The SECURE Act Has Passed! Now What?

Stalled in the Senate since May, the Setting Every Community Up for Retirement Enhancement (SECURE) Act — the most significant retirement bill to be enacted since the passage of the Pension Protection Act of 2006 — seemed uncertain to pass in 2019. Now, bundled with the year-end budget that Congress just passed, the future of retirement looks SECURE.

As long-time advocates of policy that furthers retirement security, State Street has been following this legislation closely. Here, we will recap the key components of the SECURE Act, emphasizing the fast-approaching plan decisions and process revisions that will need to be made in the coming year.

Theme Spotlighted Provision Effective Date
Extending Retirement Plan Access 1. Authorized Open MEPs and Repealing the "One Bad Apple" Rule January 1, 2021 or plan years beginning after 2020*
  2. Encouraging Small Employers to Adopt Plans and Auto Enrollment by Providing Tax Credits  January 1, 2020
or tax years beginning after 2019
  3.  Establishing Long-Term Part-Time Worker Status January 1, 2021 or plan years beginning after 2020
First contributions by part-time workers to be made in 2024
Increasing Savings Contributions 4.  Propelling Savings by Increasing the Limit on Automatic Escalation from 10% to 15% January 1, 2020
or plan years beginning after 2019
  5.  Allowing  Contributions to a Traditional IRA after Age 70 January 1, 2020
or plan years beginning after 2019
  6.  Changing Required Minimum Distribution Age from 70½ to 72 January 1, 2020
Expanding Distribution and Spending Options 7.  Modifying the Fiduciary Safe Harbor for Selecting an Annuity Provider December 2019
(date of enactment, which is the date signed by the president)
  8.  Enabling Portability of Lifetime Income Products January 1, 2020
or plan years beginning after 2019
  9.  Offering Penalty-Free Distributions upon the Birth or Adoption of a Child January 1, 2020
  10.  Amending Wealth Transfer Strategies by Limiting the Window of Post-Death Payments  Deaths on or after January 1, 2020
Boosting Financial Literacy 11.  Featuring Lifetime Income Disclosure Recordkeepers to comply once Department of Labor issues regulations

Extending Retirement Plan Access 

In the coming years, the following provisions will help broaden savings plan options and inclusivity, allowing more Americans to participate in workplace plans and empowering greater retirement readiness.

1. Authorizing Open MEPs and Repealing the “One Bad Apple” Rule

This provision allows unrelated employers to participate in a multiple employer plan or “open MEP.” In addition, the previous rule that penalized the entire MEP for the violation of qualification rules by a single employer has been removed, thus eliminating the “one bad apple” rule. This provision is effective in 2021.

2. Encouraging Small Employers to Adopt Plans and Auto Enrollment by Providing Tax Credits

Under current law, employers with up to 100 employees are entitled to an annual tax credit for three years equal to 50% of the costs of starting up and administering a retirement plan, up to a cap on the annual credit of $500.

The bill increases the $500 cap to the lesser of $5,000 or $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan. For small employers that adopt automatic enrollment provisions, they would be eligible for an additional $500 credit for three years. This provision is effective in 2020.

3. Establishing Long-Term Part-Time Worker Status

Under current law, employers generally may exclude certain part-time employees (i.e., employees who have not satisfied a requirement that they have 1,000 hours of service in a year) when providing a plan to their employees. Except in the case of collectively bargained plans, the bill requires employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.

In the case of employees who are eligible solely by reason of the three-year, 500-hour rule, employers have fewer plan requirements, including:       

  • No requirement to provide matching or non-elective contributions, and
  • The option to exclude these employees from testing under the nondiscrimination and coverage rules — including the 401(k) safe harbor rules — and from the application of the top-heavy rules.

This provision is effective in 2021 with the first contributions being made in 2024.

Increasing Savings Contributions

Sponsors can help employees bolster their savings foundation in 2020 through tactics to increase automatic escalation levels and strategies for later-in-life contributions and drawdown.

4. Propelling Savings by Increasing the Limit on Automatic Escalation from 10% to 15%

Under the current law detailing the nondiscrimination safe harbor for automatic enrollment and automatic escalation, a plan may not automatically enroll or escalate employees so that they make contributions that exceed 10% of pay. The bill maintains the 10% cap for the first year in which the employee is automatically enrolled, but increases the limit to 15% after that first year. This provision is effective for plan years after 2019.

