Comprehensive Retirement Plan Reform Law
It has been more than a decade since we have seen comprehensive pension plan reform, but such legislation has just been passed by Congress. It is expected to be signed into law by President Trump today as part of the budget bill funding the federal government for the remainder of the fiscal year. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) was added as Division O to the Further Consolidated Appropriations Act, 2020 (H.R. 1865). Of critical importance to plan sponsors: The effective dates in the original bill were left unchanged. As a result, many of the new law’s provisions will become effective on January 1, 2020.
SECURE enjoyed bipartisan support, having passed the House of Representatives earlier this year on a vote of 417–3. It was expected that the Senate would quickly approve the bill through an expedited process that would have required the unanimous consent of all senators. Several objected, and the bill languished until now. Adding it to the budget bill, which was considered “must-pass” legislation, was likely the last chance it had to be enacted in this Congress.
New Rules for 401(k) Plans
SECURE makes a number of changes to the 401(k) plan rules, effective for plan years beginning after December 31, 2019. They include:
Pooled Employer Plans
A good portion of the SECURE Act is intended to increase coverage of American workers in employer-sponsored savings arrangements. SECURE provides for a new type of multiple employer plan called a Pooled Employer Plan (PEP). PEPs have been promoted as a way smaller employers can pool together to participate in a single plan and save on administrative costs. A PEP has a single plan document, a single Form 5500 filing and a single independent plan audit. A PEP should also have a larger pool of assets, allowing for institutional mutual fund share classes which have lower expense ratios.
The PEP must be sponsored by a Pooled Plan Provider (PPP), which is likely to be a financial services company, third-party administrator, insurance company, recordkeeper, or similar entity. The PPP must serve as the ERISA section 3(16) plan administrator, as well as the named fiduciary for the plan. It is expected that many PEPs will retain an ERISA section 3(38) investment advisor who would be responsible for selecting and monitoring the plan’s investment menu. Consequently, the participating employers would only have fiduciary responsibility for prudently selecting and monitoring the PPP. This is expected to be very appealing to smaller employers who are concerned about the potential for fiduciary responsibility and liability. The PEP provisions are delayed a year and will be effective for plan years beginning after December 31, 2020. The IRS and DOL are expected to provide guidance in the coming year.
An important change in the bill intended to increase coverage is a new mandate to cover long-term part-time employees. Under SECURE, if an employer maintains a 401(k) plan, then any part-time employee who has not otherwise satisfied the plan’s eligibility conditions must be permitted to participate and make elective contributions if the employee has completed 3 consecutive 12-month periods of employment and was credited with at least 500 hours of service in each of those periods. No employer contribution (including top-heavy minimum contributions) would be required until the employee has satisfied the plan’s normal eligibility requirements. This new mandate is effective for plan years beginning after December 31, 2020. Twelve-month periods of service before January 1, 2021, however, need not be counted, which will further delay the date by which a part-timer might first enter a plan under this new mandate.
Tax Credit for New Plans
Another change in the law, intended to increase the number of workplace retirement plans, is a significant increase in the tax credit given to small employers who set up a new plan. Under SECURE, the tax credit for the first 3 years after adopting a new plan will equal 50% of the plan’s startup costs up to the greater of $500 or $250, multiplied by the number of NHCEs eligible to participate up to a maximum of $5,000. This is a substantial increase from the current limit of 50% of the startup costs up to a maximum credit of $500 per year for the first 3 plan years. An additional small employer tax credit equal to $500 per year for up to 3 years is available if the plan sponsor adds auto enrollment to an existing plan or if it is included in a new plan. A “small” employer for purposes of the credit is defined as one who, in the preceding tax year, had no more than 100 employees receiving at least $5,000 in compensation. These changes are effective for taxable years beginning after December 31, 2019.
Stretch IRAs Restricted
The new law also eliminates the so-called stretch IRA (which also applies to qualified plans and 403(b) plans). Under current law, after the death of a plan participant or IRA owner, a non-spouse beneficiary is permitted to stretch the required minimum distributions over the beneficiary’s life based on his or her life expectancy. Under the new law, all amounts held by the plan or IRA must be distributed within 10 years of the plan participant’s or IRA owner’s death. An exception to the 10-year distribution rule is provided for an “eligible beneficiary,” which includes a surviving spouse, minor child, disabled or chronically ill individual, or any other beneficiary who is no more than 10 years younger than the participant or IRA owner. An exception is also provided for certain binding annuities in effect on the date of enactment. These new distribution rules will generally apply with respect to participants or IRA owners who die after December 31, 2019. However, government plans will apply the new rules to employees dying after December 31, 2021, and collectively bargained plans will apply them to employees dying in calendar years beginning after the expiration of the current collective bargaining agreement or December 31, 2021, if earlier.
Additional SECURE Provisions
Plan Amendment Timing
When SECURE was added to the budget bill, a special amendment period was included in the bill. This will allow plans to operate in accordance with the new law without having to immediately amend the plan document. Most plans will have until the end of the 2022 plan year to adopt conforming amendments.