and your retirement plan, please contact Jason Douthit or Kara Backus at Bullard Law.