2020 Appropriations Legislation Includes SECURE Act and Other Retirement Plan Changes

Congress has enacted the Further Consolidated Appropriations Act, 2020, which makes significant changes in the rules for retirement plans and IRAs. Many, but not all, of those changes are included in a portion of the legislation known as the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). Highlights for 401(k) plans include:

• Required Distributions.

  • Beginning Date. The required beginning date for minimum distributions with respect to individuals attaining age 70-½ after 2019 is increased to age 72.
  • Survivor Distributions. The required minimum distribution rules are amended to eliminate many beneficiaries’ ability to stretch out their distributions. Under the amendments, a deceased employee’s entire interest generally must be distributed within 10 years after the employee’s death. That change will not apply to “eligible designated beneficiaries,” including a surviving spouse, children who have not reached majority, and designated beneficiaries who are disabled, chronically ill, or not more than 10 years younger than the employee. If an eligible designated beneficiary dies before receiving the employee’s entire benefit, however, the remainder must be distributed within 10 years after the eligible designated beneficiary’s death. These amendments are generally effective with respect to employees who die after 2019.
• Multiple Employer Plans. For plan years beginning after 2020, the Code and ERISA are amended to diminish certain obstacles to creating multiple employer plans (MEPs).

  • Code. The Code amendments offer relief from the unified plan rule (which disqualifies the entire plan for qualification failures, even when those failures relate only to a single employer) if certain conditions are met. The relief is available for plans maintained by employers that have a common interest other than having adopted the plan—a concept that is not defined in the Code and was not addressed in the IRS’s 2019 proposed MEP regulations (see our Checkpoint article)—as well as for plans maintained by a “pooled plan provider” for participating employers that lack a common interest. Among other things, a pooled plan provider must be designated by the plan as an ERISA named fiduciary and plan administrator responsible for performing all administrative duties reasonably necessary to ensure that the plan meets its obligations under the Code and ERISA. The Treasury Secretary is directed to publish a model pooled employer plan meeting the requirements of the Code and ERISA.
  • ERISA. The ERISA amendments apply only to plans that are administered by a pooled plan provider and are not maintained for employers with a common interest. (The DOL addressed commonality of interest in its 2019 final MEP regulations (see our Checkpoint article)). These pooled employer plans will be treated as a single employer plan if the plan designates the pooled plan provider as a named fiduciary and plan administrator; reserves certain fiduciary responsibilities (including selection and monitoring of the pooled plan provider) for the participating employers; protects participants and their employers from unreasonable restrictions, fees, or penalties in certain situations; and meets certain other requirements.
• Nondiscrimination Safe Harbors. For plan years beginning after 2019, the legislation makes several changes to the use of nondiscrimination safe harbors.

  • Automatic Contributions. The maximum automatic contribution rate for plans using the nondiscrimination safe harbor under Code § 401(k)(13) is increased from 10% to 15% but only for years after the plan year following the year of a participant’s first contribution.
  • Notices. The annual safe harbor notice requirements under Code §§ 401(k)(12) and (13) are eliminated if the plan relies on safe harbor nonelective contributions (and not matching contributions).
  • Amendments. Plans may be amended to provide for safe harbor nonelective contributions after the beginning of a plan year if the plan did not at any time during that year provide for safe harbor matching contributions. The amendment must be adopted more than 30 days before the end of the plan year unless the rate of nonelective contributions is at least 4% of employee compensation, in which case the amendment must be adopted by the end of the following plan year.
• Part-Time Employees. Part-time employees who have attained age 21 and completed at least 500 hours of service for 3 consecutive 12-month periods will no longer be required to satisfy any additional period of service condition for making elective deferrals under a 401(k) plan, unless they are in a collective bargaining unit. Employees who participate solely due to this rule (e.g., because they have never completed 1000 hours of service during a year of service) can be denied matching and nonelective contributions, and can be disregarded for various nondiscrimination purposes. When applying this rule, only 12-month periods beginning after 2020 must be considered.
• Lifetime Income.

