On December 20, 2019, the President signed into law the Further Consolidated Appropriations Act, 2020 ("Appropriations Act"). This broad legislation includes numerous provisions relating to employee benefit and compensation matters, including the Setting Every Community Up for Retirement Enhancement Act of 2019 ("SECURE Act"), which focuses on retirement matters for 401(a), 401(k), 403(b) and governmental 457(b) plans, and other sections with employee benefit implications. This Client Alert addresses many of the provisions of the SECURE Act, and other select provisions of the Appropriations Act, that will impact retirement plans provided by employers, including nonprofit organizations. A separate Client Alert addressing health-related provisions of the Appropriations Act, and other recent developments relating to health and welfare plans, can be found here.
1. Broader 401(k) Eligibility for Long-Term, Part-Time Employees
Background. Before the SECURE Act, a 401(k) plan was permitted to exclude employees until they completed a "year of service", defined as 1,000 hours of service during a 12-month period.
SECURE Act. The SECURE Act prohibits a 401(k) plan from imposing a service-based exclusion on an employee who has completed at least 3 consecutive 12-month periods with at least 500 hours of service in each 12-month period (and who has reached age 21). A part-time employee offered participation under this provision need not be offered employer contributions and may be excluded from nondiscrimination testing.
Effective Date. Plan years beginning after December 31, 2020; however, for purposes of meeting an employee meeting the 3-year/500 hour requirement, years of service beginning before January 1, 2021 are not taken into account.
2. Required Minimum Distribution Changes
a. Increase In Required Beginning Date Age From 70-1/2 to 72
Background. Before the SECURE Act, a participant's required beginning date was April 1 of the calendar year following the calendar year in which the participant reached age 70-1/2 (or for a non-5% or greater owner, terminated employment from the plan sponsor, if later.)
SECURE Act. The SECURE Act increases the age-based prong from 70-1/2 to 72.
Effective Date. Distributions required to be made after December 31, 2019 for individuals who reach age 70-1/2 after December 31, 2019
b. Changes To Minimum Distribution Requirements For Designated Beneficiaries
Background. Before the SECURE Act, minimum distributions following the death of a participant (including an IRA owner) could be made annually over the life expectancy of a designated beneficiary. Alternatively, if the participant died before minimum distributions began, distributions could be made at one or more times, as long as the entire account is distributed by the end of the fifth year following the year of death.
SECURE Act. The SECURE Act eliminates the ability to make annual minimum distributions over the life expectancy of a designated beneficiary following the death of a participant, unless the beneficiary is the participant's spouse, child under the age of majority, disabled or chronically ill (as defined by the Code), or within 10 years of the participant's age. In addition, the alternative minimum distribution period is extended to the end of the tenth year following the year of death, regardless of whether the participant died before or after minimum distributions began.
Effective Date. Applies to participants who die after December 31, 2019 (with grandfather rules for contracts already annuitized, and extended effective dates for collectively bargained and governmental plans).
3. 403(b) Plan Termination – Distribution of Individual Custodial Accounts
Background. To effectively terminate a 403(b) plan, a nonprofit plan sponsor must distribute all assets to participants. The IRS has previously issued guidance under which individual annuity contracts may be distributed to participants, but such guidance did not extend to individual custodial accounts.
SECURE Act. The SECURE Act directs the Treasury Department to issue guidance by June 20, 2020 under which a 403(b) plan may make distributions of individual custodial accounts to facilitate a plan termination.
Effective Date. The guidance issued shall be retroactively effective for taxable years beginning after December 31, 2008.
4. Safe Harbor 401(k) Plans
a. Elimination of Notice Requirement and Delayed Deadline for Election of Nonelective Contribution Safe Harbor Status
Background. Before the SECURE Act, for a 401(k) plan to rely on the 3% nonelective contribution safe harbor for a plan year, the plan document had to include the safe harbor provision, and participants had to be provided with notice of safe harbor status (either on a definitive or contingent basis), before the beginning of the plan year.
SECURE Act. The SECURE Act eliminates the participant notice requirement for nonelective contribution (but not matching contribution) safe harbor 401(k) plans. The Act also allows a 401(k) plan (that is not otherwise using a matching contribution safe harbor) to be amended as late as 30 days before the end of a plan year to provide for a 3% nonelective contribution safe harbor for the plan year. Alternatively, a 401(k) plan may be amended as late as the end of the following plan year, if a 4% nonelective harbor contribution is provided.
Effective Date. Plan years beginning after December 31, 2019.
b. QACA Safe Harbor Auto-Increase Contribution Cap
Background. Before the SECURE Act, a qualified automatic contribution arrangement (QACA) safe harbor was permitted to automatically increase a participant's deferral election up to 10% of eligible compensation.
