Americans are not saving enough for retirement. To address this issue, a new retirement-related bill is making its way through Congress, The Setting Every Community Up for Retirement Enhancement (SECURE) Act. Its purpose is to help Americans save more for retirement by creating new rules to expand and preserve retirement savings, improve the administration of retirement plans, provide additional benefits and create revenue provisions.
Highlights of the Act include:
Qualified automatic enrollment arrangements (QACAs) would be able to auto increase employee deferrals up to 15% instead of the currently required 10% cap.
The legislation will allow for a new type of plan whereby unrelated employers could pool their resources to optimize buying power in a new type of plan called a “pooled employer plan” (“PEP”). By and large, the PEP is what was previously referred to as an open multiple employer plan (“open MEP”). Open MEPs were an issue that PEPs are designed to remedy. PEPs would be treated as a single plan under ERISA. The legislation also purports to eliminate the “one bad apple” rule whereby the qualification issue of one adopting employer would not taint the qualified status of the entire PEP for the remaining adopting employers.
Employers will be required to provide an estimate of monthly annuity income participants could produce in retirement if annuities were choice for eventual distribution. The disclosure would be contained on annual benefit statements. The Department of Labor would be instructed to issue guidance for disclosures and assumptions for conversion of account balances to lifetime income stream.
For years plan fiduciaries have been hesitant to offer lifetime income annuity options within their plan structure due to fear of misstep in the evaluation of financial capability of insurers offering the products. This legislation would provide guidance for fiduciaries in the selection of the products to ensure a fiduciary safe harbor. The steps are rooted primarily in relying upon the insurer as to its status under the satisfaction of state insurance statutes.
For safe harbor design plans utilizing non-elective contributions the SECURE Act would eliminate the safe harbor notice requirement, but still maintains the requirement to allow employees to make or change an election at least once per year. It would allow plans to amend to become non-elective contribution safe harbor plans any time before the 30th day before the end of the plan year. Amendments after that time period would be allowed if it provides: (1) a non-elective contribution of at least 4 percent of compensation (versus at least 3 percent) for all eligible employees that year, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year, that is, by the close of the following plan year.
The legislation would require that all distributions made after the death be made by the end of the tenth calendar year following the year of death.
To make it more affordable for small businesses to implement retirement plans, the legislation will increase the credit for small businesses by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.
The SECURE Act would allow participants to take up to $5,000 from their plan or IRA for birth, or adoption, related expenses incurred within a year of the action. These could be taken on a penalty-free basis.
The legislation will create a new tax credit of up to $500 per year to small employers to provide for startup costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment.
Allows graduate and postdoctoral students’ stipends and non-tuition fellowship payments to be treated as compensation to be used as the basis for IRA contributions.
Plans would be prohibited from offering participant loans from the plan via use of a credit card.
Ends the restriction of IRA contributions to a traditional IRA by individuals who are 70½ years of age.
To allow participants to preserve their lifetime income investments and avoid surrender charges and fees, plans will be allowed to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
Under current law, employers are not required to include part-time employees (those working less than 1,000 hours per year) in their defined contribution plan. The legislation will require employers maintaining a 401(k) plan to have at least a dual eligibility requirement under which an employee must complete either one year of service (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service, except in the case of collectively bargained plans. For employees that are eligible based solely on the second new rule, employers may exclude those employees from testing under the nondiscrimination and coverage rules and from the application of top-heavy rules. In addition, those employees that are eligible based solely on the second new rule may be excluded from employer contributions.
Taking life expectancy into account, this legislation will increase the required minimum distribution age from 70½ to 72.
Businesses will be permitted to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year. The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.
Allows for consolidated filing of the Form 5500 for similar plans sponsored by members of a group. This may help reduce aggregate administrative costs, making it easier for small employers to implement a retirement plan. All the plans in the group must be defined contribution plans, have the same trustee, named fiduciary(ies), administrator, plan year, and investments options.
Modifies nondiscrimination rules with respect to frozen defined benefit plans to allow existing participants to continue to accrue benefits.
Other changes such as increased filing failure penalties, PBGC premiums, 529 plans, some tax implications to certain identified individuals, and church plans are also included in the legislation.
It’s important to note that the SECURE Act is not yet finalized and has not been signed into law. As always, we will stay abreast of the legislation and will inform you when any significant changes are made.
This material has been prepared from data believed to be reliable, but no representation is being made as to its accuracy or completeness.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that by using the information provided, plan sponsor will be in compliance with ERISA regulations
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