  • Fiduciary Safe Harbor. A fiduciary’s duty of prudence under ERISA is deemed satisfied in connection with selecting an insurer for a guaranteed retirement income contract if the fiduciary, after conducting a search and analysis meeting certain standards, concludes the insurer is financially capable of meeting its obligations and the contract cost is reasonable.
  • Disclosure. After regulations are issued, pension benefit statements will be required to include, at least once every 12 months, lifetime income disclosures showing the monthly payments a participant or beneficiary would receive if their total benefit were used to provide a lifetime income stream.
  • Investment Portability. For plan years beginning after 2019, amounts invested in an option with a lifetime income feature—including amounts attributable to elective deferrals—may be distributed in a trustee-to-trustee transfer or by distributing an annuity contract up to 90 days before the investment ceases to be a permissible investment option under the plan, without regard to restrictions on in-service distributions.
• Credit Card Loans. The exception that prevents plan loans from being treated as taxable distributions is denied to any loan made “through the use of a credit card or any other similar arrangement.”
• Childbirth or Adoption. Plans may allow participants to take distributions of up to $5,000 (per controlled group) for a qualified birth or adoption without violating the distribution restrictions applicable to 401(k) and certain other plans. Individuals who receive these distributions may repay the amount distributed to the plan or to another plan to which a rollover contribution could be made.
• Consolidated Form 5500. The IRS and DOL are directed to modify the annual reporting rules to allow members of certain groups of defined contribution plans with the same plan year, plan investments, trustee, named fiduciaries, and administrator to file a single aggregated Form 5500.
• Tax Credits. The maximum tax credit for a small employer’s qualified startup costs associated with the establishment and administration of an eligible employer plan is increased to as much as $5,000 per year (depending on the number of eligible nonhighly compensated employees). The legislation also establishes a new tax credit for eligible small employers that adopt an automatic contribution arrangement. Small employers are generally those with 100 or fewer employees.
• Disaster Relief. The legislation includes temporary disaster-relief provisions that, among other things, waive the 10% additional tax on early distributions for “qualified disaster distributions” up to a specified amount, and authorize the repayment of such distributions within 3 years to an eligible retirement plan to which a rollover contribution could be made. The limit on loans that are not treated as plan distributions is also temporarily increased for qualified individuals living in a qualified disaster area.
• Plan Adoption. A qualified retirement plan may be treated as adopted on the last day of a taxable year beginning after 2019 if it is adopted no later than the deadline (with extensions) for the employer’s federal tax return for that taxable year.
• Plan Amendments. For most plans, the deadline for plan amendments made pursuant to the SECURE Act or any Treasury or DOL regulation issued thereunder will be the end of the first plan year beginning on or after January 1, 2022 (2024 for governmental and collectively bargained plans). If, in the interim, a plan operates as if a retroactive amendment were already in effect, the retroactive amendment will not be treated as violating the anti-cutback rule (unless otherwise provided in Treasury guidance).

EBIA Comment: Some of the legislation’s provisions are already effective, while others have delayed effective dates or will take effect once regulations are issued. 401(k) plan sponsors and advisors will need to quickly familiarize themselves with the legislation’s various required and optional provisions. While the MEP provisions explicitly offer some interim relief for good faith compliance until regulations are issued, such relief is not included for other changes. As a result, 401(k) plan sponsors and advisors should proceed with caution. Employers and advisors working with welfare plans and fringe benefits will be interested in other changes made by the legislation, which are covered in our separate Checkpoint article. For more information, see EBIA’s 401(k) Plans manual at Sections II.F.2 (“Multiple Employer Plan”), II.H (“Tax Credits: Small Employers and Certain Plan Participants”), XII (“Distributions: Code Requirements and Design Choices”), XV.H (“Special Hardship Rules for Disaster Relief”), XVI (“Distributions: Plan Loans”), XIX (“Nondiscrimination: Minimum Coverage Rules”), XXII (“Nondiscrimination: ADP and ACP Safe Harbor Plan Designs”), XXIV (“ERISA Fiduciary Rules: Overview”), XXVI (“ERISA Fiduciary Rules: Participant-Directed Investments”), and XXVII (“Plan Administration: Adoption, Amendment, Submission”).

Contributing Authors: EBIA Staff.