Ashley Bell, CPA
How does the SECURE Act effect Your Retirement Plan?
By Ashley Bell, CPA
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law, as part of the Further Consolidated Appropriations Act, 2020 (H.R. 1865), which was primarily a budget and spending law. The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers (including for-profit and tax-exempt employers of all sizes). If you offer your employees a retirement plan, below are a list of rules that may affect your current retirement plan.
Credit Card Loans. Effective December 20, 2019, making new plan loans through any credit card or similar arrangement is prohibited. Any such loans will be treated as taxable distributions. If your plan has previously allowed credit card loans, any loans made prior to December 20, 2019, are not affected. By prohibiting this practice, the SECURE Act confirms that retirement plans are intended to provide retirement (not “rainy day”) savings.
Required Minimum Distributions (RMDs). Under prior law, RMDs from tax-qualified retirement plans, 403(b) and 457(b) plans generally had to start no later than April 1 of the calendar year following the later of (i) the year in which an employee attains age 70 ½ or the calendar year in which the employee retires (but 5-percent owners could not use this retirement rule). SECURE changed age 70 ½ to age 72 for RMDs for individuals who attain age 70 ½ after December 31, 2019. Employers should confirm that their plan administrator will immediately update all retirement plan distribution paperwork describing the RMD rules to reflect the new law.
“Stretch” beneficiaries eliminated for defined contribution (DC) plans. Under prior law, if payments to a non-spouse designated beneficiary under a DC plan (including 403(b) plans) began within one year after the participant’s death, such payments could be made ratably over the beneficiary’s life expectancy (i.e., potentially stretched out over decades), but if the payments did not begin by that time, they had to be paid out in full within five years after the participant’s death. Under the new law, for participant deaths that occur after December 31, 2019, all distributions generally must be paid within 10 years from the date of death. But the new 10-year payout rule does not apply to payments made to the participant’s surviving spouse, a child who has not reached the age of majority, a disabled or chronically ill individual (or trusts for the benefit of such individuals), or any individual who is not more than 10 years younger than the deceased participant, so long as the payments begin within one year after the participant’s death (but for surviving spouses, the payments are not required to begin until the deceased participant would have attained age 72). In addition, if such “eligible designated beneficiary” dies before receiving all payments owed to them, the remaining amount must be paid out within 10 years after the eligible designated beneficiary’s death.
Eliminating this “stretch” feature paid for most of the changes in the law made by the SECURE Act. Since the distributions cannot be stretched over multiple generations, participants might want to change beneficiary designation in many cases.
Plans may not be required to permit all delayed payments that the new law would allow. Rather, SECURE establishes the outer limits of what is permissible with respect to participants who die after December 31, 2019 (with later dates for certain collectively bargained and governmental plans).
The new rules may impact amounts payable to beneficiaries of a participant who has already begun to receive payments but who dies after 2019. The new law may also affect survivor benefit features, including annuity forms and certain installment payments.
Fiduciary safe harbor. Effective December 20, 2019, (DC) plan fiduciaries can use a new ERISA fiduciary safe harbor to reduce uncertainties when offering an annuity to plan participants. If plan fiduciaries satisfy the safe harbor, they are deemed to have met ERISA’s prudence standard for selecting an insurance carrier for the DC plan’s annuity option and will not be liable for losses if the insurer cannot satisfy its obligations under the annuity contract.
When an employer selects an annuity provider for its retirement plan, the employer is an ERISA fiduciary, which means that the employer must act solely in the best interests of plan participants and beneficiaries when making its decision. For DC plans, the new safe harbor clarifies that employers are not required to select the lowest cost contract. Rather, the employer can consider the value, features and benefits of the contract and attributes of the insurer (such as its financial strength) in considering the cost of the annuity contract.
The safe harbor also clarifies that employers are not required to review the appropriateness of the annuity after the contract has been purchased. The new safe harbor does not apply to cash balance or other Defined Benefit plans.
Conforming plan amendments (retroactive to the first day as of which the new rules apply) generally will not be required any earlier than the last day of the first plan year beginning in 2022 (or later for certain collectively bargained and governmental plans). Additional guidance from the IRS is expected on plan amendment deadlines.