SECURE Act: Increased Savings Opportunities for Participants

The Setting Up Every Community for Retirement (SECURE Act) Act was enacted on Dec. 20, 2019 as part of the Further Consolidated Appropriations Act of 2019. Many of these provisions had been pending in Congress for some time, and the law brings about the biggest changes in retirement since the Pension Protection Act in 2006.

 

In general, plans must act in accordance with the new laws in the regulations by the effective dates applicable, but most plan amendments will generally not be required until the last day of the first plan year beginning in 2022 (and later for governmental and some union plans).

 

The SECURE Act has provided plan sponsors and participants in 401(k), profit sharing and other defined contribution plans the opportunity for further enhancements towards saving for retirement. This includes automatic enrollment increases, flexibility in safe harbor profit sharing contributions and mandatory enrollment for part-time employees.

 

The SECURE Act increases the qualified automatic contribution arrangement cap from 10% to 15% for the second plan year after an employee is enrolled in the plan. This increase applies to both automatic enrollment and plans with an auto escalation feature. The maximum percentage cannot exceed 10% for the first year of participation in the plan. Qualified automatic enrollment plans will still provide for a safe harbor matching or profit-sharing contribution by the employer. This became effective Jan. 1, 2020.

 

Provisions for safe harbor 401(k) plans, by which a plan sponsor commits to minimum funding amounts in order to pass non-discrimination tests, have been simplified. A plan may be amended after the close of the plan year in order to allow safe harbor nonelective (profit sharing) contributions of at least four percent. This is a great opportunity for a plan sponsor to make a change to the employer funding amounts via a plan amendment after the end of the plan year. A plan may also be amended to provide safe harbor nonelective contributions of the current 3% amount by the 30th day before the close of the current plan year. Additionally, the safe harbor notice requirement for the nonelective safe harbor has been eliminated, but each eligible employee must be provided the opportunity to change deferral elections at least annually. This became effective Jan. 1, 2020.

 

401(k) plans may require one year of service and age 21 for participation, which are the maximum eligibility terms by statute. With the SECURE Act, the plans must also provide that employees who complete three consecutive years of service with a minimum of 500 hours per year become eligible for the deferral portion of the plan.  The newly eligible, part-time employees would not be part of the nondiscrimination testing requirements; therefore they may be excluded from matching, profit sharing or other employer contributions to the plan. If part-time employees are included in employer contributions at the plan sponsor’s election, the employees receive a year of vesting credit for each year they worked at least 500 hours.

 

This feature is effective beginning Jan. 1, 2021 and does not apply to collectively bargained (union controlled) plans or 403(b) plans.

 

It is also important to mention that the SECURE Act contains provisions that changed the ages for required minimum distributions. This will be addressed in a future column.

 

 

There are specific provisions of SECURE specifically affecting 403(b) and plans church-controlled organizations maintain.

 

Under SECURE Act Section 110, the Department of the Treasury has been instructed to issue guidance no later than six months after the Dec. 20, 2019 enactment which provides that if an employer terminates a 403(b) plan custodial account, the plan administrator may distribute an individual custodial account in kind to a participant or beneficiary of the plan. The distribution must be maintained within a 403(b)(7) custodial account until amounts are paid to the participant or beneficiary. The similar treatment of individual annuity contracts paid are noted under IRS Revenue Ruling 2011-7. The Treasury guidance will be applied retroactively for the tax years beginning Dec. 31, 2008, and will help provide clarity regarding the distribution treatment for custodial accounts held in 403(b) plans.

 

SECURE clarifies that individuals who are eligible to participate in a tax-favored retirement account maintained by a church include those participating in plans also maintained by church-controlled organizations (including both qualified church controlled organizations (QCCOs) and non-QCCOs). This is effective for plan years beginning on or before Dec. 20, 2019.

 

The ruling now permits retroactively a church plan under Code Section 403(b)(9) to include “steeple” churches as well as QCCOs and non-QCCOs in a Section 403(b)(9) plan.

 

As many of the provisions still need more details and clarification, we look forward to upcoming future guidance which will allow greater opportunities for employees to increase their retirement savings.