An Analysis of the SECURE Act

Jan 08, 2020

On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was enacted as part of the Further Consolidated Appropriations Act, 2020. SECURE is the most sweeping retirement legislation since the Pension Protection Act of 2006, and many of its provisions are designed to make retirement plans more accessible to employees and less cumbersome for employers. 

The majority of the SECURE Act provisions take effect in 2020, although some took effect on the date the SECURE Act was signed, and several have retroactive effect. Provisions regarding open multiple employer plans (MEPs) and pooled employer plans (PEPs), as well as provisions regarding the inclusion of part-time workers in 401(k) plans, do not take effect until 2021. Because operational compliance is required when the change takes effect, quick action may be needed for those changes already in effect or taking effect in 2020. 

An employer generally has until the last day of the first plan year beginning on or after January 1, 2022 to amend its plan document to reflect the changes made by the SECURE Act (later amendment deadlines apply for applicable collectively-bargained and governmental plans). As long as the plan is operated in accordance with the law changes as they take effect, and required amendments are adopted retroactively in a timely manner, the plan will be treated as operating in accordance with its terms and will not be treated as violating otherwise applicable anti-cutback rules when it is eventually amended. 

The Further Consolidated Appropriations Act, 2020 also includes disaster relief covering major disasters declared during periods beginning on January 1, 2018 and ending on February 18, 2020 (i.e., 60 days after the date of enactment). The disaster relief provisions are part of the Taxpayer Certainty and Disaster Tax Relief Act of 2019 that is contained in Division Q of the appropriations act, and are summarized at the end of the table that follows.

As with any major legislation, clarification of the scope and breadth of these changes will come in the months ahead. In the meantime, Newport has set forth below summaries of each of the changes based on our interpretation of the language included in the statute. 
 

