While the safe harbor will provide some degree of protection to plan fiduciaries regarding the selection and implementation of a lifetime income option, the decision to offer (or not offer) a lifetime income option as an investment option or as a component of an investment option still requires significant fiduciary consideration and diligence.

Portability of lifetime income investments. Lifetime income investments often can be subject to termination penalties, surrender charges, and other fees upon liquidation. These concerns of penalties, charges, and fees often lead to plan fiduciaries not offering lifetime income investment options, or if offered, participants not taking advantage of such options. The SECURE Act allows for the transfer or distribution of the lifetime income investment to potentially avoid some or all of the penalties, charges, and fees.

Under the changes, participants who invest in lifetime income investment options in their plans, and who are faced with a plan-level decision to eliminate the options, may take a distribution of the investment without regard to any other plan-level restrictions on in-service distributions (such as a prohibition on in-service distributions before age 59½). The distribution would have to be in the form of a direct transfer to another retirement plan. The change is effective for plan years beginning after 2019.

For plans that intend to offer one or more lifetime income investment options, an amendment to the plan documents will be needed to permit these types of in-service and in-kind distributions of lifetime income investments.

Plan sponsors should also consider whether the plan should be amended to accept in-kind transfers of lifetime income investments, such as through a rollover from a previous employer-sponsored plan.

Changes to plan distribution rules

Required beginning date increased to age 72 for required minimum distributions (RMDs). Currently, a participant in a qualified retirement plan generally is required to begin to receive certain minimum distributions by April 1 of the calendar year following the year in which the participant attains age 70½ or terminates employment, whichever comes later. The SECURE Act increases the RMD age to age 72, if elected by the plan sponsor. This change applies to both defined-benefit plans and defined-contribution plans, and is effective for participants who turn age 70½ after December 31, 2019.

Plan sponsors will need to evaluate the new RMD rules and generally amend plan documents to reflect the new RMD age of 72 in required provisions that govern the required minimum distribution rules. However, as stated, plan sponsors could choose to retain provisions that mandate distributions at an earlier age.

Changes to post‑death RMDs for DC plans. Under current law, a plan may allow a designated beneficiary to "stretch" distributions from a plan over the beneficiary's remaining life expectancy. Now, there will be a cap of 10 years (for designated beneficiaries) and five years (for nondesignated beneficiaries) on the time permitted to exhaust the plan or IRA assets.

The 10-year rule generally does not apply to an "eligible designated beneficiary," which includes a beneficiary who, as of the date of the participant's death, is a surviving spouse, a minor child, a disabled person, a chronically ill person, or any person not more than 10 years younger than the employee. Such eligible designated beneficiaries may spread RMDs over the beneficiary's expected lifetime, except that for minor children, the 10-year rule begins to apply on the date that the minor children reach the age of majority. These new rules generally apply with respect to participants who die after December 31, 2019, subject to possible additional delays for employees subject to collective bargaining agreements.

Depending upon a plan's existing provisions, the plan may need to notify participants of the changes and solicit new beneficiary elections from affected participants.

Child birth or adoption distributions up to $5,000. Defined-contribution plans may permit penalty‑free distributions of up to $5,000 for expenses related to the birth or adoption of a child. This change is effective for distributions after 2019.

Changes to other DC safe harbors

Safe-harbor plan adoption and administration. The notice requirement for the 3 percent non-elective contribution safe harbor has been eliminated and a plan sponsor may elect into the 3 percent non-elective safe harbor at any time up until 30 days of the close of the plan year. There are also options to make the safe harbor election after the dates above if (1) the amendment to adopt the non-elective safe harbor is made by the end of the following plan year, and (2) the non-elective contribution is at least 4 percent. This change is effective for plan years after 2019.

Increased QACA safe harbor rate cap. The default automatic contribution rate may now be increased to 15 percent. The current 10 percent default contribution rate cap is required to be retained for a participant's first year of participation. However, it may now be increased to 15 percent for subsequent years. This change is effective for plan years beginning after 2019.

Soft-frozen defined-benefit plans

Nondiscrimination testing relief with respect to closed or "soft-frozen" defined-benefit plans is available so as to permit existing participants to continue accruing benefits without violating testing requirements. This relief would cover plans that closed before April 5, 2017, or that have been in effect for at least five years without a substantial increase in coverage or benefits in the previous five years. These changes are effective immediately, or, if the plan sponsor so elects, for plan years beginning after 2013.

Form 5500 changes

Consolidated Form 5500 reporting for defined contribution plans. The IRS and DOL have been directed to modify annual retirement plan reporting rules to permit filing a consolidated Form 5500 in certain situations (such as multiple defined-contribution plans sponsored by the same employer). The modified rules must be implemented by the end of 2021 and apply for plan years beginning after 2021.

Increased penalties for failure to file returns. Late filing penalties have been raised for a number of required tax returns and filings. For example, the late filing penalty for failing to file a Form 5500 is increased to $250 per day, capped at $150,000 (increased from $25 and $15,000, respectively). The increased penalties are effective for returns and filings due on or required to be provided after December 31, 2019.

Lisa Barton ([email protected]) is a partner with Morgan, Lewis & Bockius LLP, where she advises clients in designing, drafting, and operating tax-qualified retirement and health and welfare plans, as well as nonqualified deferred compensation and equity compensation plans.

Read more: 

• Rethinking retirement planning in wake of SECURE Act
• 3 ways the SECURE Act affects company retirement plans