The SECURE Act Passes: The Future Is Now
Those of you who attended our fall client employee benefits seminar learned about the future of retirement plans, including the likely enactment of the SECURE Act in the near future. As expected, the SECURE Act became law on December 20, 2019 and several of the provisions are already in effect. This Alert will focus on the retirement provisions that are effective this year and future alerts will address some of the other changes at a later date.
The SECURE Act does not make major changes to the retirement plan rules, but reflects the recent tendency of Congress to tinker with them in order to address certain perceived deficiencies. For example, because life expectancies have increased, the date that distributions must begin to be made from plans to participants has been increased from the April 1 following the year in which a participant attains age 70½ to the April 1 following the year in which the participant attains age 72. In order to pay for many of the SECURE Act changes, distributions must generally now be completed within 10 years after a participant’s death, rather than made over the beneficiary’s life expectancy, if the participant’s spouse is not the beneficiary.
The SECURE Act also encourages small employers (those with up to 100 employees) to establish plans by providing a larger tax credit of 50% of the cost (up to $5,000 per year for three years) and encourages these small employers to add automatic contribution and automatic increase features to new or existing plans by providing an additional $500 per year tax credit for three years for doing so. Considering the significant evidence of the effectiveness of automatic contributions and automatic increases, all employers should seriously consider adding automatic contribution and automatic increase features to their plans this year.
The SECURE Act also increases the cap on automatic contributions for qualified automatic contribution arrangement (QACA) safe harbor plans from 10% to 15% in recognition of studies showing participants should be saving much more for retirement than 10% of compensation if they did not start contributing in their early 20’s. Preventing employers from automatically increasing contributions above 10% if the plan was a QACA made little sense, so this is a very good change.
Other favorable changes are the allowance of penalty free withdrawals of up to $5,000 for expenses related to the birth or adoption of a child and the reduction in the age at which participants may take in-service distributions from pension plans for any reason from 62 to 59½. Although these changes were made in part to raise tax revenue, they may actually result in employers making larger contributions to their pension plans especially for certain high income employees late in their career, resulting in reduced income and payroll taxes.
Two other changes increase employers’ ability to elect to have their 401(k) or 403(b) plans treated as safe harbor plans for any year. The first allows any employer with a 401(k) or 403(b) plan to elect to be a safe harbor plan, provided that it takes action at least 30 days before the end of the plan year and agrees to contribute at least 3% of compensation for all participants. The second allows an employer with a 401(k) or 403(b) plan to become a safe harbor plan for a plan year as late as the end of the following plan year if the employer agrees to contribute at least 4% of compensation for all participants. Consequently, there are reasons to run ADP and ACP test projections more than 30 days before the end of each year to preserve all options.
These and other SECURE Act changes will require plan amendments, but not for a few years. However, SPDs will need to be updated this year along with administrative procedures. Please contact one of our employee benefits attorneys with any questions regarding these changes.
As part of its year end legislative package, Congress also decided to bail out the drastically underfunded Coal Miners’ Pension Fund. Congress did not, however, enact any type of fix or bailout for the many other underfunded multiemployer plans around the country, like the Teamsters’ Central States Pension Fund. But, Congress’s willingness to bail out the Coal Miners’ Fund using taxpayer dollars increases the odds that Congress will eventually pass some type of “fix” for these other multiemployer plans in order to prevent participants and retirees from losing most or all of their pensions.
We will continue to monitor developments in this area and provide updates as they develop. Any employer who is considering withdrawing from a multiemployer pension plan should consult with its legal advisers regarding the potential impact of any legislation on the employer’s future ability to withdraw from the plan and amount of its withdrawal liability. Please let us know if you have any questions about this.