Member Article

This week, Congress passed and President Trump is expected to sign a domestic spending package that includes significant changes affecting retirement plans in the SECURE (Setting Every Community Up for Retirement Enhancement) Act, and a permanent repeal of the “Cadillac tax” on high-cost employer-sponsored health coverage that was enacted with the Affordable Care Act (ACA). The SECURE Act is the most comprehensive set of changes to retirement plan rules in many years. While this Alert provides a summary of important provisions, our Employee Benefits Group will cover these changes in more detail in our annual update webinar in February, 2020.

SECURE Act Changes for Retirement Plans

The SECURE Act revises several federal tax and fiduciary rules that apply to employer-sponsored retirement plans, including the following:

Required Minimum Distribution Rule Changes

• The age used for determining when required minimum distributions must begin for retirement plan participants is raised from 70½ to 72, effective for distributions made after December 31, 2019, for individuals who attain age 70½ after that date.
• The required minimum distribution rules for surviving beneficiaries of participants in defined contribution plans are revised to require distribution of the participant's entire interest in the plan over a 10-year (rather than 5-year) period, unless the surviving beneficiary is an “eligible designated beneficiary.” For eligible designated beneficiaries, distributions are allowed to be paid over the life or life expectancy of the designated beneficiary, beginning in the year following the participant's death. An “eligible designated beneficiary” means a surviving spouse, an individual who is disabled or chronically ill, a minor child, or an individual who is not more than 10 years younger than the participant. The new rules generally apply for distributions following dates of death after December 31, 2019, although for governmental and collectively bargained plans, the rules apply for distributions with respect to dates of death after December 31, 2021.
  
  

New Rules for 401(k) Plans

• Long-term part-time employees must be permitted to participate in 401(k) plans. Under this rule, any employee who works at least 500 hours per year for at least three consecutive years must be permitted to make elective deferrals to the plan. Employers do not need to treat such employees as eligible under the plan for purposes of employer matching contributions, and may exclude them from nondiscrimination testing. This rule is effective for plan years beginning after December 31, 2020, although no 12-month period beginning before January 1, 2021 will be taken into account for determining if the three consecutive year period has been met. The new rule does not apply to collectively bargained plans.
• For safe harbor 401(k) plans with automatic enrollment, the maximum default contribution rate based on auto-escalation is increased from 10% of compensation to 15%, effective for plan years beginning after December 31, 2019.
  
  

Penalty-Free In-Service Withdrawals for Birth or Adoption of a Child

• Qualified plans, 403(b) plans, and governmental 457(b) plans may permit participants to receive in-service distributions up to $5,000 in the case of the birth or adoption of a child, and such distributions will be exempt from any early withdrawal penalty tax that would otherwise apply, effective for distributions made after December 31, 2019.
  
  

Lifetime Income Disclosure Requirement for ERISA Defined Contribution Plans

• Defined contribution plan sponsors that are subject to the Employee Retirement Income Security Act of 1974 (ERISA) will need to annually disclose to participants the monthly amount that would be payable if the participant's total account balance were used to provide a lifetime income stream. This change is effective for disclosures issued more than 12 months after the latest of when the Department of Labor publishes a model disclosure, issues regulations regarding the new rule, or establishes the assumptions to be used in calculating the lifetime income stream amount.
  
  

Other Changes

The SECURE Act includes a number of other retirement plan changes, including provisions that:

• Expand access to multiple employer plans
• Increase the small employer plan start-up tax credit
• Provide new rules for distribution of benefits upon termination of 403(b) plans
• Modify nondiscrimination rules to protect older, longer service participants, and
• Expand portability of lifetime income options.
  
  

New In-Service Distribution Rule for Defined Benefit and Governmental 457(b) Plans

A separate law, included in the appropriations package, lowered the minimum age at which defined benefit plans may allow participants to receive in-service distributions from 62 to 59½, effective for plan years beginning after December 31, 2019. In-service distributions from governmental 457(b) plans are also permitted for participants who have attained age 59½ , effective for plan years beginning after December 31, 2019.

“Cadillac Tax” Repealed

The ACA's so-called “Cadillac tax” provision would have imposed a 40% excise tax on high-cost employer-provided health care coverage. Originally scheduled to take effect in 2018, implementation of the tax was repeatedly delayed amid continuing efforts by employer groups and unions to repeal it altogether. The new appropriations package includes a complete repeal of the tax, effective for taxable years beginning after December 31, 2019.

If you have questions, please feel free to reach out to your contact in the Hanson Bridgett Employee Benefits Group.