The SECURE Act Has Passed! What Does It Change?

| by Michael J. Gheen, CPA/PFS®, CRPS®, Vice President

The SECURE Act, a transformational retirement legislation, has recently passed, and it could change the DC Plan landscape and contains provisions that may affect your plan and your participants. The SECURE Act is seen as a great opportunity (and the most comprehensive retirement security enhancement at the federal level since the Pension Protection Act of 2006) to improve retirement security for millions of Americans. To get a good grasp on what the bi-partisan Act encompasses for both, retirement in general and for participants in defined contribution plans, we need to take a look at the main initiatives. So, what are some of the main changes the SECURE Act brings with it?

Open MEPs

Unrelated employers are now able to adopt a defined contribution (DC) open multiple employer plan (MEP). The new law also eliminates the rule that disqualifies the entire MEP if one employer violates the qualification rules (also known as the “one bad apple” rule). The plan’s employer will continue to be treated as the plan sponsor for the portion of the plan attributable to the employees and beneficiaries of that employer. In contrast, the designated pooled plan provider must provide the following for the MEP:

  • be a named fiduciary,
  • be bonded according to ERISA section 412,
  • serve as the ERISA section 3(16) plan administrator, and
  • register with the Department of Labor (DOL)

Simplified 5500 reporting is available to MEPs that cover fewer than 1,000 participants if no single employer has more than 100 participants covered by the plan. The open MEP and simplified reporting provisions are in effect for plan years beginning in 2021.

Testing Relief for Frozen DB Plans

Nondiscrimination testing relief is available to frozen defined benefit plans if certain requirements are met. This provision helps resolve the long-standing issue where some soft frozen defined benefit (DB) plans struggle to pass compliance testing. Although the provision is in effect on the date of enactment, there is an option for employers to chose to apply the rules to plan years beginning after 2013.

Changes to RMD Required Beginning Dates

The required beginning date for Required Minimum Distributions (RMD) has been increased from age 70 1/2 to age 72. This change will apply for distributions after 2019 to any individual who reaches 70 1/2 after December 31, 2019. The age 701/2 rule was first applied to retirement plans in the 1960s and has never been adjusted to reflect increases in life expectancies.

Changes to Distributions Rules for Beneficiaries

Under current law, the period of time a benefit must be paid to a beneficiary after the participant’s death depends on whether death occurred before or after retirement payments began. Under the new law, however, whether before or after benefits have begun, if there are benefits due under a DC or IRA after the participant’s death, it must be paid within 10 years if the beneficiary is not defined as an “eligible designated beneficiary.”

An eligible designated beneficiary is defined as one of the following at the employee’s date of death:

  • Spouse,
  • Minor child,
  • Disabled individual,
  • Chronically ill individual, or
  • An individual who is not more than 10 years younger than the employee

This is effective for deaths beginning in 2020; however, there may be a later effective date for collectively bargained and governmental plans. This excludes irrevocable elections that are already in place prior to December 20, 2019.

Safe Harbor for Selection of Lifetime Income Provider

Selecting a lifetime income provider is a fiduciary act under the Employee Retirement Income Security Act (ERISA). Under the new law, fiduciaries are given an optional safe harbor to satisfy the prudence requirement when selecting insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract. This provision is effective December 20, 2019.

Auto Enrollment Escalation Limits Change

Current law provides for a 10% safe harbor automatic enrollment escalation limit. Under the new law, the 10% cap applies for the first year the employee is enrolled, and then increases to 15% after that year. This provision is in effect for plan years beginning in 2020.

Benefit Statement Disclosure

Benefit statements provided to DC plan participants are required to include a lifetime income disclosure at least once in any 12-month period. The disclosure must illustrate the monthly payments the participant would receive if the total account balance was used to provide lifetime income streams for a single life annuity as well as a qualified joint and survivor annuity for the participant and the participant’s surviving spouse. The DOL will develop a model disclosure. This provision will be in effect for benefit statements issued more than 12 months after the DOL issues the final interim rules, model disclosure, and assumptions.

