CHART OF KEY SECURE ACT 401(K) PLAN PROVISIONS

Provision Descriptions

Increases In 401(k) Retirement Plan Access for Unrelated Employers Through Open MEPs.

One of the SECURE Act’s major stated goals was to increase retirement plan coverage across the board by making it easier for unrelated employers to offer retirement plans. The SECURE Act accomplishes this in large part by making it easier for unrelated, often smaller employers lacking the resources to offer retirement plans on their own, to band together to provide “pooled” 401(k) retirement plans for their employees.

Legally, this is accomplished by expanding and modifying the present-day multiple employer plan (“MEP”) rules. After SECURE, employers generally may now band together to offer 401(k) plans through a “pooled plan provider.” This is now true even if the employers are not related to each other – meaning they no longer have to share “a common characteristic,” such as being in the same industry — as was the case under previous multiple employer plan rules.

Generally stated, the new MEP provisions (sometimes called “open MEPs”) apply to unrelated employers who jointly sponsor a retirement plan (such as a 401(k) plan) through a “pooled plan provider,” which must acknowledge in writing that it is the “named fiduciary” for the combined plan. The pooled plan provider, which must serve as the entity providing most of the plan administrative functions (including nondiscrimination testing), must be registered with the DOL, be properly bonded, and meet a number of other specific legal requirements.

Interestingly, the legislation requires the DOL to publish model plan language which meets the specific SECURE Act requirements for open MEPs. This will be sure to be helpful to entities wishing to become pooled plan providers, thereby taking advantage of the opportunities afforded by the new legislation. Back to chart

Increases in Business Tax Credit for Small Employer Retirement Plan Startup Costs

In a further effort to help make setting up retirement plans more affordable for small businesses; a separate SECURE Act provision Increases the business tax credit for plan startup costs. Under the new law, the tax credit increases from the current cap of $500 to:

For the first credit year and for each of the two taxable years immediately following the first credit year, the greater of —

• $500, or
• the lesser of —
  • $250 for each employee who is not a “highly compensated employee” and who is eligible to participate in the sponsoring employer’s retirement plan; or
  • $5,000

Accordingly, under the new law, the credit may be as high as $5,000 for up to three years. Back to chart

Increases in Annuity Options Available Within 401(k) Retirement Plans

In one of the more significant and controversial changes from previous law, the SECURE Act meaningfully changes the existing fiduciary rules to help ease the path for 401(k) plan sponsors to select providers of distribution options in the form of annuities. Annuities offer a guaranteed income over the course of a retiree’s lifetime – which can be especially beneficial, considering many Americans these days are living longer lives and spending more years in retirement. Up until now, most 401(k) plans have distributed participant’s account balances in the form of lump-sums or installment payments. Relatively few 401(k) plans these days distribute benefits in the form of annuities.

All of that is about to change. Previously, retirement plan sponsors had the sole fiduciary responsibility to prudently choose and monitor annuity providers. However, the burden and potential risk of loss that accompany choosing and monitoring annuity providers often has been a deterrent, particularly to smaller plan providers. Should an annuity provider go out of business, for example, the plan sponsor faced the potential for liability, including possible litigation.

The new SECURE Act rules generally shift the fiduciary liability onto the annuity providers themselves, which are often large insurance companies, by imposing on these providers the duty to provide plan sponsors with products appropriate for their customers. These providers are generally more than willing to take on the fiduciary responsibility in exchange for the opportunity to earn large profits by selling their products to a wide new sector of 401(k) retirement plan sponsors.

Although there are numerous specific requirements listed in the new law, generally stated, employers sponsoring plans are insulated from risk if the insurer they pick is in good standing with the state insurance department in which the insurer is based. The employer is specifically not required to select the lowest cost provider when making a determination. Back to chart

Increase in the Age at Which Required Minimum Distributions (“RMDs”) Must Commence

The law requires participants in 401(k) plans to begin taking their money out of their plans at a specified age, known as the “required beginning date.” Starting at this date, participants generally must begin taking what are known as “required minimum distributions” from their 401(k) plans. Prior to the SECURE Act, the required beginning date was the later of age 70 ½, or, if a 401(k) plan permits, the date on which the participant retires.

Under the SECURE Act, the age at which RMDs from 401(k) plans generally must now commence increases to age 72, up from the previous, long-standing RMD required age of 70 ½.

Once a participant reaches his or her required beginning date for RMDs (now age 72 if no longer working), he or she generally must take the first RMD by the April 1 of the year after reaching age 72.

