The SECURE Act (Setting Every Community Up for Retirement Enhancement Act) was signed into law in late 2019 and is the most significant legislation affecting employer-sponsored retirement plans in many years. The SECURE Act is designed to increase employee access to tax-advantaged retirement accounts, help participants access retirement funds in times of need prior to retirement, and change when participants and beneficiaries must take distributions from qualified retirement plans, including IRAs. Employers have time to make required amendments to plans but need to be familiar with and get ready for the various required and discretionary changes made by the SECURE Act.
Long-term part-time employee participation in 401(k) plans: Employers have generally been allowed to exclude part-time employees from 401(k) plans. However, under the SECURE Act, 401(k) plans will need to allow long-term, part-time employees to make pre-tax deferrals from their compensation to their 401(k) accounts. As soon as January 1, 2024, an employee who is not otherwise eligible for the plan but who has completed three consecutive years with at least 500 hours of service each year will be allowed to make 401(k) deferrals. However, such part-time employees are not required to receive any employer matching or profit-sharing contributions that may be provided for full-time employees. This new rule will apply to plan years that begin after December 31, 2020, and 12-month periods of service beginning before January 1, 2021, are not considered for eligibility purposes.
Penalty-free withdrawals for birth or adoption of a child: Starting in 2020, plan distributions up to $5,000 that are used to pay for expenses related to the birth or adoption of a child are free of the 10 percent early withdrawal penalty, but will still be subject to ordinary income taxes. This is allowed while the employee is still working, and the $5,000 amount applies on an individual basis.
Required minimum distribution age raised from 70½ to 72: For decades, individuals were generally required to begin taking required minimum distributions (RMDs) from their retirement accounts (including IRAs) by April 1 of the year following the later of the year they reached age 70½ or terminated employment. Under the SECURE Act, for individuals who attain age 70½ on or after January 1, 2020, the required beginning date will be based on the attainment of age 72, rather than age 70½. Plans will need to carefully track which participants are subject to the prior age 70½ rule and which are subject to the new age 72 rule.
Many “stretch” RMDs for beneficiaries will be eliminated: For plan participants or IRA owners who passed away before 2020, individual beneficiaries were generally allowed to “stretch out” the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life expectancy. However, the SECURE Act eliminates the “stretch” strategy for distributions to most non-spouse designated beneficiaries, which are generally now required to be distributed within ten years following the plan participant’s or IRA owner’s death. Exceptions to this new 10-year rule are allowed for distributions to certain “eligible designated beneficiaries” such as a surviving spouse, a surviving child who has not reached majority, a chronically ill or disabled individual, and any other individual who is not more than 10 years younger than the plan participant or IRA owner.
Multiple Employer Plans now easier to form: A multiple employer plan (MEP) is a single plan maintained by two or more non-union unrelated employers. Starting in 2021, new rules will reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services. For example, prior to the SECURE Act, employers participating in a MEP had to have a “commonality of interest” and meet other requirements. The Act allows so-called “Open MEPs” called “pooled employer plans” (PEPs) — multiple employer defined contribution plans without a commonality of interest. Unlike the prior law, these may be maintained by financial service firms, record keepers and third-party administrators. This may result in significant changes to how small employers establish and maintain employee retirement plans.
Plan sponsors should consult with their legal counsel and advisors to determine how all aspects of the SECURE Act will affect them.
Ryan Curtis (chair), David Heap, Kristi Hill and Haley Carr are attorneys with Fennemore Craig, P.C.’s ERISA and Employee Benefits Practice Group. They assist employee benefit plans, trustees and administrators in complying with important federal laws, including ERISA, the Internal Revenue Code and the Affordable Care Act. They assist plans with complex plan corrections and represent plan sponsors before regulating governmental entities, including defending plan sponsors in IRS audits and Department of Labor investigations.