SECURE Act Changes Loom

Check these items off your to-do list

Remember 2019? It was in December of that year (which seems very long ago now) that the SECURE Act was signed into law.

Today, as COVID-19 continues raging around the world, the SECURE Act may have slipped off your radar in favor of other pressing issues. But make no mistake, it is still out there — and it does require your attention. In general, plan sponsors have until the last day of the 2022 plan year (December 31, 2022, for calendar-year plans) to adopt the amendments required by the Act. However, operational compliance is required during the period between the actual plan amendment date and the effective date for the Act’s required changes.

Here are just two of the items that will need the attention of 401(k) plan sponsors. Because many of the words and phrases in this article have specific legal meanings, please consult the plan’s attorney to be sure your plan will be compliant with these and other provisions of the Act.

Eligibility for long-term part-timers

In the decades prior to the SECURE Act, plans could set a year of service for eligibility purposes at a minimum of 1,000 hours worked during a plan year. Under the SECURE Act, the required hours have been reduced. Employees who are at least 21 years old and who work at least 500 hours in three consecutive 12-month periods must be allowed to make salary deferrals in the 401(k) plan. The definition of a year of vesting service is also changing to reflect the 500-hour minimum, rather than the former 1,000 hours in a plan year requirement. These rules become effective for plan years that begin after December 31, 2020.

While these long-term, part-time employees will be able to make salary deferrals, they are not required to be included in employer matching contributions or other contributions from the employer.

Sponsors should start tracking the hours of their part-time staff for the plan year beginning after December 31, 2020. Workers who accumulate at least 500 hours of service during the first, second and third years after that date must be allowed to begin salary deferrals in the plan during the subsequent plan year. For a calendar year plan, then, deferrals would be allowed during the 2024 plan year from employees with at least 500 hours of service in 2021, 2022 and 2023.

It is worth noting that employees included in the plan only because of this provision—those with less than 1,000 hours of service — do not need to be included in the plan’s nondiscrimination tests, including top-heavy testing. As before, employees with at least 1,000 hours of service and who meet the plan’s age requirement must be included in the tests.

Lifetime income disclosures

Along with disclosures about vesting status and investments, plans will soon be required to include a new disclosure about lifetime income. To meet this requirement, the disclosure must describe the participant’s balance in terms of a monthly annuity that could be purchased with the participant’s account balance. By December 20, 2020, the U.S. Department of Labor (DOL) expects to release interim rules, including a model disclosure statement and assumptions on which the annuity figure should be based. As long as the disclosure meets legal requirements, the plan and its fiduciaries will be protected against liability arising from it. Expect the first disclosure to be required 12 months after the DOL issues its interim rules, likely sometime during 2021.

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