401K Update: SECURE Act – Helping Americans Save for Retirement

Americans are not saving enough for retirement. To address this issue, a new retirement-related bill is making its way through Congress, The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Its purpose is to help Americans save more for retirement by creating new rules to expand and preserve retirement savings, improve the administration of retirement plans, provide additional benefits and create revenue provisions.

Highlights of the Act include:

Increase Auto Enrollment Safe Harbor Cap

Qualified automatic enrollment arrangements (QACAs) would be able to auto increase employee deferrals up to 15% instead of the currently required 10% cap.

Pooled Employer Plans (aka, Open MEPs)

The legislation will allow for a new type of plan whereby unrelated employers could pool their resources to optimize buying power in a new type of plan called a “pooled employer plan” (“PEP”).  By and large, the PEP is what was previously referred to as an open multiple employer plan (“open MEP”).  Open MEPs were an issue that PEPs are designed to remedy.  PEPs would be treated as a single plan under ERISA.  The legislation also purports to eliminate the “one bad apple” rule whereby the qualification issue of one adopting employer would not taint the qualified status of the entire PEP for the remaining adopting employers.

Lifetime Income Disclosure

Employers will be required to provide an estimate of monthly annuity income participants could produce in retirement if annuities were choice for eventual distribution. The disclosure would be contained on annual benefit statements.  The Department of Labor would be instructed to issue guidance for disclosures and assumptions for conversion of account balances to lifetime income stream.

Lifetime Income Provider Selection Fiduciary Safe Harbor

For years plan fiduciaries have been hesitant to offer lifetime income annuity options within their plan structure due to fear of misstep in the evaluation of financial capability of insurers offering the products. This legislation would provide guidance for fiduciaries in the selection of the products to ensure a fiduciary safe harbor.  The steps are rooted primarily in relying upon the insurer as to its status under the satisfaction of state insurance statutes.

Simplification of Safe Harbor 401(k) Rules

For safe harbor design plans utilizing nonelective contributions the SECURE Act would eliminate the safe harbor notice requirement, but still maintains the requirement to allow employees to make or change an election at least once per year. It would allow plans to amend to become nonelective contribution safe harbor plans any time before the 30th day before the end of the plan year. Amendments after that time period would be allowed if it provides: (1) a nonelective contribution of at least 4 percent of compensation (versus at least 3 percent) for all eligible employees that year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of the following plan year.

Acceleration of Post-Death RMD Distribution

The legislation would require that all distributions made after the death be made by the end of the tenth calendar year following the year of death.

Increase Credit Limit for Small Employer Plan Start-Up Costs

To make it more affordable for small businesses to implement retirement plans, the legislation will increase the credit for small businesses by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.

Child Birth or Adoption Withdrawals

The SECURE Act would allow participants to take up to $5,000 from their plan or IRA for birth, or adoption, related expenses incurred within a year of the action.  These could be taken on a penalty-free basis.

Small Employer Automatic Enrollment Credit

The legislation will create a new tax credit of up to $500 per year to small employers to provide for startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.

Treat Certain Taxable Non-Tuition Fellowship and Stipend Payments as Compensation for IRA Purposes

Allows graduate and postdoctoral students’ stipends and non-tuition fellowship payments to be treated as compensation to be used as the basis for IRA contributions.

Participant Loans via Credit Cards Prohibition

Plans would be prohibited from offering participant loans from the plan via use of a credit card.

Repeal of Maximum Age for Traditional IRA Contributions

Ends the restriction of IRA contributions to a traditional IRA by individuals who are 70½ years of age.

Portability of Lifetime Income Options

To allow participants to preserve their lifetime income investments and avoid surrender charges and fees, plans will be allowed to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. These transfer can be accomplished without regard to plan restrictions related to in-service distributions.

Allowing Long-term and Part-time Workers to Participate in 401(k) Plans

Under current law, employers are not required to include part-time employees (those working less than 1,000 hours per year) in their defined contribution plan. The legislation will require employers maintaining a 401(k) plan to have at least a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service, except in the case of collectively bargained plans. For employees that are eligible based solely on the second new rule, employers may exclude those employees from testing under the nondiscrimination and coverage rules and from the application of top-heavy rules. In addition, those employees that are eligible based solely on the second new rule may be excluded from employer contributions.

Increase in Age for Required Beginning Date for Mandatory Distributions

Taking life expectancy into account, this legislation will increase the required minimum distribution age from 70½ to 72.

Plans Adopted by Filing Due Date for Year May Be Treated an in Effect as of Close of Year

Businesses will be permitted to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year. The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.

Combined Annual Reports for Group of Plan

Allows for consolidated filing of the Form 5500 for similar plans sponsored by members of a group. This will reduce aggregate administrative costs, making it easier for small employers to implement a retirement plan. All the plans in the group must be defined contribution plans, have the same trustee, named fiduciary(ies), administrator, plan year, and investments options.

Modification of Nondiscrimination Rules to Protect Older, Longer Service Participation

Modifies nondiscrimination rules with respect to frozen defined benefit plans to allow existing participants to continue to accrue benefits.

Other Changes

Other changes such as increased filing failure penalties, PBGC premiums, 529 plans, some tax implications to certain identified individuals, and church plans are also included in the legislation.

It’s important to note that the SECURE Act is not yet finalized and has not been signed into law. As always, we will stay abreast of the legislation and will inform you when any significant changes are made.

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