5. Allowing Contributions to a Traditional IRA after Age 70

Under current law, an individual who has reached age 70 ½ by the end of the year cannot make a non-rollover contribution to a traditional IRA. Under the bill, this age limitation would be repealed. The bill also includes a provision reducing the amount of any excludable IRA charitable distribution by the sum of all post-70 ½ deductible contributions (except those that reduced a prior year’s excludable charitable distribution). These provisions are generally effective in 2020.

6. Changing the RMD Age from 70½ to 72

Under the bill, the age 70½ trigger for taking required minimum distributions would be raised to age 72, effective for distributions after 2019 with respect to individuals who turn 70½ after 2019. Under the effective date, if an individual turns 70½ in 2019, such individual will need to take a required minimum distribution for 2019 and 2020, even though he or she may not attain age 72 until 2021. This change will cause some immediate effective date challenges because distributions to individuals who turn 70 ½ in 2020 will have to be treated differently for the withholding and rollover rules.

Expanding Distribution and Spending Options

This category of provisions includes several key and quickly in-effect measures surrounding lifetime income easements and penalty-free, family-oriented withdrawals. Plan sponsors should consider their participants’ interests and plan’s stance on each provision and anticipate immediate next steps in 2020.

7. Modifying the Fiduciary Safe Harbor for Selecting an Annuity Provider

Defined contribution plan fiduciaries interested in pursuing lifetime income options within their savings plans can now rely on representations from insurers regarding their financial status under state insurance laws. This provision helps to relieve the fiduciary liability of plan sponsors in conducting insurer due diligence, enables a more streamlined process to lifetime income option evaluation and is effective upon enactment of the legislation. While this transition does not require sponsors to revise existing plan elements, it does enable them to more easily evaluate them.

8. Enabling Portability of Lifetime Income Products

The bill facilitates portability of lifetime income products held in retirement plans, meaning employees can move these products if the lifetime income investment in their current plan is no longer authorized.

Similarly, plan participants would be allowed to take a distribution of a lifetime income investment if the distribution is made via a direct rollover to another retirement plan or IRA.

9. Offering Penalty-Free Distributions upon the Birth or Adoption of a Child

Upon the birth or adoption of a child, a participant may withdraw up to $5,000 penalty-free from an IRA or any type of defined contribution plan that permits these types of distributions. Such distributions may also be repaid, in which case, the repayment would be treated like a rollover. For sponsors, the effective date challenge will be determining whether any post-2019 distribution is a birth or adoption distribution, in order to comply with the withholding and rollover rules.

10. Amending Wealth Transfer Strategies by Limiting the Window of Post-Death Payments

Within the “stretch IRA” construct, intended to extend IRA distribution over generations, designated beneficiaries are now required to draw down all assets within an IRA or plan (other than a defined benefit plan) within 10 years of the IRA owner or plan participant’s death. The intention of this provision is to liquidate plan assets for tax and other economic activity. An exception to this rule applies to beneficiaries who are (1) spouses, (2) within 10 years in age of the decedent, (3) disabled or chronically ill, and (4) minors until they reach the age of majority. The new rule generally applies with respect to deaths after 2019.

Boosting Financial Literacy

The most logistically complex to execute, and therefore receiving the longest implementation lead time of the spotlighted provisions, financial literacy tactics are expected to give participants both a glimpse of their financial futures and an opportunity to adjust behaviors today.

11. Featuring Lifetime Income Disclosure

The legislation requires that a lifetime income disclosure benefit statement be provided annually to defined contribution plan participants. This disclosure is intended to provide participants with a projection of what they could expect to receive monthly during retirement as a function of their savings to date. By translating the saving experience into a future income stream, participants can better assess their retirement readiness and make changes accordingly.

While projections can be perilous, given market volatility and the sometimes-winding journey to retirement, income inputs come from Department of Labor-prescribed assumptions and explanations, meaning employers and service providers will not bear the burden of liability should actual benefits be less than those reflected in the disclosures. This provision becomes effective upon issuance of guidance by the Department of Labor.

At the four-way intersection of access, saving, spending and education is an opportunity to powerfully and positively change the way participants and plans prepare for and experience retirement. We are excited by the progress this bill portends and will continue to champion policy that propels better retirement outcomes.