The RMD for any year is typically the account balance as of the end of previous year (Dec. 31) divided by a distribution period taken from the “Uniform Lifetime Table” published by the IRS. Back to chart

Penalty-Free 401(k) Withdrawals for Childbirth or Adoption

Because 401(k) plans are meant to be retirement vehicles, there are penalties in place for withdrawals or distributions that are made from such plans for purposes other than retirement or other legally sanctioned purposes. One of these is a ten percent (10%) penalty tax for early withdrawals made from 401(k) plans, which generally applies to withdrawals that are made prior to age 59 ½, unless an exception applies. Previous exceptions included death, disability, and distributions made pursuant to a “qualified domestic relations order.”

The SECURE Act adds a new exemption from the 10% percent penalty tax for early withdrawals made from 401(k) plans in the event of a “qualified birth or adoption.” Basically, this means any distribution to an individual if made during the one-year period beginning on the date on which either (i) a child of the individual is born; or (ii) on which the legal adoption of an eligible adoptee is finalized.

The aggregate amount which may be treated as a “qualified birth or adoption” withdrawal by any individual for any birth or adoption cannot exceed $5,000.

The withdrawal is not considered to be a plan loan, and so it is not subject to the regular plan loan repayment rules. However, a special rule permits recipients to repay the amount of the withdrawal in one or more contributions to the plan, in what is effectively one or more rollover contributions (assuming that the plan allows rollover contributions). Back to chart

Simplification of Non-Elective Contribution 401(k) Safe Harbor Arrangement

Many 401(k) plans these days are “safe harbor plans,” meaning that they are designed to meet specific legal requirements in order to gain exemption from some of the nondiscrimination testing rules that would otherwise apply. Safe harbor plan requirements include the making of mandatory employer matching or nondiscretionary contributions, accelerated vesting provisions, and special participant notice obligations.

The SECURE Act simplifies the safe harbor plan rules for plans that use the non-elective arrangement, which is one of the permissible options. The arrangement requires employers to contribute annually an amount equal to three percent of a participant’s eligible compensation to the plan. Generally stated, the new law accomplishes two things designed to help employers who choose to use this safe harbor arrangement:

• The annual notice requirement is eliminated.
• Plan sponsors using a three-percent of compensation nonelective contribution arrangement generally may now switch to a safe harbor 401(k) plan by formally amending the plan at any time prior to the 30th day before the close of the plan year.
  • Aternatively, if a plan sponsor wishes to adopt a safe harbor nonelective contribution arrangement of four percent of compensation, then it has until the end of the following plan year in which to formally amend the plan to accomplish this change.

Back to chart

Increase in Default Contribution Rate and Tax Credit Available for Certain Automatic Enrollment Plans

An increasing number of employers these days are offering 401(k) plans with automatic enrollment provisions, in which eligible employees automatically become plan participants, even if they do nothing to sign up. Workers can always opt out of the plan if they choose, but studies indicate that a large percentage do not.

Typically, the plan sponsor sets a default contribution rate for employees, although the employee can choose to contribute at a different rate. Frequently, the employee’s default contribution rate starts at three percent of his or her annual pay and gradually increases to ten percent with each year that the employee stays in the plan – although this is an example and is not the only possible model.

Increased Default Contribution Rate. Up until now, the maximum default contribution rate that could be imposed under an automatic enrollment arrangement was ten percent of a participant’s compensation. The SECURE Act increases the maximum default contribution rate from ten percent to fifteen percent, except for an employee’s first year of plan participation (in which case the cap is still fixed at ten percent). Back to chart

New Tax Credit

The SECURE Act also creates a new tax credit of up to $500 per year for up to three years, available to certain small employers for purposes of defraying the initial costs of establishing a 401(k) plan, provided that the plan includes an automatic enrollment feature. The credit is also available to small businesses that convert an existing 401(k) retirement plan into an automatic enrollment plan.

For these purposes, a “small employer” is generally defined as an employer having no more than 100 employees who received at least $5,000 of compensation from such employer for the preceding year. Back to chart

Requirement for 401(k) Plans to Allow Long-Term, Part-Time Employees to Participate

Qualified retirement plans, including 401(k) plans, are subject to strict participation requirements. Under prior law, employers could exclude part-time workers who work fewer than 1,000 hours per year. This has had the effect of excluding a great many part-time, seasonal, and other employees who may not be able to consistently meet the 1,000 per year requirement – a category of workers whose ranks, according to recent surveys, are increasing.

The SECURE Act attempts to close the gap by requiring most employers maintaining a 401(k) plan to include a dual eligibility provision, under which an eligible employee must be permitted to participate upon completion of either:

• Completion of one year of service (under the previous 1,000-hour rule); or
• Completion of three consecutive years of service, in which the employee completes more than 500 hours of service in each year.

