SECURE Act Passage Now Secure

December 19, 2019

The world of benefits regulation has seen significant change lately, with the enactment of tax reform in 2017 (see “Focus on ERISA - Tax Reform Includes Benefits and Compensation Provisions”), and the rise and fall of the U.S. Department of Labor’s amended fiduciary rule (see “ERISA’s Amended Fiduciary Rule - Done, Done, on to the Next One”). Now, with the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act” or the “Act”), Congress has just passed some bipartisan enhancements to the way Americans save for retirement that will make changes to a number of provisions of Internal Revenue Code of 1986 (the “Code”) and Employee Retirement Income Security Act of 1974 (“ERISA”). The SECURE Act has now been attached to a year-end spending bill, the Further Consolidated Appropriations Act, 2020,1 which, being passed by the House on December 17, 2019, was passed by the Senate today (December 19, 2019). In the interest of getting information to you before significant time has elapsed after the passage of the Act, this OnPoint is being distributed as the Act is being passed, before there has been the opportunity to confirm that there were no changes made in connection with its finalization. Thus, it is possible that last-minute changes to the Act made before its passage may not be reflected in the discussion below.

Background

In 2013, Congress considered the Secure Annuities for Employee Retirement Act of 2013 (the “SAFE Act”),2  introduced by former Senator Orrin Hatch.  Title II of the SAFE Act included a grab-bag of changes intended to simplify or relax various regulatory requirements relating to retirement plans, but the bill was never enacted. In 2016, Senator Hatch introduced the first version of the Senate bill that has now become the SECURE Act. The 2016 legislation included a number of provisions from the SAFE Act and other pieces of legislation, in some cases with modifications.

Though it was hardly a SAFE journey for this legislation, with the SECURE Act having passed both the House and the Senate, it now appears nearly certain that the SECURE Act will become law, and that it is now a SAFE time to SECURE an understanding of the bill.  A summary of the SECURE Act follows below.

Discussion

The Act may be viewed as touching on four general areas: (i) expanding the availability of tax-qualified retirement savings to more employees and expanding the time horizon in which individuals may keep their retirement assets in tax-deferred accounts; (ii) certain technical changes regarding tax-qualified plans and IRAs; (iii) selected changes regarding Section 529 plans; and (iv) administrative and other miscellaneous provisions.  Most of the provisions will be effective for plan years after December 31, 2019.

A.  Expanding Tax-Qualified Retirement Savings

Multiple Employer Plans (§ 101)

Certain multiple employer plans (“MEPs”) are defined contribution plans jointly sponsored and maintained by more than one employer.  This type of MEP potentially facilitates the ability of employers (particularly smaller employers) to share costs in operating a plan and use their combined bargaining power to allow for access to plan services and to negotiate lower fees.  There has been uncertainty under the Code and ERISA regarding the extent to which unrelated employers may adopt MEPs.The Act generally will permit so-called “open MEPs” that would not need to be sponsored by a group or association or by a professional employer organization, and will generally eliminate the risk under plans administered by “pooled plan providers” that the actions of one employer could adversely affect the tax-qualification of the plan with respect to other sponsoring employers.  The Act also will simplify various notice and other administrative requirements applicable to certain small MEPs, and makes a number of other miscellaneous MEP-related changes.

Required Minimum Distributions for IRAs (§§ 114, 401)

Under prior law, a participant in a defined contribution plan that is a former employee or an IRA owner was required to take a minimum distribution from their defined contribution plan or IRA account by April 1 of the calendar year following the calendar year in which the individual reached the age of 70½. The Act amends Section 401(a)(9) of the Code to change this age to 72.  This change will apply to individuals who attain 70½ after December 31, 2019.  This change possibly could result in a significant increase in the amount of money that may remain in tax-beneficial savings vehicles.

In addition, under prior law, beneficiaries of an IRA (other than spouses, in many cases) or defined contribution plan account could “stretch” the required minimum distributions over their own lifetime.  The Act amends Section 401(a) of the Code so that following the death of a participant in a defined contribution plan or an IRA owner, distributions generally must be made by the end of the 10th calendar year following the year of the death.  The rule would not apply to surviving spouses of the participant or IRA owner, disabled or chronically ill beneficiaries, beneficiaries who are not more than 10 years younger than the participant or IRA owner or to children of the participant or IRA owner who have not reached the age of majority.

Maximum Age for Deducting Traditional IRA Contributions (§ 107)

Under prior law, Section 219(d)(1) of the Code prohibited a deduction to an IRA beneficiary if such individual attained age 70½ before the end of the taxable year in which the contribution was made.  The Act repeals Section 219(d)(1) such that a deduction is allowed regardless of the age of the individual beneficiary.  This provision could have a significant impact on the level of retirement savings for older Americans.

