SECURE Act Passes House and Moves to Senate

The Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”), a piece of legislation representing the most significant change to the Internal Revenue Code in years, passed the U.S. House of Representatives in late May. Although the Senate has its own version of the bill – known as the Retirement Enhancement and Savings Act of 2019 (“RESA”) – the SECURE Act will likely be the basis for any eventual law that emerges from Congress.

While the text of the SECURE Act, as passed by the House, can be found here, below are some important highlights for employers and administrators of qualified retirement plans.

Penalty-free withdrawals in case of the birth of child or adoption

Participants in employer-sponsored retirement plans are generally penalized for taking distributions from their account balance prior to age 59 ½. The SECURE Act gives plan participants the option to withdraw up to $5,000 from their retirement plan within one year of the birth or adoption of a child without incurring a tax penalty. The change is to encourage people to contribute more to their retirement plans knowing that they can access the funds upon the birth or adoption of a child.

The plan distributions are taxable income to the recipient unless repaid to the plan. Repayments to the plan are characterized as rollover contributions rather than standard plan loan repayments.

This change is effective for distributions made after December 31, 2019.

The delayed requirement to take mandatory distributions

Current law generally requires retirement plans to begin making distributions once a participant attains age 70 ½. The SECURE Act, recognizing that people are living longer than in previous generations, delays the requirement to begin distributions until the participant attains age 72.

This change is effective for retirement plan participants who attain age 70 ½ after December 31, 2019.

Increased access to retirement plans for long-term part-time workers

As of now, employees may not be eligible to participate in employer-sponsored retirement plans unless they work more than 1,000 hours per year. Concluding that these rules negatively and disproportionately impact women, as they are more likely than men to work part-time, the SECURE Act requires employers to allow plan participants to those part-time employees working at least 500 hours per year for three consecutive years.

Employees participating in a plan by nature of the new provisions are not required to be counted for purposes of non-discrimination and top-heavy rules. Part-time plan participants who eventually become full-time employees will first be counted for purposes of non-discrimination and top-heavy calculations as of the first plan year after the plan year in which the employee works at least 1,000 hours.

This change applies to plan years beginning after December 31, 2020.

Increased cap for automatic enrollment contributions

Current 401(k) rules allow employer-sponsored plans to have an automatic enrollment feature, resulting in new participants automatically enrolled in salary deferrals between 3% and 10%. Acknowledging the success that automatic enrollment features have had in increasing employee contributions to 401(k) plans, the SECURE Act will allow plans to have automatic enrollment that allows for up to a 15% salary deferral.

Plans featuring an automatic enrollment feature will continue to be required to inform plan participants of their ability to opt-out of the automatic salary deferrals, as well as other existing notice and disclosure requirements.

This change applies to plan years beginning after December 31, 2019.

Tax credit for small employers adopting an automatic enrollment feature

Continuing with the theme of promoting employer-sponsored plans with automatic enrollment features, the SECURE Act offers a $500 tax credit to defray initial costs for new 401(k) and SIMPLE IRA plans that include automatic enrollment. The credit will also be available to employers that convert an existing plan to an automatic enrollment design.

The credit is in addition to the plan start-up credit allowed under present law and will be available for three years.

This change applies to plan years beginning after December 31, 2019.

Elimination of safe harbor notice requirement for certain safe harbor plans

Under current law, all safe harbor 401(k) plans must provide written notice to plan participants informing them of their rights under the applicable plan. The SECURE Act will eliminate this notice requirement for safe harbor 401(k) plans that make nonelective contributions on behalf of each plan participant.

Additionally, the SECURE Act gives a plan sponsor until the last day for distributing excess contributions for the plan year to amend the plan to adopt the non-elective contributions safe harbor. However, if plan sponsors want to take advantage of this extended amendment window, non-elective contributions in the amount of at least 4% of participant salary – raised from 3% – are required.

This change applies to plan years beginning after December 31, 2019.

Conclusion

The SECURE Act still faces some hurdles in its race to get through Congress and to the President’s desk, but as both the Senate and House have indicated that retirement savings reform is an issue that can rally bi-partisan support, it is likely that some version of the bill will be signed into law – eventually.