SECURE Act Creates Need for Estate Plan Review
Congress recently passed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act, or the “Act”) implementing one of the most substantial pieces of retirement plan legislation in years, into law.
The bill was an attachment to a must-pass $1.4 trillion spending bill. Congress passed the new law in the eleventh hour of the 2019 legislative session.
The SECURE Act brings changes that affect both plan sponsors and participants. Its goal is to incentivize employers (particularly small businesses) to offer retirement plans, promote additional retirement savings, and enhance retiree financial security. It also includes several provisions that will impact current retirement plan administration. The changes brought by the Act are generally positive, but a few will create some new administrative challenges and questions. Key changes include:
Open Multiple Employer Plans (MEPs)
Among several other MEP-related provisions, the Act provides for the establishment of defined contribution Open MEPs – referred to as “Pooled Plans” – now treated as single ERISA (Employee Retirement Income Security Act) plans. The result is that the SECURE Act abolishes the commonality requirement of Open MEPs because all are treated as single ERISA plans.
Part-Time Employee Eligibility for 401(k) Plans
Sponsors of 401(k) plans will be required to allow employees who work at least 500 hours during each of three consecutive 12-month periods to make deferral contributions ─ in addition to employees who have satisfied the general “one year of service” requirement by working at least 1,000 hours during one 12-month period.
Long-term part-time employees eligible under this provision may be excluded from eligibility for employer contributions, and the Act provides very significant nondiscrimination testing relief with respect to this group. Nonetheless, this is an example of a provision that creates new recordkeeping and administrative challenges, although with a generally positive result for employers and for plan participants.
Required Minimum Distributions (RMDs)
The age at which required minimum distributions must commence increased to 72, from 70.5.
Increased Tax Credits
The cap on start-up tax credits for establishing a retirement plan will increase to up to $5,000 (depending on certain factors) from $500. Small employers who add automatic enrollment to their plans also may be eligible for an additional $500 tax credit per year for up to three years.
Safe Harbor 401(k) Enhancements
Employers will have more flexibility to add non-elective safe harbor contributions mid-year. The Act eliminates the notice requirement for safe harbor plans that make non-elective contributions to employees. The automatic deferral cap for plans that rely on the automatic enrollment safe harbor model (aka the Qualified Automatic Contribution Arrangement or “QACA” safe harbor) also will increase to 15 percent, from 10 percent.
Other Retirement Plan Highlights
- Penalty-free (not tax-free) retirement plan withdrawals for a birth or adoption.
- An objective fiduciary safe harbor for the selection of a lifetime income provider is added to encourage employers to offer in-plan annuity options. Also included, is tax-advantaged portability for a lifetime income product from one plan to another or between plans/Individual Retirement Accounts (IRAs) to help avoid surrender charges and penalties where the lifetime income product is removed from a particular plan.
- A separate provision requires participant lifetime income disclosures illustrating the monthly payments if the participant’s account balance was used to provide lifetime income in an annuity.
- Also included is nondiscrimination testing relief for some closed defined benefit plans.
- Certain clarifications relating to the termination of 403(b) custodial accounts and 403(b) retirement income accounts within church-sponsored plans. Increase in penalties for failing to file plan returns on time.
Most interesting for estate planning purposes, the Act also repeals the maximum age for IRA contributions and eliminates the stretch IRA. As to the latter, non-spouse beneficiaries of inherited IRAs will be required to take their benefits in income on an accelerated basis (as compared with current law) – this will have estate planning implications for individuals and families that should be understood and reviewed.
The SECURE Act is one of the most comprehensive retirement plan reforms in a decade and brings many changes for consideration. Plan sponsors should consider how the SECURE Act will impact the administration of their plans. Employers that do not currently sponsor retirement plans may wish to consider (or reconsider) doing so given the Act’s additional incentives ─ or may consider joining a MEP.
Most provisions of the Act went into effect on January 1, 2020. In the coming months, it is very important to review your estate plan and specifically your retirement assets. If you have done planning with a Designated Beneficiary Trust or Stretch out Trust, it will be necessary to consider the Act’s practical effects on these trusts and whether or not they will continue to meet your goals for the beneficiaries.
Kira S. Masteller is a Shareholder in our Trust and Estate Planning Practice Group.