The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act which was signed into law in December of 2019 has enacted sweeping changes to the retirement plan industry.  As a result, this is the second in a series of articles that are intended to summarize the most impactful aspects of the SECURE Act as they apply to tax-qualified retirement plan sponsors.

It is important to understand that even though this legislation was only recently enacted, many of its provisions are already effective.  Therefore, it is critical for retirement plan sponsors to take the time to educate themselves on the impact of these changes in order to help ensure the proper administration and operation of their retirement plans.


Eligibility of Long-term, Part-time Employees

Most plan sponsors and industry practitioners are well versed in the most restrictive eligibility service requirements that may be applied under the Internal Revenue Code (“Code”) and the Employee Retirement Income Security Act (“ERISA”).  More specifically, a plan sponsor is permitted to restrict retirement plan participation to only those employees who accrue at least 1,000 hours of service during a 12-month eligibility period in order to achieve one “year of service” (“One Year of Service Rule”).  Notwithstanding, the SECURE Act has substantially expanded the employees to whom plan sponsors will be forced to offer plan participation … but only in connection with a 401(k) elective deferral feature.  This was accomplished by creating an alternate maximum service requirement which, once satisfied, will also require a plan sponsor to offer plan participation to a new class of employee.

Effective for plan years beginning after December 31, 2020, employees with at least 500 hours of service in three consecutive 12 month periods must be deemed to satisfy any service eligibility requirement that might otherwise apply for purposes of being permitted to make elective deferrals under a 401(k) defined contribution plan.  However, an age eligibility restriction of no later than the attainment of age 21 will continue to be permitted to apply in the normal manner.  Thus, while an age eligibility restriction of the attainment of age 21 might continue to restrict participation, an employee who works at least 500 hours in three consecutive twelve month eligibility periods must be allowed to make elective deferrals to a 401(k) plan.

To reiterate, this new eligibility provision only applies to an elective deferral feature of a 401(k) plan.  Thus, a plan sponsor who is forced to allow a “long-term part-time” employee (“LTPTE”) to defer a portion of his or her salary into a 401(k) plan in this manner could continue to restrict the same employee from receiving an employer matching or profit sharing contribution until such individual satisfied the “normal” One Year of Service Rule.  In addition, the LTPTEs who are allowed to defer a portion of their income are excluded from the nondiscrimination, minimum participation, top-heavy and coverage requirements that might otherwise apply.  Therefore, in general, the ability of the LTPTEs to defer as a result of this exception will not hurt the plan sponsor due to any otherwise applicable mandatory compliance testing requirement.

Finally, the first 12-month period which may be used to measure the completion of 500 hours of service in order to determine whether a LTPTE has accrued 500 hours of service in three consecutive 12 month eligibility periods under the new rule begins no earlier than January 1, 2021.  Thus, under the new rule, the absolute earliest that an LTPTE could accrue three consecutive 12 month eligibility periods with at least 500 hours of service would be December 31, 2023 which would then trigger an initial participation date of no earlier than January 1, 2024.  Therefore, while it is important to understand and prepare for this significant change to the eligibility rules, it will not have any operational impact until at least 2024.


In-Service Withdrawals for Birth or Adoption

Effective as of January 1, 2020, the Secure Act also granted plan sponsors the discretion to implement a new form of in-service distribution known as a “qualified birth or adoption distribution” (“QBOAD(s)”).  In general, a QBOAD allows a parent to take a distribution of up to $5,000 from his or her retirement plan account within a year of a child’s birth or adoption.  Notwithstanding the statutory authorization to allow QBOADs under the SECURE Act, there are many areas of uncertainty associated with these distributions that will require a significant amount of additional guidance from the Internal Revenue Service (“IRS”), presumably in the form of Treasury regulations.  Thus, it generally is advisable for plan sponsors to refrain from attempting to implement QBOADs before the additional necessary guidance is issued.

