SECURE Act 101: New Law Changes Plan Policies, Creates Design Options
James Quaid, Larry A. Ruff
Defined contribution plan sponsors have some important decisions to make and opportunities to consider in the wake of the enactment of the Setting Every Community Up for Retirement Enhancement (SECURE) Act at the end of 2019. The Act is intended to boost retirement financial security on several fronts.
Offering safe harbor for annuities
The SECURE Act creates a plan sponsor safe harbor for annuity selection with respect to the selection of an insurer for a guaranteed retirement income contract (GRIC). The purpose is to limit plan sponsors’ potential liability if an insurer is unable to satisfy its financial obligations under the annuity contract.
To meet the safe harbor, plan sponsors must undertake “an objective, thorough, and analytical search for the purpose of identifying insurers from which to purchase” annuity contracts. Additionally, plan sponsors need to assess the financial capability of the insurer to satisfy its obligations under the GRIC, and the cost of the GRIC, which must be reasonable.
The plan sponsor must obtain written representation from the insurer involving their compliance with state licensing and laws. This includes representation on audited financial statements, financial examinations and that their reserves satisfy the statutory requirements of their state.
A fiduciary that satisfies the requirements under the Act will not be liable “following the distribution of any benefit, or the investment by or on behalf of a participant or beneficiary pursuant to the selected GRIC or for any losses that may result to the participant or beneficiary due to an insurer’s inability to satisfy its financial obligations under the terms of such contract.” This safe harbor provision was effective on the date of enactment.
Promoting lifetime income
The SECURE Act contains interrelated provisions that deal with lifetime income options for plan participants. Important changes include:
Portability of Certain Investments
The Act allows participants to take a distribution of “lifetime income investments” without regard to restrictions on withdrawals, if the lifetime income investment is no longer authorized to be held as a plan investment option. This provision is effective for plan years beginning after December 31, 2019.
Annual Disclosure of Projected Income
The Act requires sponsors to furnish participants with annual lifetime income disclosures that provide an estimate of the participant’s lifetime income stream in monthly payments that they would receive after retirement. This is based on the participant’s current account balance and using required assumptions. The effective date of this provision will be one year after the Department of Labor issues regulations spelling out how those projections need to be made.
Additional Provisions of the SECURE Act
Additional provisions include:
- Provision for the creation of “Pooled Employer Plans” (PEPs), easing restrictions on multiple employer plans by allowing them to be sponsored by financial institutions and offered to employers without any common geography or industry category;
- Allowing an employer to adopt a retirement plan retroactively, that is after the close of a taxable year, but before the time for filing the tax return of the employer;
- A 401(k) or 403(b) plan may be amended to add a safe harbor nonelective contribution of either 3% or 4% of participant compensation during or after the end of a plan year;
- Raising the safe harbor cap on auto-enrollment deferrals from 10% to 15%;
- Eliminating the annual notice requirement for nonelective 401(k) safe harbor plans;
- Allowing participants to take penalty-free distributions for expenses related to the birth or adoption of a child;
- Raising the age for required minimum distributions from 70½ to 72 for those individuals who were born on or after July 1, 1949;
- Eliminating “stretch IRAs” for most beneficiaries; and
- Allowing participants to make IRA contributions after age 70½.
Most plan sponsors will have until the end of 2022 to adopt plan amendments under the new law, though effective dates for the Act’s many provisions vary.
Time to take advantage
Some of the more narrowly applicable provisions of the SECURE Act are not included in this summary. We recommend that you consult an ERISA attorney or your tax advisor for a more complete briefing on all of the law’s provisions that may affect your plan.
Sidebar: Including part-time employees
One key component of the SECURE Act includes requiring certain part-time employees to participate in 401(k) plans. It applies to employees age 21 years of age or older who have worked at least 500 hours annually during the prior three-year period.
Eligible part-time employees will be allowed to make employee deferrals to their employer’s 401(k) plan. Employers will not be required to contribute to the 401(k) accounts of part-time employees. Nor will employers need to count them in their participant census for discrimination testing purposes.
This provision of the SECURE Act does not take effect until plan years beginning in 2021. However, the three-year clock on prior employment is not retroactive, so employers could defer granting eligibility to these part-timers for another three years.
For more information, contact Jim Quaid at firstname.lastname@example.org or Larry Ruff at email@example.com or 312.670.7444. Visit ORBA.com to learn more about our Employee Benefit Plans Services.