SECURE Act Summary of Provisions, Effective Date and Perspective and Detail

Effective Date	Provision Summary	Perspective and Detail
Taxable years  beginning after December 31, 2008 (in accordance with guidance to be issued by the IRS no later than June 20, 2020)	In-kind distributions of 403(b)(7) custodial accounts now permitted to effectuate  termination of 403(b) plan	In order for an employer to terminate a 403 (b) plan. all of its assets must be distributed. However, if participants in the  plan hold individual custodial accounts, the employer may riot have the ability to force a distribution of the assets in the account, such that the termination of the plan becomes difficult or impossible. This provision solves  that problem. allowing the custodial account  to be distributed in-kind to the custodian and its tax-favored status preserved as long as it  is administered in accordance with required rules.
December 20, 2019, with retroactive effect	Clarification of individuals that may be covered under 403(b)(9) retirement income accounts maintained by church-controlled organizations	Due to its retroactive effect, this is essentially a clarification of current law/intent, rather than a change. The individuals that may be covered include duly ordained, commissioned, or licensed ministers,  regardless of the source of compensation;  employees of a tax-exempt organization that is controlled by or associated with a church or a convention or association of churches;  and certain employees after separation from service with a church, a convention or  association or churches, or an organization described above.
Plan years beginning after  December 31, 2015	Certain foster care payments now counted as compensation for qualified plan purposes	Contributions to a defined contribution plan cannot exceed a participant's compensation. Many home healthcare workers are prevented from saving for  retirement because their only income comes from difficulty of care payments that are exempt from tax. Compensation (or earned income) now includes qualified foster care payments that are difficulty of care payments that the recipient excludes from income. Contributions attributable to this type of income are treated as after-tax contributions. A similar change applies to compensation for IRA contribution purposes effective for IRA contributions made after December 20, 2019.
Plan  years beginning after  December 31, 2017	Special minimum funding rules for community newspaper plans	These are plans sponsored by family-owned, non-publicly traded, independent newspapers. The new rules increase the interest rate for calculating the funding obligations and provide a longer amortization period. The rules cover only those plans under which accrued benefits have not increased since December 31, 2017.
Plan years beginning after  December 31, 2018	Modifications to flat and variable rate PBGC premiums for CSEC plans	These are cooperative and small employer charity pension plans.
Participant loans made after December 20, 2019	Loans from retirement plans are not excludable from income if they are made through the use of a credit card or any other similar arrangement.	If your plan offers a participant loan arrangement through the use of a credit card or similar arrangement, contact your service provider immediately to discuss suspending those arrangement.
December 20, 2019 (can optionally be made effective for plan years beginning after December 31, 2013)	Nondiscrimination testing relief for certain closed defined benefit plans and defined contribution plans. Relief is generally available only to plans that were frozen before April 5, 2017 or that were in effect for at least 5 years before being frozen and did not substantially increase coverage, the value of benefits rights and features, or benefit amounts during that 5-year period.	Defined benefit plans are sometimes frozen to new participants for financial reasons. Even through frozen, the plans must  continue to satisfy minimum participation,  coverage and nondiscrimination rules.  However, as frozen plans mature and  participants receive payment of benefits, the participant population may become less  diverse, making it difficult to satisfy  applicable rules. This relief treats the plans as satisfying applicable requirements if  certain conditions are met, and liberalizes some of the testing rules to make passage easier.
Distributions made  after December 31, 2018	Registered apprenticeship  program fees and qualified  education loans eligible for payment from a 529 education savings account.	Distributions from 529 education savings accounts are excludable from income if made for qualified higher education expenses. Such expenses now include fees, books, supplies and equipment needed for a designated beneficiary to participate in a registered apprenticeship program, and amounts (up to $10.000) paid as principal or interest on any qualified education loan.
Distributions made  after December 31, 2019	"Qualified birth or adoption distributions" are now permissible from IRAs, qualified plans and annuities, 403(b) plans, and governmental 457(b) plans.	Payments of up to $5,000 per birth or adoption will be exempt from the 10% early payment penalty tax if made within 1 year of a birth or adoption of an eligible adoptee. Distributions can be repaid and if repaid, are excludible from income as though received as part of a rollover. Distributions are not  eligible rollover distributions and no special tax notice is required, but 10% income tax withholding is due unless waived. Until guidance is issued, it is not clear that an employer would be required to make qualified birth or adoption distributions available under its plan.
Plan years beginning after December 31, 2019	In-service distributions from  pension plans and governmental  457 (b) plans permitted at age 59-1/2	Pension plans were previously prohibited  from making in-service distributions prior to age 62, and 457(b) plans could not make in-service distributions prior to age 70-1/2.
Plan years beginning after December 31, 2019	Maximum permitted automatic contribution rate under a Qualified Automatic Contribution Arrangement (QACA) is raised to 15% (maximum rate cannot exceed 10% during the period beginning on the date the automatic contribution first  becomes effective and ending on the last day of the following plan year)	The current maximum permitted automatic contribution rate is 10%.
