The SECURE Act, signed into law in December, immediately impacts 401(k) plans with provisions that became effective January 1st, and other provisions going into effect in later years. Here is an overview of the relevant changes.
Changes Effective Now
For 401(k) Safe Harbor Plans that use employer nonelective contributions to satisfy the safe harbor requirements:
- The requirement to send a 401(k) safe harbor notice before the beginning of each year has been eliminated; and,
- Plan sponsors may amend plans to elect safe harbor status up to 31 days before the end of a plan year or, if the plan sponsor is willing to make a nonelective contribution equal to at least 4% of pay, before the end of the following plan year.
Note that the changes above do NOT apply to 401(k) Safe Harbor Plans that use matching contributions to satisfy safe harbor requirements.
The cap on automatic deferrals under a Qualified Automatic Contribution Arrangement has been raised from 10% to 15%.
For distributions and loans:
- The age used to determine the required beginning date for Required Minimum Distributions (RMDs) has been increased from age 70-1/2 to age 72. This is effective for individuals who reach age 70-1/2 after December 31, 2019; there is no relief for individuals who reached age 70-1/2 before January 1, 2020.
- Plans may not offer participant loans through credit cards or similar arrangements.
- For distributions made following the death of a participant after December 31, 2019, all amounts held by the plan must be distributed within 10 years following the participant’s death. There are exceptions for surviving spouses, minor children, disabled beneficiaries, and any other beneficiary who is no more than 10 years younger than the participant.
- Plans may permit in-service transfers of certain lifetime income investment options or annuity contract options that are no longer offered by the plan.
- Distributions up to $5,000 made within one year of birth or adoption are not subject to early distribution excise tax and may be repaid.
- Disaster relief is provided for distributions and loans up to $100,000, eliminating early distribution penalties.
The SECURE Act provides a more detailed and useful fiduciary safe harbor for selection of lifetime income investment providers.
Changes Effective In The Future
Under the SECURE Act, effective for plan years beginning after December 31, 2020, employees who work three consecutive 12-month periods and complete at least 500 hours in each period must be eligible to make 401(k) deferrals:
- Must meet any plan age requirement by end of last 12-month period.
- Employer nonelective or matching contributions not required (including safe harbor).
- May exclude these employees for nondiscrimination, ADP/ACP, and coverage testing.
- No top-heavy contributions are required.
- Requirements do not apply to employees covered under a collective bargaining agreement.
- 12-month periods before January 1, 2021 are not taken into account.
This means that many part-time employees will become eligible to make 401(k) deferrals and affected employers will have to track hours or service for these individuals beginning in 2021.
Participant benefit statements will have to include an illustration of projected lifetime income, using prescribed assumptions. This change will be effective for benefit statements issued 12 months after DOL issues guidance.
Beginning in 2021, subject to the issuance of guidance by the Treasury and DOL, providers may offer Pooled Employer Plans, which will allow unrelated employers to participate in a single plan if certain requirements are met. We will provide more information as we learn more about these plans.
Plans must follow new SECURE Act requirements and may apply optional provisions in operation; amendments must be effective retroactively and be adopted by the last day of the first plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year plans) (or later if provided by the Treasury Secretary).