The Secure Act: Breaking down the key points

The Secure Act of 2019 (Setting Every Community Up for Retirement Enhancement) was signed into law as part of a government funding package on Dec. 20, 2019, with overwhelming bipartisan support.

The goal is to expand retirement savings opportunities to more people and to accelerate tax revenues as a means to pay for the proposed changes. The act seeks to improve access to employer-sponsored retirement savings plans, increase savings levels within plans, streamline administration of plans and provide for a wider range of options for generating retirement income, such as annuities.

Following is a high-level overview of changes to retirement plans for participants and employers.

Required Minimum Distributions (RMDs)

The act changed the RMD rules for employees who reach age 70½ or pass away after Dec. 31, 2019. For these individuals, the required beginning date has changed to April 1 following the year in which the participant reaches age 72. The increase in the age is intended to account for today’s longer life expectancies compared with when the original legislation was passed.

Additionally, the five-year post-death distribution rule has increased to 10 years. This means beneficiaries must take a distribution of the account by the end of the 10th calendar year following the participant’s death. The act also eliminated the lifetime distribution option for all beneficiaries except spouses, minor children, chronically ill or disabled individuals, and other beneficiaries who are no more than 10 years younger than the participant.

Penalty Free Distributions for Birth or Adoption

A new distribution type is available for participants following the birth or adoption of a child. Parents can take a distribution of up to $5,000 from the plan without having to pay the 10% premature distribution penalty if the distribution is made within one year of the birth or adoption. In addition, the funds can be repaid to the plan and would be treated like a rollover contribution when it is repaid.

Part-time Employee Eligibility

401(k) plans are now required to include employees who work 500 hours or more per year for three consecutive years for purposes of making elective deferrals, although employer matches are not required. The law permits plans to ignore years of service prior to Jan. 1, 2021 for the three-year period, therefore the first employees eligible to enter would be in 2024

Increased Automatic Enrollment Maximum

Under the prior laws, a plan that implemented a qualified automatic contribution arrangement could only automatically escalate participants to a 10% deferral rate. The new law permits this rate to increase to 15%.

Annuity Payment Disclosure

The act requires, on an annual basis, 401(k) account balances are required to disclose the lifetime income stream that would be provided by the plan balance. These disclosures are not required until two months after the Department of Labor finishes the rules around permissible assumptions for the calculation of monthly annuity payments.

New Uses for 529 Plans

The act broadens the use for 529 plans. With the new law, 529 plans can be used to pay for apprenticeship program expenses and as much as $10,000 during a person’s lifetime for student loan payments.

Increased Availability of Annuities Within Retirement Plans

The act increases the availability of annuities within retirement plans. Plan sponsors now can rely on written representations from insurers for the purposes of conducting periodic reviews and for the insurer’s status under state insurance laws for the purpose of considering the insurers’ financial status. And, lifetime income investments can be transferred among retirement plans when the option is no longer authorized by the original plan.

Impact to Employers & Retirement Plan Sponsors

The act not only has major changes for plan participants, but there also are changes related to plan administration for different types of employers.

First, plans providing a safe harbor nonelective contribution that does not have an additional matching contribution will no longer be required to provide a safe harbor notice to participants.

Additionally, new tax credits are available for small employers with startup costs (plan expenses of at least $10,000 and 20 nonhighly compensated employees — maximum credit of $5,000) and employers that start an automatic enrollment in their plan ($500 for three years).

Lastly, unrelated employers can create retirement plans administered by a third party. Known as an open multiple employer plans (MEPS) allow smaller employers to benefit from economies of scale and strengthen their negotiation position with plan providers — without risk if one employer fails in meeting its plan obligations.

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