Plan years beginning after  December 31, 2019	Elimination of annual safe harbor notice for 401(k) nonelective safe harbor plans and delayed adoption of nonelective safe harbor plans	An annual notice is still required for 401(k) matching contribution safe harbor plans. Nonelective safe harbor contribution can be adopted any time prior to the 30th day before the close of the plan year (or any time before the last day of the following plan year if the nonelective contribution is at least 4% of compensation), so long as the plan was not a matching contribution safe harbor plan during the year.
Taxable years  beginning after December 31, 2019	Increase in plan start-up tax  credit for employers that have  no more than 100 employees  receiving at least $5,000 in compensation in the prior year	A tax credit is currently available for the first three years a plan is established, equal to 50% of qualified startup costs, not to exceed $500. The $500 limit is increasing to the greater of (i) $500, or (ii) the lesser of {A)  $250 times the number of eligible non-highly  compensated employees or (B) $5,000. This can help defray the expenses associated with establishing or administering a plan and  providing retirement education to employees. The credit is part of the general business  credit under Code Section 38(B) and is subject to the limits of that code section.
Taxable years beginning after December 31, 2019	New automatic enrollment tax  credit of $500 is available for  employers that have no more than 100 employees receiving at least $5,000 in compensation in the prior year	The credit is available for the first three years an eligible automatic contribution arrangement is included in a qualdiecl plan, SEP or SIMPLE retirement account. The credit is part of the general business credit under Code Section 38(B) and is subject to the limits of that code section.
Taxable years beginning after December 31, 2019	Compensation for IRA  contribution purposes now  includes taxable non-tuition  fellowship and stipend payments  received by individuals pursuing  graduate or postdoctoral study	Compensation can affect the extent to which an IRA contribution is deductible. This provision broadens the types of payments that can be included as compensation.
Contributions made for taxable years beginning after December 31. 2019	Age limit for traditional IRA contributions eliminated	Currently, IRA contributions cannot be made to a traditional IRA after age 70-1/2; this barrier is being eliminated.
Distributions made for taxable years beginning after December 31, 2019	Qualified charitable distributions from IRAs now reduced by deductible IRA contributions  made after attainment of age  70-1/2	Taxpayers 70-1/2 and older can have IRA distributions (up to $100.000) excluded from income but still counted for required minimum distribution purposes, if the  distributions are transferred directly to a charity. Under SECURE, any deductible  IRA contributions made after attainment of age 70-1/2 will reduce the amount of charitable distributions that can be excluded from income.
Plan years beginning after  December 31, 2019	Distributions to protect elimination of a "lifetime income investment" now permitted	Lifetime income investments are investment options that allow employees to elect a guaranteed level of annual income and/or an annuity. lf the investment option offering the lifetime income investment is being eliminated from a plan's lineup, the option may be transferred in-kind to an eligible retirement vehicle, or an annuity contract may be distributed to the participant, even if a distribution from the plan is not otherwise permissible.
Taxable years beginning after December 31, 2019	Increase in plan start-up tax  credit for employers that have  no more than 100 employees  receiving at least $5,000 in compensation in the prior year	A tax credit is currently available for the first three years a plan is established, equal to  50% of qualified startup costs, not to exceed $500. The $500 limit is increasing to the greater of (i) $500, or (ii) the lesser of (A)  $250 times the number of eligible non-highly  compensated employees or (B) $5,000. This can help defray the expenses associated  with establishing or administering a plan and  providing retirement education to employees. The credit is part of the general business  credit under Code Section 38(B) and is subject to the limits of that code section.
Taxable years beginning after December 31, 2019	New automatic enrollment tax  credit of $500 is available for  employers that have no more than 100 employees receiving at least $5,000 in compensation in the prior year	The credit is available for the first three years an eligible automatic contribution arrangement is included in a qualified plan, SEP or SIMPLE retirement account. The credit is part of the general business credit under Code Section 38(B) and is subject to the limits of that code section.
Taxable years  beginning after December 31, 2019	Compensation for IRA  contribution purposes now  includes taxable non-tuition  fellowship and stipend payments  received by individuals pursuing  graduate or postdoctoral study	Compensation can affect the extent to which an IRA contribution is deductible. This provision broadens the types of payments that can be included as compensation.
Contributions made for taxable years beginning after December 31, 2019	Age limit for traditional IRA contributions eliminated	Currently, IRA contributions cannot be made to a traditional IRA after age 70-1/2; this barrier is being eliminated.
Distributions made for taxable years beginning after December 31, 2019	Qualified charitable distributions from IRAs now reduced by deductible IRA contributions  made after attainment of age 70-1/2	Taxpayers 70-1/2 and older can have IRA distributions (up to $100,000) excluded from income but still counted for required minimum distribution purposes, if the  distributions are transferred directly to a charity. Under SECURE, any deductible IRA contributions made after attainment of age 70-1/2 will reduce the amount of charitable distributions that can be excluded from income.
Plan years beginning after  December 31, 2019	Distributions to protect elimination of a "lifetime income investment" now permitted	Lifetime income investments are investment options that allow employees to elect a guaranteed level of annual income and/or an annuity. lf the investment option offering the lifetime income investment is being eliminated from a plan's lineup, the option may be transferred in-kind to an eligible retirement vehicle, or an annuity contract may be distributed to the participant, even if a distribution from the plan is not otherwise permissible.
Returns, statements, and notifications required to be filed or provided after December 31, 2019	Substantial increase in penalties for failure to file	One example: the penalty for failing to file a 5500 required to be filed under Code Section 6058 is increased from $25 a day to $250 a day.
