On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law. The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers (including for-profit and tax-exempt employers of all sizes). Whether you currently offer your employees a retirement plan (or are planning to do so), you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).
Changes effective immediately.
Some of the SECURE Act provisions are required to be (or can be) operationally implemented immediately by employers who sponsor and maintain tax-qualified retirement plans, such as 401(k) plans, cash balance plans or traditional defined benefit (DB) pension plans, and 403(b) plans. This tax alert focuses attention on those provisions. A separate tax alert will summarize other changes in the law that, while important, are not immediately effective.
- Credit card loans prohibited. Effective December 20, 2019, making new plan loans through any credit card or similar arrangement is prohibited. Any such loans will be treated as taxable distributions.
The new law does not appear to impact any credit card plan loans made before December 20, 2019. So it appears that repayment of such loans could continue in accordance with their terms.
Some plans had allowed such loans as an “on-demand” line of credit that could be used for routine or small purchases. By prohibiting this practice, the SECURE Act confirms that retirement plans are intended to provide retirement (not “rainy day”) savings
- Increased age for required minimum distributions (RMDs). Under prior law, RMDs from tax-qualified retirement plans, 403(b) and 457(b) plans generally had to start no later than April 1 of the calendar year following the later of (i) the year in which an employee attains age 70 ½ or the calendar year in which the employee retires (but 5-percent owners could not use this retirement rule). SECURE changed age 70 ½ to age 72 for RMDs for individuals who attain age 70 ½ after December 31, 2019.
If an individual attained age 70 ½ in 2019 and if they have terminated employment or are a 5-percent owner, RMDs must still begin by April 1, 2020, (and continue annually thereafter) in accordance with prior law.
Similar changes apply to traditional IRAs (without regard to employment status).
Employers should confirm that their plan administrator will immediately update all retirement plan distribution paperwork describing the RMD rules to reflect the new law.
Employees who were expecting to begin RMDs when they reached age 70 ½ in 2020 or later may want to reconsider their options.
- “Stretch” beneficiaries eliminated for defined contribution (DC) plans. Under prior law, if payments to a non-spouse designated beneficiary under a DC plan (including 403(b) plans) began within one year after the participant’s death, such payments could be made ratably over the beneficiary’s life expectancy (i.e., potentially stretched out over decades), but if the payments did not begin by that time, they had to be paid out in full within five years after the participant’s death.
Under the new law, for participant deaths that occur after December 31, 2019, all distributions generally must be paid within 10 years from the date of death. But the new 10-year payout rule does not apply to payments made to the participant’s surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill individual (or trusts for the benefit of such individuals), or any individual who is not more than 10 years younger than the deceased participant, so long as the payments begin within one year after the participant’s death (but for surviving spouses, the payments are not required to begin until the deceased participant would have attained age 72). In addition, if such “eligible designated beneficiary” dies before receiving all payments owed to them, the remaining amount must be paid out within 10 years after the eligible designated beneficiary’s death.
Similar rules apply to IRAs.
Eliminating this “stretch” feature paid for most of the changes in the law made by the SECURE Act.
Since the distributions cannot be stretched over multiple generations, participants might want to change beneficiary designation in many cases.
Plans may not be required to permit all delayed payments that the new law would allow. Rather, SECURE establishes the outer limits of what is permissible with respect to participants who die after December 31, 2019 (with later dates for certain collectively bargained and governmental plans).
The new rules may impact amounts payable to beneficiaries of a participant who has already begun to receive payments but who dies after 2019. The new law may also affect survivor benefit features, including annuity forms and certain installment payments.
IRS guidance is needed to clarify how these new rules work.
- Fiduciary safe harbor. Effective December 20, 2019, DC plan fiduciaries can use a new ERISA fiduciary safe harbor to reduce uncertainties when offering an annuity to plan participants. If plan fiduciaries satisfy the safe harbor, they are deemed to have met ERISA’s prudence standard for selecting an insurance carrier for the DC plan’s annuity option and will not be liable for losses if the insurer cannot satisfy its obligations under the annuity contract.
When an employer selects an annuity provider for its retirement plan, the employer is an ERISA fiduciary, which means that the employer must act solely in the best interests of plan participants and beneficiaries when making its decision.
