For Individuals,For Plan Sponsors,Retirement Savings Plans,Custom

SECURE Act Enacted

December 20, 2019

On December 20, 2019, President Trump signed into law a $1.4 trillion spending bill to fund the federal government through the end of its fiscal year (September 30, 2020).  Attached to the bill was the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019; the first significant pension reform in a more than a decade.

While certain provisions apply only to private sector plans covered by the Employee Retirement Income Security Act of 1974 (ERISA), they often serve as best practices for governmental plans.  For public sector plan sponsors, the following are key provisions of note:

  • Increase Beginning Date of Required Minimum Distributions (RMDs)
    Increases age for commencing RMDs for plans and IRAs from 70½ to 72. The SECURE Act does not change RMD requirements for participants who are age 70½ or older in 2019.
  • Post Age 70½ IRA Contributions
    Repeals limit prohibiting individuals age 70½ and above from making non-rollover contributions to traditional IRAs. The provision includes a rule coordinating these contributions with the rules for qualified charitable distributions.
  • Portability of Lifetime Income Investments
    Participants in qualified defined contribution (DC), 403(b), and governmental 457(b) plans are  allowed to take distribution of a lifetime income investment if the lifetime income investment is no longer authorized to be held under the plan via a direct rollover to an IRA or other retirement plan or, in the case of an annuity contract, through direct distribution to the individual.
  • Distributions for Birth or Adoption
    Allows penalty-free, in-service distributions from a DC plan (including a 403(b) or 457(b) plan) or IRA in connection with a birth or adoption, up to $5,000. The distribution could be later repaid and treated as a rollover. This does not appear to be a required distribution option when designing plan features.
  • "Stretch" Required Minimum Distributions (RMDs)
    Upon death of an IRA owner or DC plan participant (including in a 403(b) or 457(b) plan), the individual beneficiary is required to draw down entire inherited interest within 10 years.  This provision applies to deaths after December 31, 2021 in the case of governmental plans, and deaths after December 31, 2019 in the case of IRAs and most other plans.

    This provision does not apply to an eligible designated beneficiary who is:
    • the surviving spouse;
    • a child under the age of majority;
    • disabled or chronically ill (including where they are beneficiaries of certain trusts); or
    • any other person who is not more than 10 years younger than the participant/IRA owner.
    In these cases, the distribution could be taken over the eligible designated beneficiary's life or life expectancy per prior law. The 10-year rule applies to a minor upon reaching the age of majority.

    Current law is unchanged for non-individual beneficiaries, such as estates and charities, which are subject to a five-year rule and cannot "stretch" the payouts over a longer period.
  • Conforms In-Service Distributions to Age 59½
    While not part of the SECURE Act, the spending bill modifies the law to allow in-service distributions at age 59½ for defined benefit plans, governmental 457(b) plans and DC money purchase plans, conforming the in-service distribution laws to those of 401(k) and 403(b) plans.
  • Lifetime Income Disclosures
    ERISA DC plan benefit statements are required to include a lifetime income disclosure at least once a year, illustrating the amount of monthly payments the participant would receive if total accrued benefits were used to provide lifetime income through a qualified joint and survivor annuity and a single life annuity.

    The Department of Labor is required to set rules for calculating the disclosure, and the provision is not effective until those rules are issued.
  • Fiduciary Safe Harbor for Selecting Annuity Providers
    Adds a statutory safe harbor for ERISA plans, similar to the existing regulatory safe harbor, for the selection of annuity providers. The statutory safe harbor:

    • Allows DC plan fiduciaries to rely on written representations from insurers regarding their financial capabilities under state insurance law (this changes the current safe harbor, which requires the plan sponsor to determine the financial capacity of the insurance company);
    • Generally, deems fiduciaries to have conducted a periodic review of the financial condition of the insurer if the fiduciary obtains certain written representations annually from the insurer.
  • Remedial Amendment Period
    The bill includes a remedial amendment period, which gives employers a transition period before they need to amend their plans pursuant to the new law. For governmental plans, the plan amendment deadline is the last day of the 2024 plan year.
  • Repeal of Cadillac Tax for High-Cost Health Plans
    While not part of the SECURE Act, the spending bill also repealed the 40% excise tax on high-cost health plans known as the Cadillac Tax.

We are working to implement changes made by the SECURE Act. ICMA-RC will keep plan sponsors and participants apprised of updates with additional communications in 2020.

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