Pension benefit statements furnished more than 12 months after the Seсretary of the Treasury issues. Certain information	Lifetime income disclosure must now be included on pension benefit statements for individual account plans once each 12-month period.	Statements must now include the amount of monthly payments the participant would receive if his/her total accrued benefits were used to provide an annuity for life, The IRS is directed to issue a model disclosure, publish  assumptions to be used, and issue interim final rules regarding this new requirement.
Not specified	Fiduciary safe harbor for selecting issuer of guaranteed retirement income contract	The safe harbor, if satisfied, absolves the fiduciary from liability for losses due to an insurer's inability to satisfy its financial obligations under the contract. The safe harbor describes steps the fiduciary should take in selecting the contract insurer.
Returns filed for plan years beginning after December 31, 2019	Electronic filing of returns that include information regarding 250 or more plans	Electronic filing is generally required if the filer is required to file 250 or more returns. In recognition of changes made by SECURE that permit filing 5500s on an aggregate basis (e.g., by MEPs), this provision looks to  the number of plans included in a single return to determine whether the 250 threshold has been met.
Plan years beginning after  December 31, 2020 (employers and  pooled plan providers can take  advantage of this  new provision as long as they comply in good faith with a reasonable interpretation of the new rules)	The unified plan/one bad apple rule is eliminated for defined contribution MEPs that either  have commonality or have a pooled plan provider. A pooled plan provider is a  person designated by the plan  as a named fiduciary, the plan  administrator of the MEP, and  as the person responsible to  perform all administrative duties  (including conducting proper  testing with respect to the plan  and the employees of each  employer in the plan) which are  reasonably necessary to ensure  that the plan complies with any  requirements applicable under  ERISA and the Code, who  registers as a pooled plan  provider, acknowledges in  writing it is a named fiduciary  and the plan administrator, and  ensures all persons who handle  assets of or are fiduciaries of the  MEP are appropriately bonded.	Under current law, if a participating employer  in a MEP fails to satisfy applicable Code rules, the entire MEP can be disqualified. This rule will be eliminated for MEPS whose terms provide (i) that the assets of a non-compliant plan will be transferred to a plan  maintained solely by the noncompliant  employer, to an eligible retirement plan for  each participant, or to another appropriate  arrangement (unless transfer is determined  not to be in the best interest of plan  participants); and (ii) that the noncompliant  employer will be liable for any liabilities of  such plan attributable to the employees of  such employer. Participating employers will continue to be treated as the sponsor of the plan with respect to their employees, except with respect to duties assumed by the pooled plan provider.
Plan years beggining after December 31, 2020(plans established prior to December 20, 2019 must affirmatively elect to be treated as a pooled employer plan)	"Pooled employer plans" are treated as a single plan under ERISA. A pooled employer plan is an individual account plan covering two or more unrelated employers that satisfies applicable tax code rules and that (i) designates a pooled plan provider as a named fiduciary of the plan, (ii) designates one or more trustees (other than an  employer in the plan) to be  responsible for collecting contributions to the plan, (iii)  provides that each participating  employer retains fiduciary  responsibility for selecting the  pooled plan provider and other  named fiduciaries and for investing and managing plan  assets when not delegated to  another fiduciary, (iv) does not  subject employers and participants to unreasonable  restrictions, fees or penalties for  ceasing participation, receiving  distributions, or transferring  assets, (v) requires the pooled  plan provider to provide specific  disclosures and requires  participating employers to take  necessary actions to maintain the qualified status of the plan, and (vi) provides that required disclosures can be provided electronically.	Treatment as a single plan allows the filing of a single 5500 and maintenance of a single ERISA bond. Currently. only MEPs whose participating employers have commonality, or that satisfy the requirements in recently- finalized DOL regulations, are treated as a single plan under ERISA. Pooled employer plans must have a  bond equal to 10% of funds handled,  not to exceed $1,000,000. They must also include in 5500 filings a list of participating employers, a good faith  estimate of the percentage of contributions  and account balances attributable to each  employer, and identifying information  regarding the pooled plan provider. Pooled employer plans that cover fewer than 1,000 participants may qualify for simplified 5500 reporting if no single employer has 100 or more participants.
Plan years beginning after December 31, 2020	Long-service part-time employees must be allowed to participate in 401(k) plans	Under current law, employees do not have to be offered participation in a 401(k) plan until they have completed 1,000 hours of service, a requirement that many part-time employees may never satisfy. This provision requires those employees to be offered participation once they have completed at least 500 hours of service in 3 consecutive  12-month periods (counting only periods of service completed on or after January 1, 2021), if they are at least age 21 at the end  of that time. Employers do not have to make  contributions for employees who become participants solely as a result of this change, and these employees can be disregarded for discrimination and coverage testing purposes, as well as for purposes of top heavy rules. Vesting status will be measured  differently for these employees. Collective  bargaining employees are generally exempt.
Annual reports filed for plan years beggining after December 31, 2021	Individual account/defined contribution plans that have the some trustee, the same one or more named fiduciaries, plan years that begin on the same date, and the same investment options, may file a single aggregated return.	This would likely require that an entity with access to each plan's data agree to file an  aggregated return on behalf of the plans.