SECURE Act. The SECURE Act increases the cap from 10% of eligible compensation to 15% of eligible compensation.
Effective Date. Plan years beginning after December 31, 2019.
5. Age 59-1/2 In-Service Distributions from Defined Benefit Plans and Governmental 457(b) Plans
Background. A defined benefit plan generally may not permit in-service distributions before age 62, and a governmental 457(b) plan generally may not permit in-service distributions before the calendar year in which a participant reaches age 70-1/2.
Appropriations Act. The Bipartisan American Miners Act of 2019, included in the Appropriations Act, allows in-service distributions from defined benefit plans at age 59-1/2, and from governmental 457(b) plans beginning in the calendar year in which a participant reaches age 59-1/2.
Effective Date. Plan years beginning after December 31, 2019.
6. Nondiscrimination Relief for Closed Defined Benefit Plans
Background. Some plan sponsors have closed their defined benefit plans to new entrants as of a specified date, but have allowed accruals to continue for participants already in the plan as of such date. Over time, some of these plans have experienced difficulty meeting the nondiscrimination and minimum participation requirements with respect to the ongoing accruals. Since 2014, the IRS has issued a series of notices providing temporary extensions of nondiscrimination relief for closed defined benefit plans meeting specified criteria.
SECURE Act. The SECURE Act provides permanent nondiscrimination relief for closed defined benefit plans that met the nondiscrimination requirements for the year of closure and the two following years, and that meet the various criteria specified by the SECURE Act.
Effective Date. December 20, 2019; however, the plan sponsor may elect for the SECURE Act changes to apply to plan years beginning after December 31, 2013.
7. Lifetime Income Provisions
a. Annuity Selection Fiduciary Safe Harbor
Background. Plan fiduciaries are required by ERISA to act prudently when selecting investments available under a plan. Under pre-SECURE ACT law, ERISA did not contain a specific safe harbor provision under which a plan fiduciary could demonstrate prudence when selecting an in-plan annuity provider.
SECURE Act. The SECURE Act adds a safe harbor procedure to ERISA, under which a plan fiduciary may obtain fiduciary protection for selection of an insurance company to provide an in-plan annuity. The safe harbor involves obtaining written representations from the insurer regarding licensing, solvency and similar matters. The representations must cover a 7-year lookback period. The plan fiduciary must also engage in a thorough search among insurance companies, and consider the reasonableness of the cost of the annuity product.
Effective Date. December 20, 2019.
b. Lifetime Income Disclosure
Background. Sponsors of 401(k), 403(b), profit sharing and money purchase plans covered by ERISA must provide participants with periodic statements detailing account investment holdings and vesting status.
SECURE Act. The SECURE Act adds a requirement to include a "lifetime income disclosure" in at least one of the periodic statements each year. The disclosure must show the monthly annuity amount that could be purchased with the participant's account, based on assumptions to be specified by the Department of Labor (DOL). The DOL is directed to issue, by December 20, 2020, interim rules regarding lifetime income disclosures and a model lifetime income disclosure statement, which includes appropriate caveats regarding the nature of the lifetime income disclosure as an estimate and its underlying assumptions. Plan sponsors and fiduciaries are protected from liability for lifetime income disclosures meeting legal requirements.
Effective Date. 12 months after the latest of the DOL's issuance of interim final rules, the model disclosure, and the assumptions to be used in preparing the disclosure.
c. In-Service Distributions of In-Plan Annuity Contracts Upon Discontinuance of Plan's Offering of Such Contracts
Background. The Internal Revenue Code ("Code") imposes restrictions on in-service distributions from defined contribution retirement plans, which vary based on the type of plan.
SECURE Act. The SECURE Act amends the Code to permit in-service distributions from qualified plans (including 401(k) plans), 403(b) plans and governmental 457(b) plans if a plan stops offering a specific in-plan annuity option. Specifically, the participant's in-plan annuity may be rolled over to an IRA or other eligible retirement plan, or directly distributed to the participant, during the 90-day period before the in-plan annuity option becomes unavailable under the plan.
Effective Date. Plan years beginning after December 31, 2019.
8. Plan Loans Through Credit Card Prohibited
Background. Before the SECURE Act, there was no prohibition on allowing plan loans to be accessed through a credit card or similar arrangement.
SECURE Act. The SECURE Act prohibits plan loans from being accessed through a credit card or similar arrangement.
Effective Date. Loans made after December 20, 2019.
