Benefits experts are still poring through the SECURE Act’s various mandated provisions, optional provisions, and effective dates, some of which may be retroactive. This series of articles will break down the implications that the Act has for existing tax-qualified retirement plans. This article will focus on the Act’s impact on required minimum distributions (RMDs) for both defined benefit and defined contribution plans. Related articles will address (1) changes that impact 401(k) and other defined contribution plans only, (2) changes for defined benefit plans only; and (3) other changes to the retirement plan landscape.
Remedial Amendment Period
Plan sponsors generally have until the last day of the 2022 plan year to adopt amendments that reflect the Act’s required revisions. For calendar year plans the last day is December 31, 2022. Governmental plans have until the 2024 plan year to amend. Remember that operational compliance is still required during the period from the effective date for the Act’s required changes and the date the plan is amended.
Delay of Lifetime RMDs – MANDATORY
Prior law: Distributions from an eligible employer retirement plan must be made by April 1 of the calendar year following: (a) the calendar year in which the participant turns age 70-1/2, or (b) for a participant who is not a 5% owner, the calendar year in which he or she terminates employment after age 70-1/2.
Under the Act: The required age for RMDs is raised from 70-1/2 to 72. Participants who are not 5% owners and who work beyond the required age for RMDS, under the Act still don’t trigger RMDs until the calendar year in which they retire. The Act did not change the way in which 5% owners are determined. In addition, post-death distributions to a participant’s surviving spouse are not required to begin before the calendar year in which the participant would have obtained age 72 (formerly 70-1/2).
Effective date: The new age applies to employees who turn age 70-1/2 after December 31, 2019; that is, for those born after June 30, 1949. For those born on or before June 30, 1949 (already obtained age 70-1/2 prior to January 1, 2020), the prior law applies.
What to do and when: Plan sponsors should work with their service providers to track two populations: those born on and before June 30, 1949 (for whom age 70-1/2 is the RMD trigger date), and those born after that date (for whom age 72 is the RMD trigger date). Distributions of RMDs for the latter population therefore need not begin until April 1 of the calendar year following the year they attain age 72.
This change to tax-qualified retirement plans will necessitate updates to distribution forms, SPDs, 402(f) notices, and participant communications.
Post-Death RMDs are accelerated – MANDATORY
Prior law: In general, distributions are permitted to be paid annually over the beneficiary’s life expectancy. In general, if the participant died before RMDs began, distributions could be made at various times, provided the entire account was distributed by the end of the fifth year following the participant’s year of death.
Under the Act: Following the death of the participant, distributions must generally be made by the end of the 10th calendar year following the year of death. The determination of the 10-year period is presumably calculated in the same way that the 5-year period was calculated. Payments can be made over the beneficiary’s life expectancy provided the beneficiary is an “eligible designated beneficiary”, which can be the surviving spouse, a disabled/chronically ill individual, a minor child of the participant or a beneficiary no more than 10 years younger. Prior rules still apply to a beneficiary that is not a “designated beneficiary”.
Effective date: The rule regarding the acceleration of post-death RMDs is effective for deaths that occur after December 31, 2019. Special delayed effective dates apply to collectively bargained and governmental retirement plans.
What to do and when: Sponsors of tax-qualified retirement plans should be working with their service providers to implement these rules now.
This change will impact beneficiary designation forms, distribution forms, SPDs and other participant/beneficiary communications.
Special Note for Defined Benefit Pension Plans
The Act does not change actuarial increases required by Internal Revenue Code 401(a)(9)(C). For individuals who continue working and choose to retire late, a defined benefit plan must provide actuarial increases beginning at age 70-1/2.
Commentators anticipate IRS guidance to provide self-correction relief for plans that fail to implement the new rules correctly during the remedial amendment period and clarify the Act’s impact on current regulations. Tax-qualified plan sponsors considering an amendment prior to the remedial amendment deadline, for the sake of clarity for itself and its service providers, may want to wait to see how further guidance may affect that amendment.
With the passage of the 2020 federal government spending bill less than a week before Christmas, Congress has gifted us with the most significant piece of retirement legislation in over a decade. This newly enacted legislation incorporates the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) that was overwhelmingly passed by the House of Representatives earlier this year but never considered by the Senate. The spending bill even has a few additional retirement-related tidbits that were not part of the SECURE Act.
