Changes to current rules applicable to retirement plans made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act (signed into law by President Trump on December 20, 2019) are (in most cases) already effective. In this article we review, very briefly, the effective dates of some of the key provisions of SECURE and sponsor issues they present.
We caution that SECURE compliance is something of a moving target. Given SECURE’s precipitous implementation schedule, new compliance issues with respect to plan administration are likely to emerge as sponsors, providers, and regulators begin working with the new rules.
For details on the SECURE provisions discussed, please see our article reviewing the new legislation.
Mandatory lifetime income disclosure
The new DC lifetime income disclosure requirement applies to benefit statements furnished more than 12 months after DOL issues rules as to how “lifetime income streams” are to be determined and model notices. Sponsors will want to follow (and where appropriate submit comments on) DOL’s regulatory process in this regard.
DC annuity safe harbor
The DC annuity safe harbor is generally effective as of the date of enactment. Sponsors considering the inclusion of an annuity distribution option will want to review the new safe harbor to determine if it addresses their concerns.
Increase the mandatory distribution age to 72
The increase in the mandatory distribution age to 72 is effective for 2020 and only applies to individuals who attain age 701⁄2 in 2020 or later. Thus, the change does not apply to an individual who attained 70 1/2 in 2019 and is only 71 in 2020. Sponsors will want to consult with their recordkeepers/administrators to implement this change. At least one immediate compliance issue likely to require further guidance has been identified with respect to this change: distributions to persons turning 70 1/2 in 2020 will not be “required minimum distributions” and will therefore be subject to different income tax withholding rules. Revision of systems to reflect this change will in many cases not be immediate.
Closed group nondiscrimination relief
Closed group nondiscrimination relief – allowing DB plans that meet certain conditions to be aggregated with DC plans and tested on a benefit accruals basis, without having to satisfy a (burdensome) “gateway” test – is generally effective as of the date of enactment. SECURE includes, however, “special rules” allowing the sponsor to elect: (1) to have the SECURE nondiscrimination relief apply years beginning in 2014; and (2) to reinstate (in certain circumstances) benefit accruals, and/or benefits, rights, and features, that (before the SECURE date of enactment) had been eliminated for a closed class.
IRS has been providing, on a temporary basis, limited nondiscrimination relief for closed groups.
Sponsors with closed group issues will want to review whether to adopt a pre-SECURE-enactment effective date and whether the relief for reinstatement of benefits might apply. They will also want to consult with their actuary about compliance with the new rules generally.
Elimination of certain “stretch” payments to beneficiaries under DC plans
SECURE’s new requirement that payments under DC plans (and IRAs) be made (subject to certain exceptions) within 10 years of the participant’s death generally applies to distributions with respect to employees who die in 2020 or after. There is an exception for certain binding annuity contracts.
DC plan sponsors will want to review the application of this new rule with their administrator/recordkeeper. Certain issues, e.g., what constitutes a binding annuity contract, may require further clarification by IRS.
Require coverage of long-term part-time employees
SECURE’s requirement that 401(k) plans cover employees working more than 500 but less than 1,000 hours per year for three consecutive years generally applies to plan years beginning after December 31, 2020. For purposes of the new requirement, years beginning before January 1, 2021 are not taken into account. Thus, generally, the first long-term part-time employee will be eligible beginning in 2024.
Increase in the safe harbor auto-escalation cap
SECURE’s increase in the cap on the maximum deferral percentage in a safe harbor 401(k) plan from 10% to 15% is effective in 2020. There is likely to be a lag in programming plan recordkeeping systems to capture this increase. We expect IRS guidance on two issues: Can the increase in the cap on the maximum deferral percentage in a safe harbor plan be increased mid-year (in effect, as a catch up)? How will plans that incorporate the relevant section (Internal Revenue Code section 401(k)(13)(C)(iii)) be required to implement the increased cap?
Credit card loans
The prohibition on credit card loans is effective as of the date of enactment. Immediate implementation is, however, likely to be problematic.
Effective dates more broadly
We would expect that there will be a call for some sort of relief from the consequences of a failure to comply immediately (e.g., as of January 1, 2020) with some of the requirements of SECURE, as sponsors and providers work to understand and then implement required changes.
We will continue to follow these issues.