With those words of caution, the Secure Act establishes QBOADs as a form of distribution available from 401(k), 403(b), governmental 457(b) and individual retirement accounts (“IRA(s)”) but not defined benefit plans.  In addition, QBOADs are: 1) exempt from the 10% early withdrawal penalty tax that would otherwise apply to a pre-59-1/2 retirement plan distribution; 2) not subject to the 20% mandatory tax withholding that normally applies to rollover distributions; and 3) not permitted to be rolled over to another tax-qualified retirement vehicle.  Instead, QBOADs are subject to the tax withholding rules that apply to lump sum distributions that are not eligible for rollover which means that 10% tax withholding applies unless the recipient elects otherwise.

Also, a recipient of a QBOAD may repay the amount of such distribution back to the distributing plan or to an IRA.  However, the statute did not indicate whether a retirement plan that allows for QBOADs must also allow for repayment. The SECURE Act also failed to advise whether there is any deadline for such a repayment to occur.

It is noteworthy that the $5,000 maximum QBOAD distribution amount is an individual limit.  Therefore, each parent of a newborn or adopted child would be eligible to withdraw up to $5,000 as a QBOAD meaning that it would be possible for both parents to collectively receive up to $10,000 in relation to a single qualifying event.  Unfortunately, what remains unclear is whether any specific documentation or justification is required to substantiate an individual’s eligibility to receive a QBOAD.

QBOADs appear to be a valuable new form of distribution that many retirement plan participants will appreciate and, presumably, take advantage of.  However, to reiterate, additional guidance is necessary from the IRS before it would be prudent to implement and effectuate such forms of distribution.


Delayed Initial Adoption Deadline for Qualified Plans

Effective for plan years beginning after December 31, 2019, the SECURE Act provides plan sponsors with an extended deadline to adopt a new tax-qualified retirement plan.  More specifically, a plan sponsor will have up until the deadline for filing its tax return for such year, including extensions, in order to formally adopt a new retirement plan.

In the past, a plan sponsor would have to formally adopt a plan before the end of the plan year to which it relates.  For example, a plan intended to be effective for the 2019 calendar year would need to be formally adopted by the plan sponsor by no later than December 31, 2019.  However, under the new rule, a plan intended to initially be effective for the 2020 calendar year might be adopted as late as October 15, 2021.  This deadline would, of course, be influenced by the tax filing deadline of the specific business form of the plan sponsor and could also be influenced by applicable funding deadlines.  Regardless, the extended adoption deadline has the potential to provide significant retirement plan adoption flexibility to a plan sponsor who might not understand the desirability of adopting a retirement plan until sometime after the last day of the prior tax year.

Notwithstanding the increased adoption timing flexibility granted under this provision of the SECURE Act, it remains impermissible to retroactively make elective deferrals under a 401(k) type feature.  Thus, the flexibility granted by this provision would be limited to only employer funded benefits such as those associated with profit sharing contributions and defined benefit plans.


Lifetime Income Disclosures

The SECURE Act also imposes a requirement that, at least once annually, benefit statements for defined contribution plan participants such as 401(k) and profit sharing plans must include a “lifetime income disclosure” (“LID”).  In this context, a LID is the value of the payment that the participant would receive if his or her total account balance were converted to provide a monthly benefit payment for the remainder of his or her life.

In order to allow plan sponsors to satisfy this requirement, the SECURE Act directed the Department of Labor (“DOL”) to promulgate additional regulations, create a model disclosure, and prescribe actuarial assumptions to use in order to covert account balances to lifetime income stream equivalents.  The DOL was directed to complete these steps by no later than one year after the date of enactment of the SECURE Act.

The effective date for the LID requirement is conditioned upon the DOL’s issuance of the additional guidance described above and is not scheduled to become effective until one year after the DOL issues such additional guidance.  The SECURE Act was enacted in December of 2019.  Therefore, it seems likely the DOL’s additional guidance will be issued no earlier than mid to late 2020.  This means that the LID requirement itself will likely not become effective until, at the earliest, mid to late 2021.  Hopefully, this will be enough time for recordkeepers to program their systems for the changes necessary to include this additional data within participant benefit statements.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.