On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “Act”). This constitutes the most comprehensive law in the retirement plans field since the Pension Protection Act of 2006. The Act’s provisions that affect defined contribution plans, such as 401(k) plans and 403(b) plans, are as follows:
- Multiple Employer Plans: The Act permits employers with no relationship to participate in one retirement plan. That type of plan, which was previously referred to in the industry as an “open MEP,” is now called a “pooled employer plan.” Importantly, such a plan will be treated as a single plan, which means that only one Form 5500, and only one plan audit (if applicable), will be required annually. In addition, for such plans and for plans “maintained by employers which have a common interest other than having adopted the plan,” the so-called “one bad apple” rule generally will not apply. Thus, if certain requirements are satisfied, a participating employer’s compliance issue(s) will not subject the entire plan to disqualification. These rules apply to plan years beginning after December 31, 2020.
- Automatic Deferrals: The Act allows qualified automatic contribution arrangement safe harbor plans to set participants’ default deferral rate as high as 10% of their eligible compensation, during the period ending on the last day of plan year immediately after the first year in which the automatic contribution feature first applied to the participant. After that period ends, the default rate can be increased to as high as 15% of the participant’s eligible compensation. This provision is effective for plan years beginning after December 31, 2019.
- Safe Harbor 401(k) Plan Annual Notice: Under the Act, only safe harbor 401(k) plans that satisfy the safe harbor rules via matching contributions will be required to furnish the annual safe harbor notice to participants. Thus, safe harbor 401(k) plans that satisfy the safe harbor rules via nonelective contributions will not have to furnish the annual safe harbor notice. This provision applies to plan years beginning after December 31, 2019.
- Mid-Year Amendment Adding Safe Harbor Nonelective Contribution Feature: A non-safe-harbor 401(k) plan can be amended mid-year to become a non-elective contribution safe harbor plan. If the mid-year amendment is adopted fewer than 31 days before the end of the plan year, the nonelective safe harbor contribution must equal at least 4% of compensation (instead of 3%), and the amendment must be adopted by the end of the next plan year. This provision is effective for plan years beginning after December 31, 2019.
- Participant Loans: The Act prohibits plans from making plan loans available to participants through a credit card or any other similar arrangement, effective for loans received after December 20, 2019.
- Lifetime Income Options: Plans can allow the trustee-to-trustee transfer of a lifetime income investment (e.g., in the form of an annuity contract) to an eligible employer plan or IRA when such lifetime income investment is no longer permitted to be held as a plan investment option, without regard to any plan restrictions on in-service distributions. This provision applies to plan years beginning after December 31, 2019. Also, a lifetime income disclosure to participants will have to include certain specific information (e.g., the amount of monthly payments the participant would receive if his or her accrued benefits were used to provide lifetime income in the form of a qualified joint and survivor annuity). The Act directs the DOL, by December 20, 2020, to issue a model lifetime income disclosure. In addition, no plan fiduciary or plan sponsor will incur any liability under this provision solely because they provided this disclosure based on calculation assumptions to be provided by the DOL. That provision will apply to benefit statements furnished more than 12 months after the latest of the DOL’s issuance of regulations, the model disclosure, or calculation assumptions. Moreover, the Act creates a new fiduciary safe harbor for employers that choose to include a lifetime income investment option in their defined contribution plan. That safe harbor, which applies to their selection of an insurer for a guaranteed retirement income contract, is effective as of December 20, 2019.
- 403(b) Plan Terminations: The Act directs the IRS to issue guidance providing that if an employer terminates a 403(b) plan, accounts can be distributed in kind to participants. A participant’s individual custodial account will be maintained on a tax-deferred basis as a 403(b) custodial account until it is distributed (subject to compliance with 403(b) rules in effect when the individual custodial account is distributed). This provision is retroactively effective for plan years beginning after December 31, 2008.
- Eligibility of Certain Long-Term, Part-Time Employees: The Act provides that employees who are not full-time employees but have attained at least age 21 must be allowed to participate in their employer’s 401(k) plan no later than the end of 3 consecutive 12-month periods during each of which the employee has completed at least 500 hours of service. However, the plan sponsor is not required to make nonelective or matching contributions on behalf of such employees, even if those contributions are made on behalf of other eligible employees, until the long-term, part-time employee satisfies the plan’s requirements for those contributions. Also, the plan sponsor can elect to exclude such part-time employees when performing annual compliance testing. This provision is effective for plan years beginning after December 31, 2020, but 12-month periods beginning before January 1, 2021 are not taken into account. Thus, no employees will need to be permitted to make salary deferrals under this provision before 2024.
- In-Service Distributions for Birth or Adoption: Plans can permit a penalty-free distribution to an individual if it is made during the 1-year period beginning on the date on which the individual’s child is born or on which the legal adoption of a child by the individual is finalized. The distribution cannot exceed $5,000, although the individual can elect to repay that amount to his or her plan account. These Act provisions apply to distributions made after December 31, 2019.
- Required Minimum Distributions: The Act increases the age at which these distributions must begin, from age 70 ½ to age 72. This rule applies to distributions required to be made after December 31, 2019, with respect to individuals who attain age 70 ½ after that date. The Act also changes the post-death required minimum distribution rules for defined contribution plans, by requiring that all distributions after the participant’s death be made by the end of the 10th calendar year following the year of the participant’s death. However, that 10-year distribution requirement generally does not apply if the participant’s designated beneficiary is an “eligible designated beneficiary” (e.g., surviving spouse; child who has not reached the age of majority). This post-death provision generally applies to distributions with respect to participants who die after December 31, 2019.
- Adoption of New Plan: If an employer adopts a plan after the close of a taxable year, but before the deadline for filing the employer’s tax return for such taxable year (including extensions), the employer can elect to treat the plan as having been adopted as of the last day of such taxable year. This rule applies to plans adopted for taxable years beginning after December 31, 2019.
- Consolidated Form 5500 Returns: The Act directs the IRS and DOL to modify Form 5500 so that all members of a group of plans may file a consolidated Form 5500. Generally, a group of plans will be eligible to file a consolidated Form 5500 if all the plans in the group: (1) are defined contribution plans; (2) have the same trustee, the same named fiduciary(ies), and the same plan administrator; (3) have the same plan year; and (4) provide the same investments or investment options to participants. This provision is effective for plan years beginning after December 31, 2021.
- Form 5500 Penalties: The Act substantially increases late filing penalties. First, the penalty is increased from $25 to $250 per day for each day the filing is late. Second, the maximum penalty is increased from $15,000 to $150,000. These increases apply to Forms 5500 that are due after December 31, 2019.
- Form 8955-SSA Penalties: The Act substantially increases the late filing penalty from $1 to $10 per participant for each day the filing is late, up to a maximum of $50,000 (which was previously $5,000). These increases apply to returns due after December 31, 2019.
- Plan Amendments: Non-governmental plans must be amended for applicable Act provisions by the last day of the 2022 plan year. Governmental plans have until the end of the 2024 plan year.
Here is a link to the Act (see “Division O”): https://www.congress.gov/116/bills/hr1865/BILLS-116hr1865enr.pdf