Limitations on Automatic Contributions (§ 102)

The generally applicable limits on contribution rates under “qualified automatic contribution arrangements” (“QACAs”) will be relaxed.  Under a QACA, each employee that has not made an affirmative decision to participate in the plan is treated has having elected to defer at least 3% of his or her compensation until the end of the participant’s first full year of participation.  If initially set at the 3% minimum, contribution rates must be increased by 1% for each of the next three successive years, such that the employee elective contribution percentages are 4% of compensation in the second year, 5% in the third year, and 6% for the fourth and all subsequent plan years.  Under prior law, an employer establishing a QACA has discretion, subject to the 3% floor, to set the initial level of automatic contributions as well as automatic increases, so long at the automatic contribution rates do not exceed 10% of the participant’s compensation.  The Act increases the upper limit on such automatic employee deferrals from 10% to 15% of the employee’s compensation.

Section 401(k) Plans and Long-Term Part-Time Employees (§ 112)

Under prior law, plan sponsors were allowed to exclude workers who work fewer than 1,000 hours per year.  The Act introduces a dual eligibility standard under which an employee will be eligible to participate in a plan if the employee satisfies the present 1,000 hours threshold or has three consecutive years of at least 500 hours of service.  Plan sponsors may exclude this latter eligible group for purposes of the plan’s nondiscrimination and coverage testing.  This rule would not affect collectively bargained plans.  Proponents of this change believe it will boost retirement savings for women, who are more likely to have part-time jobs.

Tax Credits (§§ 104, 105)

Section 45E of the Code provides a tax credit to subsidize the establishment or administration of a new retirement plan and retirement education provided to plan participants.  To be eligible for the credit, generally, an employer must have 100 or fewer employees who earn at least $5,000 in the relevant plan year.  Under prior law, the credit was capped at the lesser of 50% of the start-up costs or $500 for each of the plan’s first three years.  The Act increases the $500 annual limit to $5,000, available for use in each of the first three years of the plan’s operation.

In addition to the credit for sponsors of new plans, the Act adds a tax credit available to small employers who adopt an automatic enrollment arrangement when sponsoring a new 401(k) plan or SIMPLE IRA.  The amount of the credit would be a flat $500 available for each of the first three years after a new plan’s adoption, and would also be available to plan sponsors converting an existing plan to an automatic enrollment design.

B.  Certain Technical Changes Regarding Tax-Qualified Plans and IRAs

Making Loans Through Credit Cards and Other Similar Arrangements (§ 108)

Under prior law, there was no restriction on the method by which a plan participant could take a loan from a tax-qualified plan.  The Act prohibits tax-qualified plans from making loans under Section 72(p) of the Code through the use of credit cards or similar mechanisms.

Penalty-Free Withdrawals from Retirement Plans in Case of the Birth or Adoption of a Child (§ 113)

Section 72(t) of the Code generally imposes a 10% tax penalty on distributions from a tax-qualified plan or an IRA prior to the participant attaining age 59½.  There are a range of exceptions to this penalty.  The Act amends Section 72(t) of the Code to add an exception that allows penalty-free “qualified birth or adoption distributions” of not more than $5,000 during the one-year period beginning on the date on which a child is born or which the adoption is finalized.  Eligible adoptees must be under the age of 18 (unless physically or mentally incapable of self-support).  Such distributions may be repaid.  A similar provision had been proposed in the Family Savings Act of 2018.

Protection of Older, Longer Service Participants (§ 205)

As plan sponsors have transitioned from defined benefit plans to defined contribution plans, many defined benefit plans have faced difficulty in satisfying minimum participation and nondiscrimination testing requirements.  This can be especially true where sponsors implemented a “soft freeze” whereby no new participants may enter a plan, but current participants continue to accrue benefits and their compensation continues to increase as they work.  The Act treats certain plans as satisfying minimum participation requirements if the plan satisfied these requirements on the effective date of the freeze.  In addition, under the Act certain plans would not fail nondiscrimination requirements if a number of conditions are met.  Proponents of this section hope that it will give plan sponsors the option of continuing a plan rather than forcing a “hard freeze” where no future benefits are accrued.  A similar provision had been previously proposed by Congressman Richard Neal and Senators Rob Portman and Ben Cardin in the Retirement Security Preservation Act of 2017.

Stipend and Non-Tuition Fellowship Payments (§ 106)

The Act amends the term “compensation” in Section 219 of the Code to expressly include amounts paid to an individual to aid in the pursuit of graduate or postdoctoral study.  With the proposed change, graduate and postdoctoral students could use these grants to make IRA contributions.

