After months of uncertainty, Congress finally passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) as part of a year-end appropriations bill, and on December 20, 2019, the president signed it into law. This article summarizes four things we think you should understand about the new law. For a more complete discussion of the provisions discussed below, as well as many others, download our white paper now.
The SECURE Act represents one of the most significant pieces of retirement plan legislation in more than a decade. The new legislation includes policy changes that will affect defined contribution (DC) plans, defined benefit (DB) plans, and individual retirement accounts (IRAs). It also addresses rule changes associated with 529 college savings plans.
Four key aspects of the SECURE Act
1 Encourages the establishment of small business retirement plans and auto-enrollment through increased tax credits
To help defray the cost of adding a 401(k) plan, the new law has increased the tax credits available to employers with up to 100 employees. These credits can now be as high as $5,000 and last up to three years. And there’s an additional credit available to small businesses that include automatic enrollment in their new plan or that add the feature to an existing plan.
2 Increased access to lifetime income options (annuities) inside DC plans
Under the new law, DC plans will be required to provide every participant monthly annuity projections of their accumulated account balance, based on U.S. Department of Labor assumptions.
To help spur the availability of lifetime income options within plans, the new law makes it easier for DC plan fiduciaries to retain safe harbor status in selecting annuity providers. Fiduciaries can now rely on an insurer’s own representations regarding its ability to fulfill the contract, along with its status, under state insurance laws.
The new safe harbor protections also clarify that there’s no requirement to select the lowest-cost contract and provide criteria for evaluating the total value delivered by insurers and their annuity offerings.
This aspect of the legislation could have a significant impact on how DC plans present information to participants, shifting the focus from balances to projected income (and ultimately, decumulation) in retirement.
3 Loosening some restrictions
The SECURE Act also loosens some restrictions in an effort to ease some of the most significant challenges along the way to retirement readiness.
For instance, one provision makes DC plan withdrawals available without the 10% early withdrawal tax penalty to help with childbirth or adoption expenses. Another adds student loan payments to the list of allowable 529 educational savings plan expenses.
Two important provisions target the needs of those approaching or settling into retirement: raising the commencement age for required minimum distributions (RMDs) from 70 ½ to 72 and removing the age 70 ½ restriction on traditional IRA contributions.
4 It addresses the administrative burden for plan sponsors
The SECURE Act’s provisions zero in on a few specific inconveniences that could complicate, delay, or prevent positive plan action. This includes extending the deadline for retroactively adopting a retirement plan for a previous year to that year’s actual tax-filing date (including any extensions). It also modifies deadlines and notification requirements for safe harbor plans while streamlining annual reporting for closely related DC plans and testing requirements for frozen DB plans.
Other SECURE Act provisions worth noting
One change that’s already stirring controversy is the elimination of the stretch IRA option for inheritors of retirement plan balances who aren’t spouses and don’t qualify as eligible designated beneficiaries.
In what’s being described as the SECURE Act’s biggest tax revenue generator, these other inheritors will need to take distribution of—and pay taxes on—inherited non-Roth retirement account balances within 10 years.
And last, the government has opened the door to another flavor of retirement plan—with the establishment of open multiple employer plans. For the first time, unrelated businesses will be allowed to band together for the sole purpose of starting and offering a DC plan for their collective employees.
Participating employers would be required to use a pooled plan provider to perform all the administrative duties necessary to ensure regulatory compliance.
Next steps for retirement plan professionals
SECURE Act amendments are due by the last day of the first plan year beginning on or after January 1, 2022 (January 1, 2024, for governmental and collectively bargained plans), unless the secretary of the Treasury sets a later date. So yes, the clock is ticking.
However, as with any new legislation, there are many questions that need to be answered, and guidance or relief will be needed for certain provisions.
For now, we suggest taking some time to learn about the new provisions. The detailed white paper prepared by John Hancock’s ERISA consultants and attorneys is a great place to start. It includes details on each of the provisions and viewpoints on the intentions behind each one.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein.
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