Here are some of the key changes:
Frozen Defined Benefit Plan Nondiscrimination Testing
Currently- Defined benefit plans that were frozen to new hires in the past and operate with a grandfathered group of employees continuing to accrue benefits have ultimately run into problems trying to pass nondiscrimination or minimum participation requirements as the group of benefiting employees became smaller and normally higher paid. This problem for frozen defined benefit plans has been around for a while and the IRS has been providing stop-gap measures to deal with it every year.
Effective as of the
date of enactment of this legislation and available going back to 2013 – plans
may permit the grandfathered group of employees to continue to accrue benefits
without running afoul of nondiscrimination or minimum participation rules so
long as the plan is not modified in a discriminatory manner after the plan is
closed to new hires. This special nondiscrimination testing relief also extends
defined benefit plans that close certain plan
features to new hires,
defined contribution plans that provide make-up contributions
to participants who had benefits in a defined benefit plan that were frozen.
Increasing the 10% Limit on Safe Harbor Auto Escalation
Currently – a safe harbor 401(k) Plan with automatic enrollment provisions cannot automatically enroll or escalate a participant’s contribution rate above 10%.
Effective for Plan
Years beginning after Dec. 31, 2019 – the 10% cap would remain in place in
the year the participant is enrolled but the rate can increase to 15% in a
Simplifying the Rules for Safe Harbor Nonelective 401(k) Plans
Currently – All safe harbor plans must provide an annual notice prior to the beginning of the year that provides plan details and notifies employees of their rights under the plan. Also, any plan sponsors that want to consider implementing a safe harbor plan generally must adopt the safe harbor plan provisions prior to the beginning of the plan year.
Effective for Plan Years beginning after Dec. 31, 2019 – the notice requirement for plans that satisfy the safe harbor through a nonelective contribution has been eliminated. Also, sponsors can amend their plan to become a nonelective safe harbor 401(k) plan any time up until 30 days prior to year-end. The safe harbor election can even be made as late as the end of the next year if the plan sponsor provides for at least a 4% nonelective contribution.
Open Multiple Employer Plans (Open MEPs)
Currently – Multiple employer plans (MEPs) are legal and actually quite common, but a couple of limitations have stunted the development of a concept called open MEPs. An open MEP is a situation where the employers within the MEP are not tied together through a trade association or some common business relationship. In 2012 the DOL issued an Advisory Opinion provided that a MEP made up of unrelated employers that did not have “common nexus” must operate as a separate plan for each of these unrelated employers and not as a single common plan. This advisory opinion took away much of the perceived advantages of operating an open MEP. Additionally, the IRS has followed a policy that provides if one employer within the MEP makes a mistake, that the error can impact the qualified status of the entire plan; this is known as the “one bad apple” rule, this policy is clearly a negative selling point for any plan sponsor that might consider signing up to participate in a MEP.
Effective for Plan
Years beginning after Dec. 31, 2020 – the “common nexus” requirement and
the “one bad apple” rule are eliminated. The new open MEP rules provide for a
designated “pooled plan provider” that would operate as the MEPs named
fiduciary and the ERISA 3(16) plan administrator. The open MEP will be required
to file a 5500 with aggregate account balances attributable to each employer.
These changes are expected to create a market for pooled plans that will offer
efficient retirement plan solutions to smaller plan sponsors.
Effective for Distributions after 2019, with respect to individuals who attain 70 ½ after 2019. – This is a simple change to age 72 for computation purposes, but note the effective date means that if the participant is already subject to RMD rules in 2019 they remain subject to RMDs for 2020 even though the person may not be 72 yet. Also, plan sponsors should be aware that distributions made in 2020 to someone that will turn 70 ½ in 2020 will not be subject to RMD rules and therefore would be eligible for rollover and subject to the mandatory 20% withholding rules.
Increase Retirement Savings Access to Long-Term Part-Time Workers
can exclude employees that do not meet the 1,000 hours of service requirement
Effective for Plan Years beginning after Dec. 31, 2020 – Plans will need to be amended to permit long-term part-time employees who work at least 500 hours over a 3 year period to enter the plan for the purpose of making retirement savings contributions. The employer may elect to exclude these employees from employer contributions, nondiscrimination, and top-heavy testing.