For DC plans, the new safe harbor clarifies that employers are not required to select the lowest cost contract. Rather, the employer can consider the value, features and benefits of the contract and attributes of the insurer (such as its financial strength) in considering the cost of the annuity contract.
The safe harbor also clarifies that employers are not required to review the appropriateness of the annuity after the contract has been purchased.
- The new safe harbor does not apply to cash balance or other DB plans. Nondiscrimination testing relief for closed DB plans. The SECURE Act included long-awaited nondiscrimination testing relief for DB plans that are closed to new participants. The relief applies to plans that were closed as of April 5, 2017, or that have been in operation but have not made any increases to the coverage or value of benefits for the closed class for five years before the freeze can now meet nondiscrimination, minimum coverage, and minimum participation rules by cross-testing the benefits with the employer’s DC plans.
Although the changes are generally effective upon enactment, plan sponsors may elect to apply them to plan years beginning after December 31, 2013. IRS had been extending temporary relief on a year-by-year basis since 2014.
Many DB plans that were closed to new hires have been forced to freeze completely because grandfathered employees who were still accruing benefits became too small or consisted mostly of highly paid employees. The relief is intended to prevent such complete freezes.
- Retirement plan disaster relief. Congress finally provided special retirement plan disaster relief for the 2018 California wildfires and other major disasters that occurred between January 1, 2018, and February 18, 2020. This relief is similar to relief provided for 2016 and 2017 hurricanes and California wildfires, but is not an extension of (or additional relief) for those earlier disasters.
Effective December 20, 2019, retirement plans can make “qualified disaster distributions,” which are special in-service distributions of up to $100,000 (even if amounts are not otherwise distributable from the plan) that are not subject to the 10-percent early withdrawal penalty or 20-percent withholding. Participants can include the distributions in income over a three-year period and can recontribute the full distribution amount to the plan or IRA within three years.“ Qualified disaster distributions” are conditioned upon an individual taking a distribution on or after the first day of the disaster and before June 17, 2020 (i.e., 180 days after SECURE was enacted); having a principal place of abode in a presidentially-declared disaster area during the relevant disaster; and sustaining an economic loss by reason of the disaster.
SECURE also permits individuals to recontribute distributions from a retirement plan or IRA, if such distributions were to be used to purchase or construct a principal residence in a disaster area and that principal residence was not purchased or constructed on account of the disaster. These repayments must be made by June 17, 2020.
SECURE also allows plans to offer loan relief to participants whose principal place of abode during any of the covered disasters was located in a disaster area and who sustained an economic loss by reason of the disaster. The maximum loan amount is increased to the lesser of: (1) $100,000; or (2) the greater of $10,000 or 100% of the present value of the participant’s vested accrued benefit. This increased loan amount is available for loans made from December 20, 2019, through June 17, 2020. SECURE also extends for one year (or, if later, until June 17, 2020) the due date of any qualified individual’s loan repayment that would otherwise be due during the period beginning on the date of the disaster and ending 180 days after the last day of the disaster.
In welcome news for individuals and employers affected by disasters, SECURE provides a 60-day automatic extension of the deadline to file returns and pay taxes, as well as for making contributions to qualified plans and IRAs, withdrawing excess IRA contributions, and completing rollovers.
Recontributed qualified disaster distributions are treated as a tax-free rollovers.
Employers are permitted (but not required) to make these disaster relief provisions available.
The SECURE Act clarifies that the $100,000 limit is applied separately if an individual is affected by more than one relevant disaster.
The delayed loan repayment rules are available for loan repayments that were due as early as January 1, 2018.
When are plan amendments needed?
Generally, it appears that the plan amendment deadline for adopting retirement-related disaster relief provisions would be the last day of the first plan year beginning on or after January 1, 2020 (2022 for governmental plans).
Other than those disaster relief provisions, conforming plan amendments (retroactive to the first day as of which the new rules apply) generally will not be required any earlier than the last day of the first plan year beginning in 2022 (or later for certain collectively bargained and governmental plans). Additional guidance from the IRS is expected on plan amendment deadlines.