Last week, the House of Representatives overwhelmingly passed the “Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019” (H.R. 1994) by a vote of 417-3. The bill makes numerous changes affecting employer-provided retirement plans as well as individual retirement accounts (IRAs) and other tax-favored savings accounts.
The bill contains provisions designed to expand and preserve retirement savings, simplify administrative requirements, expand the use of Section 529 plans, and enhance revenue. Some of the key provisions affecting retirement plans include:
- Lifetime Income Options—The bill has several provisions designed to promote lifetime income options in retirement plans. It requires benefit statements provided to defined contribution plan participants to include a lifetime income disclosure at least once during any 12-month period. The disclosure would illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity. The Secretary of Labor is directed to develop a model disclosure.
Under the bill, plan fiduciaries and plan sponsors will have no liability under the Employee Retirement Income Security Act (ERISA) solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance issued under the provision and that include the explanations contained in the model disclosure. Fiduciaries are also afforded an optional safe harbor to satisfy the prudence requirement under ERISA with respect to the selection of insurers for a guaranteed retirement income contract and are generally protected from liability for losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract.
Finally, the bill permits qualified defined contribution plans (as well as section 403(b) plans and governmental section 457(b) plans) to make direct trustee-to-trustee transfers to another employer-sponsored retirement plan or individual retirement account (IRA) of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
- Required Minimum Distributions—Under current law, participants are generally required to begin taking distributions from their retirement plan at age 70½. The bill increases the required minimum distribution age from 70½ to 72. (As a related matter, the bill eliminates the prohibition on traditional IRA contributions after an individual turns 70½.) The bill also modifies the required minimum distribution rules with respect to defined contribution plans as well as IRAs upon the death of the account owner. Under the bill, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or a child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the 10th calendar year following the year of the employee or IRA owner’s death.
- Pooled Plans—The bill would allow two or more companies that are not in the same industry to offer defined contribution plans or IRAs to their employees through a pooled plan provider. These plans are similar to the association retirement plans that had been proposed by the Department of Labor in October 2018. As a related matter, pooled plans would not be treated as failing to meet certain defined contribution or IRA requirements if one employer did not meet its obligations (sometimes referred to as the “one bad apple” rule). The pooled plan would have a single Form 5500 annual report.
- Safe Harbor Plans—The bill increases the cap on the automatic escalation of employee deferrals in an automatic enrollment safe harbor plan from 10% to 15%. It also eliminates the safe harbor notice requirement, although it maintains the requirement to allow employees to make or change an election at least once per year. In addition, it permits amendments to nonelective contributions at any time before the 30th day before the close of the plan year; amendments after that time would be allowed if the amendment provides (1) a nonelective contribution of at least 4% of compensation (rather than at least 3%, as ordinarily required) for all eligible employees for that plan year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year (that is, by the close of following plan year).
- Part-time Workers—Plans currently can generally exclude employees who work less than 1,000 hours in a plan year. Except in the case of collectively bargained plans, the bill will require employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (under the 1,000-hour rule) or three consecutive years of service in which the employee completes at least 500 hours of service. In the case of employees who are eligible solely by reason of the latter 500-hour rule, the employer may elect to exclude such employees from testing under the nondiscrimination and coverage rules and from the application of the top-heavy rules.
- Penalty-Free Withdrawals (Birth or Adoption)—The bill provides for penalty-free withdrawals of up to $5,000 from retirement plans for a “qualified birth or adoption distribution.”
- Modification of Nondiscrimination Rules—The bill modifies certain nondiscrimination rules with respect to closed plans (e.g., participants who have grandfathered benefits under a defined benefit plan) to permit existing participants to continue to accrue benefits.
- Plans Adopted by Filing Due Date—The bill now permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year.
- Combined Annual Reports—The bill directs the Internal Revenue Service and Department of Labor to effectuate the filing of a consolidated Form 5500 for similar plans. These are defined contribution plans with the same trustee, named fiduciary (or named fiduciaries) under ERISA, and administrator; using the same plan year; and providing the same investments or investment options to participants and beneficiaries.
The bill now goes to the Senate for consideration. While there is no assurance that the Senate will take up and pass the bill, it is worth noting that the bill has 36 Democrats and 22 Republicans as co-sponsors. It is also worth noting that the bill includes several provisions that are already in a similar bill in the Senate—the Retirement Enhancement and Savings Act (or RESA). The Senate may take up the SECURE Act, but it may also decide to take up RESA; in that case, there will be a conference committee to reconcile differences, and the reconciled version will go back to both the House and Senate for passage. The President will also need to sign the final bill.