The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted late last year with a January 1, 2020 effective date. It has been publicized as the most significant piece of legislation affecting the US retirement system in more than a decade, and will inevitably affect a majority of Americans saving for retirement. The law is a collection of singular ideas that have been consolidated into one act. The new legislation is just the start of a critical conversation around the importance of retirement savings, and how we can make retirement plans work better for employees through increased flexibility and improved access to products and information.

The SECURE Act provides modest improvements to some retirement rules, e.g., extending the required beginning date from age 70½ to age 72. IRA contributions will also be permitted by individuals after age 70, provided they continue to have earned income, thus enhancing their ability to strengthen their retirement savings. A trade-off for these modest improvements is the mandatory payout of inherited retirement accounts over a period of ten years. Previously, a designated individual beneficiary could “stretch” distributions over their life expectancy, but the ten-year payout rule now supersedes the old “stretch” provisions.

The SECURE Act expressly notes, the Required Minimum Distribution (RMD) is being increased to age 72 years from 70½. If an individual is born on or after July 1, 1949, they will not have to take a RMD until they turn age 72. However, those who turned 70½ in 2019 will fall under old rules; they will receive their initial RMD by April 1, 2020, and will continue to receive distributions each year.

The SECURE Act includes several enhancements that necessitate additional guidance before participants and plan sponsors can take full action. For example, the act includes a provision that permits participants to elect a penalty-free in-service withdrawal of up to $5,000 within one year following the birth or adoption of a child. It also allows for later repayment of such withdrawals. Currently, the provision is optional for plan sponsors to adopt, but it is unclear if the 20% federal income tax withholding is also optional at the time of distribution.

Additional provisions of the SECURE Act:

  • Qualified Automatic Contribution Arrangement (QACA) safe harbor plans are allowed to increase the cap on automatically raising payroll contributions to 15% from 10% of an employee’s paycheck, provided they are given the option to opt out.
  • “Lifetime income disclosure statements” will be required annually on participant statements. They serve to provide increased transparency into retirement income and offer a better gauge of your potential monthly income throughout retirement.
  • Plans will be required to provide participants with an annual lifetime income disclosure, converting their account balance into an income stream at retirement.
  • Elimination of the annual notice requirement for nonelective 401(k) safe harbor plans that provide an employer contribution of at least 3% of each eligible employee’s compensation. The notice requirement still applies to plans using a safe harbor matching contribution option.
  • Plans may be amended to adopt a nonelective ADP safe harbor option at any time prior to the 30 days before the end of the plan year. Alternatively, a plan can adopt the ADP safe harbor option prior to the last day of the plan year, provided the employer uses a 4% nonelective contribution (instead of 3% of compensation).
  • Increases in the penalties for failure to file Form 5500, withholding notices, and annual registrations of certain plans.
  • Companies can adopt a new plan as late as the employer’s tax filing deadline, including extension. This may allow an employer to see how profits are doing before adopting a new plan.
  • More favorable tax credits for certain small employer plans, effective for taxable years/plan years beginning after December 31, 2019. For example, the credit for adopting a retirement plan ranges from $500 to $5000 depending on the number of employees and number of non-highly compensated employees (NHCEs).
  • Permanent nondiscrimination testing relief with respect to benefit accruals and benefits, rights and features provided to a closed class of participants in defined benefit (DB) plans.
  • Certain long-term, part-time employees, working at least 500 hours per year for 3 consecutive years, in non-union 401(k) plans, will be eligible to make elective deferrals, effective for plan years beginning after December 31, 2020. However, employee service prior to that date may be disregarded for purposes of this rule. As a result, the first time part-time employees are required to be allowed to defer under this rule will be in 2024.
  • Reforms to help address the retirement “coverage gap” by permitting open multiple employer plans (MEPs), thereby expanding access for workers currently without a workplace savings plan, effective for plan years beginning after December 31, 2020.
  • Allowance of consolidated Form 5500 filings by a group of similar defined contribution plans with specific shared characteristics, effective for plan years beginning after December 31, 2021.
  • Procedural changes will begin immediately, but plan sponsors will have until the end of the 2022 plan year to adopt any plan amendments.
  • Various additional provisions, (e.g. elimination of stretch IRAs and trust and estate planning strategies) will be discussed by my teammates in subsequent Perspective articles. Additionally, those provisions that do not impact accounts administered by Greenleaf Trust, (e.g. restricted allowance of annuities in retirement plans and elimination of loans via credit cards) are not detailed in this article.

The SECURE Act is structured so that businesses, their workers and other retirement savers can benefit by having increased access to workplace retirement plans and expanded retirement savings. The legislation will impact defined contribution (DC) plans, defined benefit (DB) plans, individual retirement accounts (IRAs) and 529 plans. It is anticipated that in the months ahead the IRS will provide additional guidance on many aspects of the SECURE Act. However, at Greenleaf Trust we have already begun addressing necessary changes to our systems and processes to comply with the law. As the year proceeds, plan sponsors will be informed of additional features they may consider for plan design, as well as guidance regarding documentation and necessary plan amendments. As always, feel free to reach out to any member of your Greenleaf Trust team with specific questions regarding the SECURE Act’s impact on you and your retirement savings.