Certain Payments to Home Healthcare Workers (§ 116)

Generally, payments made to home healthcare workers are not included in their gross income under Section 131 of the Code.  As such, the payments are not eligible to be contributed to an IRA or a qualified plan.  Under the Act, such payments will be considered eligible compensation for purposes of the rules governing defined contribution plans and IRAs.

Safe Harbor Notices (§ 103)

Although regarded by many as a beneficial and often preferred plan design option, safe harbor 401(k) plans (plans that are deemed to meet certain mandated qualification testing if certain conditions are met) are subject to a number of requirements that may be perceived as somewhat inflexible or otherwise burdensome.  The Act eliminates the notice requirement for safe harbor status based on nonelective contributions under Section 412(k)(C) of the Code. The Act also loosens the rules for certain safe harbor 401(k) plans to allow a plan to amend nonelective status up to 30 days before the end of the plan year (and, in certain cases, beyond such 30-day period).

Portability (§ 109)

Participants who have selected a discontinued lifetime income investment, such as an annuity, can now receive an in-service transfer of the investment option to an IRA (or other qualified plan that supports the option) in order to avoid surrender fees.  This in-service distribution must be made within 90 days after the lifetime income option is no longer authorized to be held in the original plan.

C.  Changes Regarding Section 529 Plans

Section 529 Plans (§ 302)

Plans covered by Section 529 of the Code generally allow for advantageous tax treatment for qualified tuition programs.  The Act allows distributions from Section 529 plans to receive tax-free treatment for (i) fees, books, supplies and equipment required in certain apprenticeship programs and (ii) up to $10,000 used to pay principal or interest on qualified educational loans.  

D.  Administrative and Other Miscellaneous Provisions

Fiduciary Safe Harbor for Selection of Lifetime Income Provider (§ 204)

In 2008, the Department of Labor finalized a regulation establishing a safe harbor for the selection of annuity providers by plan fiduciaries, given the long-term nature of the contract often under consideration.5  The regulation led many to conclude that it was impractical or too limited in its protections with regard to a fiduciary’s duty of prudence in the selection process particularly in evaluating the financial capabilities and long-term integrity of the insurer.6  The Act amends Section 404 of ERISA to provide steps that a fiduciary can take to fall within a safe harbor when selecting an insurer for guaranteed retirement annuity contracts.  In particular, the fiduciary will be deemed to ERISA’s duty of prudence requirement if the fiduciary engages in an objective, thorough and analytical search, considers the financial capability of insurers found to satisfy the obligations of the annuities and concludes that the insurer is capable of satisfying such obligations at the time of selection.  In reviewing the financial capability of an insurer, the fiduciary will be allowed to rely on representations from the insurer.  By following the safe harbor provisions, a fiduciary will not be liable for losses that result to a participant (or beneficiary) due to an insurer’s inability to satisfy its financial obligations under the annuity contract.

Lifetime Income Disclosure (§ 203)

The Act requires pension benefit statements under Section 105 of ERISA to include a “lifetime income disclosure.”  This disclosure will set forth the amount of monthly payments the participant or beneficiary would receive if the total accrued benefits were used to provide a qualified joint and survivor annuity.  The Secretary of Labor is directed to develop a model disclosure as well as assumptions to be used by plan administrators in drafting the disclosures and calculations.  The provision is similar to one proposed by the Department of Labor during the Obama Administration.

Increase in Penalty for Failure to File; Coordination Regarding Certain Excise Taxes (§§ 402-404)

The Act increases the addition to tax for failure to timely file a tax return in Section 6651 of the Code to the lesser of $435 or 100% of the amount required to be shown as tax on such return.  The Act also increases the penalty of failure to file Form 5500 to $250 for each day the failure continues not to exceed $150,000, and increases the failure to file a pension plan registration statement to $10 for each participant with respect to whom the failure applies, multiplied by the number of days during which the failure continues, up to $50,000 for any plan year.  The penalty for failure to file a required notification of change is increased to $10 for each day during which the failure continues up to $10,000.

The Act amends Section 6103 of the Code (which generally provides that returns and return information are confidential and prohibits government officials from disclosing them) to allow the Service to share returns and return information with the U.S. Customs and Border Protection for the purpose of administering and collecting the heavy vehicle use tax in Section 4481(a) of the Code.

Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year (§ 201)

The Act provides that, for employers that would like to start a new retirement plan, the employer need only adopt such plan on or before the due date (with extensions) for the employer’s tax return.

