Impact and opportunities in the SECURE Act
Here are some of the SECURE Act provisions that could affect the retirement industry, plan sponsors, and workers.
The House of Representatives passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE” Act) with a near unanimous vote in late May. The Act has been hung up in the Senate ever since, but industry advocates remain optimistic of its passage.
If approved by the Senate, the SECURE Act would be the first concrete step toward retirement plan reform since the Pension Protection Act of 2006.
So what could the SECURE Act mean for the retirement industry, plan sponsors, and individuals saving for retirement? The Act would make changes in a number of areas, including the following:
Removing Barriers for Multiple Employer Plans. The law currently allows unrelated employers to pool their assets and adopt a single plan. These plans are known as multiple employer plans—or MEPs (not to be confused with multi-employer plans, which are union plans). While MEPs are currently permitted, there are several rules that discourage their use, including the fact that each adopting employer must file its own Form 5500.
The SECURE Act would change this so that MEPs that meet certain conditions will be treated as a single plan and file a single Form 5500. The Act would also remove a current rule that causes plan-wide compliance problems if one of the adopting employers has a qualification problem.
Expanding part-time employee inclusion in 401(k) plans. Under current law, employers and plan sponsors may exclude certain part-time employees from participation in 401(k) plans. The SECURE Act would create a new rule requiring that long-term part-time employees—that is, employees who work at least 500 hours for three consecutive years—be allowed to participate in the elective deferral feature of the plan.
The Act does not require these employees to be eligible for a matching contribution or any other employer contribution, and it would not apply to employees covered by a collectively-bargained plan.
Required minimum distributions. Currently, participants generally must begin taking retirement plan distributions at age 70½. The SECURE Act would extend this to age 72. In addition, the Act would generally require all distributions be made within 10 years of the individual’s death, unless the beneficiary meets certain requirements (such as being the individual’s surviving spouse or minor child).
Permitting penalty-free distributions upon birth or adoption. Participants in retirement plans generally may not take money out of their plans before age 59 ½ without incurring an attendant tax penalty unless the distribution is made following a qualified distribution event (such as, disability or pursuant to a qualified domestic relations order following a divorce).
The SECURE Act would create a new permissible qualified distribution event: the birth or adoption of a child. Parents who give birth to or adopt a child could become eligible to take a withdrawal of up to $5,000 without incurring an early withdrawal penalty.
New tax credits. The SECURE Act would provide a new annual tax credit of up to $500 to certain small employers who adopt a new plan or amend an existing plan to provide for automatic enrollment. It would also increase the existing start-up tax credit (for small employers who adopt a plan) to $5,000 for three years.
Easier to adopt a plan. In addition to increasing the tax credit for starting a plan, the Act also makes it easier than ever to do so. Currently, you must adopt a plan by the end of the tax year for which it is effective. The Act would allow a company until the tax return due date for that year to adopt a plan—an important extension for small companies that might not know by the end of the year whether their financials can support a retirement plan.
More flexible safe harbor rules. The Act would also give employers that sponsor safe harbor plans slightly more flexibility. An employer could amend a plan to use a non-elective safe harbor contribution any time before the last 30 days of the plan year and even after that deadline if the contribution is at least 4 percent of pay—providing welcomed new options for sponsors who realize the plan may not pass nondiscrimination testing.
Plans with a “qualified automatic contribution arrangement” could now use an automatic contribution percentage as high as 15 percent (instead of the current 10 percent limit). Finally, plans that use a non-elective safe harbor contribution would no longer have to provide an annual notice to participants.
Pension plan relief. The Act also proposes to provide relief to certain, narrow bands of defined benefit plans. Many defined benefit plans have been frozen in recent years or closed to new participants, which potentially creates nondiscrimination issues. The Act would provide relief from these rules if certain requirements are met.
In addition, special relief is provided from the funding rules for community newspaper plans and from PBGC premiums for cooperative and small employer charity plans.
Repealing the age limit for traditional IRA contributions. Current law mandates that individuals contributing to traditional IRAs cease all contributions by age 70½. Perhaps somewhat surprisingly, there is no corresponding rule for Roth IRAs.
The SECURE Act would move toward creating a parity of sorts between these two types of IRAs by removing the age limit for contributions to traditional IRAs.
As you can see, the general thrust of the SECURE Act is to expand Americans’ access to retirement plans and to make it easier for employers to sponsor retirement plans. Presumably, this noble cause is why the SECURE Act passed almost unanimously in the House.
The path forward from here, however, is somewhat opaque. There were initially high hopes that the Senate would pass the SECURE Act with a unanimous consent (which allows the bill to avoid some of the usual processes), but that has not happened.
One of the issues, it seems, is that the SECURE Act does not contain provisions allowing 529 college savings accounts to be used for homeschool expenses. As a result, Senator Cruz (R-TX) is blocking the bill from unanimous consent.
There have also been rumblings of discontent over some of the pension provisions. It only takes one senator to block a unanimous consent, so any discontent could make it a difficult road for the SECURE Act.
Despite these obstacles in the Senate, it appears there is general support for the SECURE Act, and it would pass if it were brought to a vote. The question will be whether backroom negotiations will be successful in allowing the Act to be passed by unanimous consent, and if not, whether they will make time to bring the SECURE Act through the regular process for a vote.
The inherent uncertainties make planning for any of these changes quite difficult.
Until the path becomes clearer, employers should not bank on any of these changes (such as the ability to adopt a safe harbor) coming to pass. So, it is business as usual . . . at least for now.
The full text of the SECURE Act is available here. For those with perhaps less reading time, the Senate and House, respectively, have also released condensed summaries of RESA and the SECURE Act.
Kelsey Mayo and Hannah Munn are attorneys at Poyner Spruill LLP in North Carolina.
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