The SECURE Act’s intended impact on 401(k) plans

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) combines provisions originally introduced in the Senate’s Retirement Enhancement and Savings Act (RESA) and the House’s Family Savings Act (FSA). The following represents some of the key provisions included in the current legislation, as well as John Hancock’s views on the intentions behind each.

1    The enablement of MEPs

What’s proposed: Employers with no business or industry relationships would have the ability to band together to offer multiple employer plans (MEPs). Participating employers would be required to use a pooled plan provider to perform all administrative duties necessary to ensure regulatory compliance. Also, the SECURE Act would eliminate the one bad apple rule, where one employer’s noncompliance can threaten the tax-qualified status of an entire plan. 

The purpose: Cost is the primary reason small employers don’t offer retirement plans. This provision should help make DC plans more affordable and less administratively burdensome for smaller businesses.

2    A change in the commencement age for RMDs 

What’s proposed: A delay in the required minimum distribution (RMD) starting age, from the current age of 70½ to 72, would be allowed. 

The purpose: People are living longer, and they need their savings to go the distance. Delaying RMDs allows for the continued growth of retirement accounts on a tax-deferred basis while postponing the erosion of savings due to taking taxable distributions. This provision should provide retirees with increased flexibility. RMDs usually have a tax effect on retirees (especially those with large retirement account balances), because these distributions are taxed as ordinary income. If retirees are bumped into higher tax brackets, they become at risk of facing higher taxes on Social Security benefits and Medicare.

3    A new requirement to provide a lifetime income disclosure

What’s proposed: All DC plan benefit statements would be required to include a lifetime income disclosure. This disclosure would project the amount of monthly income participants would receive if their total accrued benefits were paid out as a single-life or qualified joint-and-survivor annuity. 

The purpose: This provision should result in participants having a better understanding of their retirement savings and whether their expected cash flow in retirement will be enough to meet their expected expenses.

4    A new eligibility requirement for long-term, part-time employees

What’s proposed: This proposal is a provision that all 401(k) plans (except those that are collectively bargained) have a dual eligibility requirement. Under this proposal, employees would qualify for participation by working 3 consecutive years of at least 500 hours each or after a year of service totaling at least 1,000 hours. 

The purpose: This provision should allow for greater participation opportunities for part-time employees. Currently, many such employees are stymied by the 1,000 hours of service requirement.

5    A new plan withdrawal allowance for birth or adoption

What’s proposed: This plan allows for a “qualified birth or adoption distribution” of up to $5,000, exempt from the early withdrawal penalty and mandatory 20% federal withholding fee. Repayment of the withdrawal would also be allowed.

The purpose: This proposal removes a possible reason to not save for retirement while providing financial assistance for participants facing childbirth or adoption expenses.

What happens next?

The House and Senate must come together on a joint bill. The Senate’s RESA bill excludes some SECURE Act provisions and extends beyond retirement plans, so it’s premature to predict the successful passage of retirement reform legislation at this point. For now, we urge you to stay plugged into what’s happening on Capitol Hill, keep your clients informed about changes that could affect their retirement strategies and programs, and expect a very interesting year ahead.