Unfortunately for plan sponsors, including larger numbers of part-time and lower hour employees, who may be less likely or able to contribute to the plan, can sometimes skew nondiscrimination test results downward. The SECURE Act attempts to counter this effect by easing some of the nondiscrimination and coverage provisions. Specifically, in the case of employees who are eligible solely by reason of the new law provision, employers are permitted to exclude such employees from testing under the Internal Revenue Code’s nondiscrimination and minimum coverage testing rules, and from application of the Code’s top-heavy requirements.

The new dual eligibility rules do not apply to 401(k) plans maintained under a collective bargaining agreement. Back to chart

Modification of Closed Plan Nondiscrimination Rules to Protect Older, Longer Service Participants

The SECURE Act contains a provision that modifies the Internal Revenue Code’s nondiscrimination rules to permit certain existing participants in “closed” defined benefit pension plans (i.e., pension plans having “frozen” classes of participants, who are often older employees or employees having relatively longer periods of service) to continue to accrue benefits under these traditional pension plans – even if the plans are not open to newer, younger employees. This change in the law is intended to protect the retirement benefits of a growing class of older, longer-service employees who have been switched over from traditional defined benefit pension plans to defined contribution plans — particularly 401(k) plans. Back to chart

Provision of Lifetime Income Disclosures for 401(k) Plans

As noted in Part One of this series, 401k plans typically distribute benefits in the form of a single lump-sum payment, or sometimes in a series of installments. Less typical are annuity payment options – although the SECURE Act makes significant strides in opening up opportunities for including annuity options in 401(k) plans (see third item in chart, above, “Increases in Annuity Options Available Within 401(k) Retirement Plans”).

The SECURE Act further requires all defined contribution plans (including 401(k) plans) to furnish a lifetime income disclosure notice to participants at least once every 12 months. The notice is designed to show how much income a participant’s lump-sum balance could generate over the course of his or her projected retirement span, by converting the account balance into a monthly annuity beginning at his or her normal retirement age.

The statute directs the DOL to issue a “model lifetime income disclosure notice” by no later than one year after the date of enactment – in other words, by no later than December 20, 2020. The DOL must also release actuarial assumptions for converting participant account balances to lifetime income-stream equivalents. Under the legislation, no plan fiduciary, plan sponsor, or other person will be held liable under ERISA for lifetime income-stream equivalents that are derived from the DOL’s model disclosure notice and/or actuarial assumptions. Back to chart

No More 401(k) Plan Loans by Means of Credit Cards

The overwhelming majority of contemporary 401(k) plans have a loan feature that permits participants to borrow against the vested balances in their 401(k) accounts. Being that the purpose of a 401(k) plan is to build up funds for retirement purposes, these loans were originally intended to be used chiefly for major, often unforeseen expenses – not to defray everyday costs. As 401(k) plans have become more common and plan loans more easily available, there is concern that, in the aggregate, substantial retirement savings are being squandered through misuse of the loan provisions.

The SECURE Act combats this with a provision that prohibits the distribution of plan loans by means of credit cards or any similar arrangement. According to a House Ways and Means Committee report, the change is intended to help ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings. This seems to be in keeping with one of the SECURE Act’s overall goals of helping to expand retirement plan coverage and preserve savings. Back to chart

Increases in Internal Revenue Code Penalties for Failure to File Certain Retirement Plan Returns

Under ERISA, both the DOL and the IRS have the authority to impose a number of penalties and excise taxes designed to enforce compliance with the law. Over time, the dollar amount of many of these penalties has increased, ostensibly to keep current with inflation, but these increases have frequently also been used as revenue-raising measures. Because both the DOL and the IRS can impose separate penalties sanctioning the same behaviors, it is important to take each of them into account when ascertaining potential liability for any failures.

The SECURE Act modifies some of the IRS penalties that are imposed for failure to file certain retirement plan information as follows:

• Failure to timely file the Form 5500 series annual report can now be assessed up to $250 per day, not to exceed $150,000 per plan year. Before the SECURE Act, the penalty was $25 a day, not to exceed $15,000.
• Failing to file Form 8955-SSA can now be assessed up to a $10 per day per participant, not to exceed $50,000, up from a penalty of $1 per day per participant, not to exceed $5,000.
• Failing to provide income tax withholding notices can be assessed up to $100 for each failure, not to exceed $50,000 for a calendar year, up from $10 for each failure, not to exceed $5,000 for a calendar year.

Back to chart