In late December 2019, President Trump signed appropriations bill H.R. 1865, which includes tax and retirement plan provisions from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act, the Act). Most observers felt that the Act had little chance to pass in 2019, but it was attached to a must-pass appropriations bill, which did the trick. A summary of the major changes and a table with effective dates follow.

Part-Time Employee Eligibility Expansion

The Act expands minimum 401(k) plan eligibility for “long-term part-time employees” who work at least 500 hours per year for three consecutive years. “Part-time” may be interpreted broadly by the Internal Revenue Service as in the past (e.g., applying the new 500-hour rules to seasonal, temporary and other service-based classifications rather than solely those labeled as “part-time”). Plans will be required to allow long-term part-time employees to make elective deferral contributions, but will not be required to provide employer matching or non-elective contributions to long-term part-time employees.

“Open” Multiple Employer Plans

The Act allows more businesses to participate in multiple employer plans, by allowing unrelated employers to form pooled retirement plans with a simplified fee structure. The “one bad apple rule” is eliminated, meaning that a disqualifying error committed by one employer will not automatically disqualify the plan for all employers.

Increased Tax Credits for Small Employer Plans

The Act increases tax credits for small employers offering qualified retirement plans with automatic enrollment by (1) increasing to $5,000 the maximum limit on the credit for small employer pension plan start-up costs and (2) creating an additional $500 credit for small employers that offer new 401(k) or SIMPLE individual retirement account (IRA) plans with automatic enrollment.

Increased Cap on Automatic Enrollment

The cap on automatic salary deferrals for employees in automatic enrollment safe harbor plans increases from 10% to 15% beginning after the employee’s first plan year.

Lifetime Income Investments

The Act makes several changes for annuities in defined contribution plans, adding:

1. New rules allowing portability of lifetime annuities if an employer drops annuities from its plan;

2. A fiduciary safe harbor to satisfy the prudence requirement with respect to selecting an insurance company to provide annuities; and

3. New rules requiring annual lifetime disclosure statements that project lifetime annuity payments at retirement based on a participant’s current balance.

Required Minimum Distributions and Maximum Contribution Age

The Act raises the age for required minimum distributions (RMDs) from age 70-1/2 to age 72. Participants who attained age 70-1/2 prior to January 1, 2020, continue to be subject to prior law and cannot suspend RMDs until attaining age 72. The Act also repeals the maximum age for making contributions to a traditional IRA.

401(k) Non-Elective Safe Harbor Plans

The Act eliminates the annual safe harbor notice requirement if the employer uses a non-elective safe harbor contribution arrangement. If certain requirements are met, an employer can amend a plan to convert to a non-elective safe harbor midyear.

Birth or Adoption Penalty-Free Withdrawals

The Act adds the birth or adoption of a child as a reason supporting in-service withdrawals from a qualified plan or IRA without penalty. The withdrawal cannot exceed $5,000, applied on an individual basis, and must be made within one year after the child’s birth or adoption.

In-Service Withdrawals at Age 59-1/2

Current law generally prohibits pension plans from allowing in-service distributions until age 62, or age 70-1/2 for governmental 457(b) plans. Under the Act, pension plans and governmental 457(b) plans can allow in-service distributions as early as age 59-1/2.

Administrative Changes

The Act includes administrative changes that:

1. Allow employers to adopt a qualified retirement plan after the close of a taxable year but before the deadline for filing the employer’s tax return for the taxable year (including extensions), enabling employers to elect to treat the plan as having been adopted as of the last day of the taxable year;

2. Allow all members of a group of plans to file a single consolidated Form 5500 if all the plans in the group are defined contributions plans, have the same trustee, have the same named fiduciaries and plan administrator, use the same plan year, and provide the same investments or investment options to participants or beneficiaries;

3. Extend relief under nondiscrimination rules for defined benefit plans that are frozen to new participants;

4. Prohibit plan participants from accessing plan loans through credit cards;

5. Increase Form 5500 penalties to $250/day for late 5500s (up to $150,000 per return), $10/day for failure to file a Social Security Administration registration statement (Form 8955-SSA) (up to $50,000), $10/day for failure to file a required notification of change (up to $10,000) and $100/day for failure to provide withholding notice (up to $50,000); and

6. Allow in-kind distributions of terminated 403(b) custodial accounts, and allow the distributed individual custodial account to be maintained on a tax-deferred basis.

Effective dates for various provisions are summarized below.