9. Multiple Employer Plan Facilitation
Background. Before the SECURE Act, a qualified plan was permitted to cover multiple employers not related as a controlled group or affiliated service group (unrelated employers). However, ERISA and the Code viewed the plan as though it were separate, individual plans for many (but not all) purposes (e.g., compliance failures by one employer could be attributed to the entire plan, and each plan sponsor had full fiduciary responsibility for its portion of the plan). ERISA recognizes that a plan covering unrelated employers could be treated as a single ERISA plan if there is a common interest among the employers other than plan sponsorship and other requirements are met.
SECURE Act. The SECURE Act provides a new compliance regime for a multiple employer plan maintained by a "pooled plan provider," which is a vendor that designates itself as a named fiduciary and plan administrator, and assumes responsibility for all administrative duties (including oversight of functions that must be performed by participating employers). The pooled plan provider must register with the IRS, and must ensure that all persons handling plan funds meet ERISA bonding requirements. For ERISA-governed plans, the plan's trustee must be a bank or non-bank custodian (qualified to hold IRA assets), which must be responsible for collecting contributions from participating employers.
For a multiple employer plan of either type (unrelated employers with a common non-plan related interest, or a plan maintained by a pooled plan provider), the SECURE Act provides that the plan as a whole is protected from the noncompliance of a participating employer, if the plan provides a mechanism for expelling a chronically noncompliant employer and holding such employer responsible for its noncompliance. The employer retains ERISA fiduciary responsibility for selection and monitoring of the pooled plan provider.
The Treasury Department and DOL are directed to issue guidance addressing the duties required to be assumed by a pooled plan provider, the expulsion of chronically noncompliant employers from the plan, and other implementation issues. The Treasury Department is directed to issue model plan language to be used by a pooled provider plan.
The SECURE Act provides for pooled provider plans to file a single Form 5500, with a list of participating employers and their respective contribution percentages and aggregate account balances.
Effective Date. Plan years beginning after December 31, 2020.
10. Penalty-Free Withdrawals For Birth Or Adoption
Background. The Code provides a 10% penalty for distributions from retirement plans before age 59-1/2 unless an exception applies.
SECURE Act. The SECURE Act adds an exception to the 10% penalty for distributions of up to $5,000 upon the birth or adoption of a child by a participant. The participant may repay the distribution to the plan.
Effective Date. Distributions made after December 31, 2019.
11. Plan Amendment Deadline; Anti-Cutback Relief
Background. The IRS has provided generally applicable guidance regarding deadlines for retroactive adoption of plan amendments. In addition, generally, a plan amendment is not permitted to result in a cutback of an accrued benefit or protected benefit, right or feature.
SECURE Act. The SECURE Act provides a plan amendment deadline of the last day of the 2022 plan year (or 2024 plan year for governmental and collectively bargained plans) to reflect SECURE Act changes, provided that the plan must be operated in accordance with each applicable provision beginning on its effective date. Such amendment will not be deemed to violate the anti-cutback requirements (unless specifically provided otherwise by the Treasury Department).
Effective Date. December 20, 2019.
12. Ability to Adopt Qualified Plan Through Tax-Filing Deadline
Background. Before the SECURE Act, a plan sponsor was required to adopt a qualified plan by the last day of the plan sponsor's taxable year in order for the plan to be treated as in effect for the taxable year.
SECURE Act. The SECURE Act permits a plan sponsor to adopt a qualified plan as late as the tax return deadline (including extensions) for the plan sponsor's taxable year, and elect to treat the plan as in effect for the plan sponsor's taxable year.
Effective Date. Plans adopted for taxable years beginning after December 31, 2019.
13. Substantial Increases In Penalties for Form 5500, Form 8895-SSA Filing, and for Failure to Provide Notice of Withholding Elections for Periodic Payment Recipients
Background. The Internal Revenue Code provides penalties for failure to timely file Forms 5500, Forms 8895-SSA, and to provide plan payees with withholding election information.
SECURE Act. The SECURE Act increases the penalties associated with these failures by ten times their pre-SECURE Act amounts.
Effective Date. Returns, statements and notifications required to be filed, and notices required to be provided, after December 31, 2019.
14. Repeal of Age Limit for Traditional IRA Contributions
Background. Before the SECURE Act, traditional IRA contributions were not permitted beginning with the year in which an individual reached age 70-1/2.
SECURE Act. The SECURE Act eliminates the age-based restriction on traditional IRA contributions.
Effective Date. IRA contributions for taxable years beginning after December 31, 2019.
Please contact the members of Venable's Employee Benefits and Executive Compensation Practice Group for additional information about these changes and how they may impact your employee benefit plans.