Combined Annual Reports for Group of Plans (§ 202)

The Act directs the Secretaries of the Treasury and Labor to modify Form 5500 so that group plans can file one aggregated annual return or report and satisfy the requirements of Section 6058 of the Code and Section 104 of ERISA.  Plans must have the same trustee, named fiduciary, administrator, plan year, and be providing the same investment options to participants and beneficiaries.  The Secretaries must ensure that the new form will contain information that will enable a participant in a plan to identify any aggregate return or report for such plan.

Church-Controlled Organizations (§ 111)

Certain plans may now expressly be offered to employees (and certain former employees) of certain tax-exempt organizations related to religious organizations, as well as to qualified ministers.

Custodial Accounts on Termination of Section 403(b) Plans (§ 110)

Where an employer terminates a 403(b) plan under which amounts are contributed to a custodial account, and the person holding the account is a qualified IRA trustee under Section 408(a)(2) of the Code, the custodial account will be deemed an IRA.

Community Newspaper Plans (§ 115)

The Act allows sponsors of “community newspaper plans” (as defined in the Act) to use alternative funding rules so as to reduce the annual amount sponsors would be required to contribute to their pension plans.  A similar provision had been proposed in the Save Community Newspaper Act of 2018.

PBGC Premiums for “CSEC” Plans (§ 206)

Cooperative and Small Employer Charity (“CSEC”) plans are defined benefit plans subject to special funding rules,8  but are subject to the same PBGC flat-rate and variable-rate premium requirements as other plans covered by Title IV of ERISA.  The Act changes the flat and variable PBGC premium rates for CSEC plans to the legislated premium rates that applied to single-employer and multiple-employer plans prior to the Pension Protection Act of 2006 (i.e., $19 per participant and $9 for each $1,000 of unfunded vested benefits).

Volunteer Firefighters and Emergency Medical Responders (§ 301)

The Act restores exclusions for state or local tax benefits and qualified reimbursement payments to members of volunteer emergency response organizations for one year.  It also increases the exclusion for reimbursement payments to $50 for each month a volunteer serves.  Similar provisions were introduced in the Cooperative and Small Employer Charity Pension Flexibility Act in 2015.

Modification of Rules Relating to the Taxation of Unearned Income of Certain Children (§ 501)

The Act removes rules that taxed children on certain unearned income (such as military survivor benefits) by deleting paragraph 4 of Section 1(j) of the Code. 

Plan Amendment Provisions (§ 601)

The Act provides for a remedial amendment period for any plan amendments required under the Act.  The period for most calendar year plans runs until December 31, 2022, and for certain governmental plans until December 31, 2024.


Conclusion
The Act contains a wide range of changes to the tax and other laws applicable to a variety of tax-preferred savings vehicles, including tax-qualified retirement plans.  In a number of important respects, the Act will bring welcome changes that may serve to increase access to retirement plans, give greater clarity in selecting certain desired investment products, and to simplify certain administrative burdens – and alleviate costs – for smaller employers.  With the inclusion of the Act in the Further Consolidated Appropriations Act, 2020, it now seems SAFE to proceed on the basis that, after going on quite the circuitous journey, the Act is about to SECURE its place in the law. 

Footnotes
1) H.R. 1865, 116th Cong., Div. O (2019).  For convenience, we continue to refer to the legislation discussed herein as the “SECURE Act” or the “Act” throughout.
2) S. 1270 (July 9, 2013), available at https://www.congress.gov/bill/113th-congress/senate-bill/1270/text. See generally Andrew L. Oringer & Andrew H. Braid, Will There Be SAFE Passage for a Grab-Bag of ERISA Changes?, 19 Pension Benefits Daily (Jan. 29, 2015).
3) After the release of Executive Order 13847 (August 31, 2018) (which generally directed the applicable regulators to pursue expanded coverage by retirement plans of employees of relatively smaller employers and of individuals not in traditional employer-employee relationships), the U.S. Department of Labor on July 29, 2019 issued a regulation that sought to clarify the circumstances under which “bona fide” groups or associations of employers, and professional employer organizations, may sponsor defined contribution MEPs. This regulation identified a number of issues without fully resolving them and without addressing a number of key tax-qualification and legal issues surrounding MEPs. See also Department of Labor Request for Information, 84 Fed. Reg. 37545 (July 31, 2019).
4) IRAs are generally subject to the same minimum distribution requirements as employer-sponsored tax-qualified plans. Code § 408(a)(6).
5) 29 C.F.R. § 2550.404a-4.
6) See U.S. Department of Labor, Field Assistance Bulletin No. 2015-02.
7) See 78 Fed. Reg. 26727 (May 8, 2013).
8) See the Cooperative and Small Employer Charity Pension Flexibility Act, Pub. L. No. 113-197.