Tax Credits for Plan Sponsors

Additional tax credits are available to employers with up to 100 employees to help offset the cost of starting up a retirement plan and an additional tax credit is available to plans with an automatic enrollment feature. These provisions are in effect for tax years beginning in 2020.

Greater Flexibility in Plan Design

Employers are now allowed until their tax filing deadline in the upcoming year to adopt a qualified plan for the prior tax year. The safe harbor notice requirement for non-elective contributions is eliminated. The new law also allows plan sponsors to switch to a safe harbor 401(k) plan with non-elective contributions at any time before the 30th day before the close of the plan year. Amendments after that time would be allowed if they provide:

  • a non-elective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and
  • the plan is amended no later than the last day for distributing excess contributions for the plan year (in other words the close of following plan year).

These provisions are in effect for tax years beginning in 2020.

Eligibility for Long-Term Part-Time Employees

Current law allows employers to generally exclude employees who do not work 1,000 in a year from participating in their 401(k) plans. Under the new law, employers maintaining a 401(k) plan are required to have a dual eligibility rule where an employee must complete either one year of service with 1,000 hours or three years of consecutive service with at least 500 hours of service in each year. Collectively bargained plans are exempt from this provision. Plan sponsors are allowed to exclude participants who meet the 500-hour rule for the following purposes:

  • Matching non-elective contributions
  • Non-discrimination testing
  • Coverage testing
  • Top-heavy testing

This is effective for plan years beginning in 2021. Service earned prior to 2021 will not be considered.

Adoption or Birth Withdrawals

Under the new law, participants may be allowed to take penalty-free withdrawals from a DC plan or IRA for any qualified birth or adoption. These distributions would not be subject to the 10% additional tax on early distributions. Also, distributions for this purpose are not eligible for rollover and may not exceed $5,000 per occurrence. This limit applies across all plans of the controlled group. Participants have the option to repay the distribution. This provision in effect for distributions beginning in 2020.

Portability for Guaranteed Lifetime Income Investments

DC plans that provide an investment option with a guaranteed lifetime income feature may allow participants to complete a trustee to trustee transfer of those funds even if distributions are not otherwise allowed in the event the plan closes that investment option. The transfer must occur within 90 days of the investment closing and is effective for plan years beginning in 2020.

403(b) Plan Termination

Plan sponsors of 403(b) plans may terminate the custodial account by transferring funds to an individual custodial account in kind to a participant or beneficiary that will maintain the 403(b) plan features at the point of termination. The DOL is expected to give guidance in the next six months which is expected to be effective retroactively to the 2009 tax year.

In-Service Distributions

Current law allows in-service distributions for Defined Benefit and governmental 457(b) plans at age 62. The new law will allow in-service distributions at 59 1/2. This may be effective in 2020 for plans that allow in-service distributions.

Disaster Relief

 Individuals who have a primary residence within a federally declared disaster relief area and suffered an economic loss as a result of that disaster may be eligible for tax relief for qualified disaster distributions. Enhanced retirement plan loans may also be available. The features of an enhanced loan include delayed loan repayments for up to one year and an increased maximum loan amount of $100,000. This provision is in effect for individuals who suffered losses in a qualified disaster area beginning in 2018 and ending 60 days after the date of enactment.

As you can see, from a policy point of view, The SECURE Act addresses issues of access and lifetime income and aims to encourage more people to direct more savings toward retirement. It is always the goal to help people get started early, invest in the capital markets long term, keep them invested and give them the ability to have a stream of retirement income. We will always be available to answer your questions and deliver the most up-to-date information as guidance in this area develops further. Don’t hesitate to reach out to us!



Principal Financial Group®’s Retirement Changes in the Spending Bill (December, 2019)

LPL Financial’s Setting Every Community Up for Retirement Enhancement (SECURE) Act

Michael Kitces’ Key 2019 Secure Act and Tax Extenders

BlackRock Inc.’s Will the SECURE Act Live Up to Its Name? (January 2020)


This document is intended to be educational in nature and is not intended to be taken as a recommendation.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Global Retirement Partners, DBA Oswald Financial, Inc., a registered investment advisor and separate entity from LPL Financial.