The Setting Every Community Up for Retirement Enhancement Act of 2019, also known as the SECURE Act, contains what some call the most sweeping changes to the U.S. retirement system since the 2006 Pension Protection Act.
With its broad impact across qualified retirement plans, it is important for plan sponsors to become familiar with the Act’s changes, and to take appropriate action. The Act’s administrative changes will likely require plan amendments, and participant notification practices will also need to change.
With that in mind, we gleaned a few key components of the SECURE Act for your review. This is not an exhaustive list, and we encourage you to seek the opinions of your plan’s counsel.
Required Minimum Distributions
If retired participants are allowed to maintain their accounts in the plan, the date on which Required Minimum Distributions (RMDs) must begin has changed. Before the SECURE Act, the RMD date occurred when the individual reached age 70½. Starting in 2020, the date has increased to age 72 for participants who were at least age 70½ by December 31, 2019. Improper application of RMD rules is a common trap for qualified plans; this change gives employers an excellent opportunity to review the plan’s processes.
Withdrawal for Birth or Adoption
Beginning in 2020, participants may take a qualified birth or adoption distribution of $5,000 or less without the 10% penalty tax that generally applies to early distributions. The withdrawal must occur within a year of the birth or adoption, and the participant may elect to re-contribute the amount withdrawn at a later time.
Increased Filing Penalties
Don’t take a casual attitude toward filing the plan’s Form 5500 on time; it’s never been a good idea, and with changes to the late filing penalties, now isn’t a good time to start. Penalties for late filing of this and some other compliance requirements increased significantly under the SECURE Act. Before, late 5500 forms were subject to fines of $25 per day to a maximum of $15,000. Now, for forms due after December 31, 2019, the fine has increased to $250 per day and a maximum of$150,000.
Lifetime Income Provisions
The retirement industry has long recognized the challenge of facing a lump sum payment at retirement, and the benefit a lifetime income option would provide. But plan sponsors have worried about the possibility of a fiduciary breach if they chose an annuity provider that did not follow through on promises. The SECURE Act attempts to fill that gap by creating a safe harbor for employers. As long as the annuity provider they select has currently — and for the preceding seven years — been licensed by the state insurance commissioner to offer guaranteed retirement income contracts, filed audited financial statements in accordance with state laws, and maintained reserves that satisfy all the statutory requirements of all states where the provider does business, the safe harbor applies.
Click here to read more about ways the SECURE Act impacts your plan’s compliance.