Stretch IRAs are Eliminated
Currently– If Retirement
plan or IRA proceeds are passed upon death to a non-spouse beneficiary; the beneficiary
can set up an inherited IRA and “stretch” out payments based upon the
beneficiary’s life expectancy. Depending upon the age of the beneficiary and
the size of the IRA this strategy potentially provided significant tax
Effective for distributions
that occur as a result of deaths after 2019 – Distributions from the IRA or
plan are generally going to need to be made within 10 years. There are
exceptions if the beneficiary is (1) the surviving spouse, (2) disabled, (3)
chronically ill, (4) not more than 10 years younger than the IRA owner or plan
participant, or (5) for a child that has not reached the age of majority, the
ten year rule would be delayed until the child became of age.
Increased Penalties for Failure to File Retirement Plan Returns and Other Notices
Failure to file Form 5500
$25 per day maximum of $15,000
Failure to report participant on Form 8955-SSA
$1 per participant, per day maximum of $5,000
Failure to provide Special Tax Notice
$10 per failure up to a maximum of $5,000
Failure to file Form 5500
$250 per day maximum of $150,000
Failure to report participant on Form 8955-SSA
$10 per participant, per day maximum of $50,000
Failure to provide Special Tax Notice
$100 per failure up to a maximum of $50,000
Other Retirement Plan Changes Effective for Years Beginning After December 31, 2019
Phased retirement changes – defined Benefit
Plans can be amended to provide voluntary in-service distributions begin at age
59 ½, down from the current age 62 requirement.
Start-up credits – the cap on tax credits that small
employers (up to 100 employees) can get for starting up a new retirement plan
has gone up from $500 to $5,000.
Auto-Enroll credits for small employers – small
employers can get an additional $500 tax credit for adopting an automatic
More time to adopt a plan – currently a
qualified plan must be adopted by the end of the employer’s tax year to be
effective for that year. The new rule will permit a plan to be adopted as late
as the due date of the employer’s tax return for the year.
Plan annuity provisions – in recognition that
defined contribution plans typically do not offer lifetime income streams two
changes have been added to encourage in-plan annuity options.
A fiduciary safe harbor standard that if
followed, would protect plan sponsors from potential liability relating to the
selection of an annuity provider.
Plans may permit tax-advantaged portability of
lifetime income annuity options from one plan to another.
403(b) changes include providing a mechanism for
the termination of a 403(b) custodial account and clarification that
non-qualified church controlled organizations (e.g. hospitals and schools) can
participate in Section 403(b)(9) retirement income accounts.
Penalty free distribution for birth or adoption
expenses – up to $5,000 could be distributed from a defined contribution or
403(b) plan to cover costs relating to birth or adoption of a child.
Special tax penalty relief and income tax
treatment for distributions for qualified disaster distributions from qualified
plans up to $100,000. Additionally, plan
sponsors can permit the $50,000 participant loan limit to be increased to
$100,000 with increased repayment periods for participants that suffered losses
in a qualified disaster area.
Other Changes with a Delayed Effective Date
Lifetime income disclosure – this provision will require a defined contribution plan to provide all participants with an annual statement that discloses the projected lifetime income stream equivalent of the participant’s account balance. This requirement will become effective for benefit statements furnished one year after applicable DOL guidance has been issued that will be necessary to provide the prescribed assumptions and explanations that will be used to create this disclosure.
Combining 5500 – IRS and DOL have been directed to permit a consolidation of Form 5500 reporting for similar plans. Defined contribution plans with the same trustee, same-named fiduciary and same plan administrator using the same plan year and same plan investments may be combined into one 5500 filing. This is scheduled to begin no later than January 1, 2022, for 2021 calendar plan year filings.
What to Do Now
Obviously the SECURE Act is bringing a lot of changes to retirement plans. Many of the operational aspects to this new retirement legislation will need to be implemented immediately, in particular, tax withholding related items that will change in 2020 will necessitate plan sponsors and their recordkeepers act immediately to review tax withholding and distribution processes. Plans do have until the end of the 2022 plan year to adopt conforming amendments to their documents. The amendment deadline is the 2024 plan year for governmental plans.
If you have any questions about the SECURE Act and this new retirement plan legislation we encourage you to contact the Findley consultant you normally work with, or contact John Lucas at 615.665.5329 or John.Lucas@findley.com.