 
 

Disaster Relief Under the Taxpayer Certainty and Disaster Tax Relief Act of 2019

In addition to the above provisions enacted under the SECURE Act, the Further Consolidated Appropriations Act, 2020 contains disaster relief provisions similar to disaster relief enacted in prior years. The relief covers disasters that occurred prior to December 20, 2019 and are declared major disasters during the period beginning January 1, 2018 and ending February 18, 2020. The following benefits are included as part of the disaster relief:

• Up to $100,000 in "qualified disaster distributions" that are not subject to the 10% early payment penalty tax, that can be included in income ratably over a 3-year period, and that can be rolled back into a qualified plan or IRA for up to 3 years following the distribution. The distributions are not eligible rollover distributions and can be made without regard to rules that otherwise restrict distributions from plans. The $100,000 qualified disaster distribution limit is reduced by qualified disaster distributions received by the participant in all prior tax years.
• Re-contribution of hardship distributions taken to purchase or build a principal residence that were not used for that purpose due to a qualified disaster, if the distribution was received during the period beginning 180 days prior to the first day of the incident period and ending 30 days after the last day of the incident period of the disaster.
• An increase in the participant loan limit to $100,000 (or the participant's vested account balance, if less) that is available for the 180-day period beginning on December 20, 2019.
• The ability to defer loan payments due during the period beginning with the first day of a disaster incident period and ending 180 days after the last day of the disaster incident period.

The relief is available to participants who suffer an economic loss and whose principal residence is located in a qualified disaster zone during the period of the disaster and is available for distributions or loans taken during the period beginning on or after the first day of the incident period for the disaster and ending 180 days after December 20, 2019. Amendments to reflect adoption of the disaster relief provisions must generally be adopted by the last day of the first plan year beginning on or after January 1, 2020.

Extensions of time to file specified reports and to make specified contributions are also provided.
 

Further Developments

Newport will continue to monitor the SECURE Act and update you as further substantive developments occur. If you have any questions, please contact your Newport representative.