The Macro View

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On December 19, 2019, Congress approved an appropriations package that will fund the government through the 2020 election. The bill now sits on the President’s desk where it is expected to be signed into law. Included as part of the package was the Setting Every Community Up for Retirement Enhancement Act (SECURE).

I had the privilege to meet with lawmakers on Capitol Hill earlier this year to share industry feedback on how provisions of the bill will impact employers and American workers.

Here is a review of some of the key provisions as they apply to company’s that are currently or thinking about sponsoring a retirement plan. If you would like to read more about this impacts individuals and families click here.

Open multiple-employer plans (open MEPs):

The establishment of open MEPs has been a key element of congressional pension reform efforts and is viewed as a way to encourage small employers to sponsor plans.

A MEP is a plan maintained by unrelated employers allowing them to band together for economies of scale when, among other things, negotiating with service providers.

Under current law, MEPS may only be offered if there is some common interest between the participating employers. As a result, MEPs are typically offered by trade associations such as the American Bar Association. In addition, under current IRS rules if a single participating employer has a disqualifying event (violates ERISA rules), the entire MEP is deemed disqualified (known as the “one bad apple” rule). SECURE removes the commonality requirements and applies any disqualification only to the employer who had the disqualifying event.

Several rules must be met for an open MEP:

  • The MEP must have a pooled plan provider (PPP). A PPP is a party named as a fiduciary under the plan that assumes responsibility for plan administration and must register with the Department of Labor (DOL).
  • Each participating employer retains fiduciary responsibility for the selection and monitoring of the PPP. Participating employers would also have fiduciary responsibility for investment and management of plan assets unless delegated to a service provider.
  • In order to get relief from the “one bad apple” rule, assets of the offending employer would need to be spun off from the MEP.

Several service providers have been waiting in the wings to serve as qualified pooled plan providers. As they roll out their service offerings we will meet with them to see if their solutions are of benefit to our clients.

Lifetime Income Provisions

Most 401k plans currently require employees to take a lump-sum withdrawal when they request a distribution upon retirement or leaving the company. This requires employees to figure out how to make their savings “nest egg” last for the rest of their life on their own. One of the beauties of defined benefit pension plans are that they provide guaranteed income for life once someone retired.   SECURE alleviates some of the liability concerns that have kept plan sponsors from offering these types of lifetime payouts.

  • Investment funds change in 401k plans all the time. SECURE would allow retirement plan participants who elect a lifetime income solution in their plan, to take a distribution out of the 401k plan if the lifetime income investment option was removed by the plan sponsor. The participant’s distribution would have to be rolled over directly to an IRA or a retirement plan.
  • A fiduciary safe harbor has been established for employers to use in selecting lifetime income providers for their retirement plans. The safe harbor allows fiduciaries to rely on written representations that annuity providers comply with applicable state insurance laws. Liability around the selection of a lifetime income provider has been a barrier to including them in current plans.

At least annually, plans would be required to provide participants a lifetime income disclosure (because come on who doesn’t love another disclosure!). This disclosure would project the lifetime income stream in retirement based upon each participant’s account balance which, joking aside, is actually something very much worth disclosing to employees.

Expanded Tax Credits

  • An expanded tax credit for small employers (with 100 or fewer employees) increases the current annual cap on the tax credit for starting a plan from $500 to the lessor of $5,000 or $250 multiplied by the number of non-highly compensated employees.
  • A new $500 tax credit is available for small employers (with 100 or fewer employees) that adopt automatic enrollment.

Miscellaneous Retirement Provisions

  • Requires that part-time employees who complete three consecutive years with at least 500 hours of service become eligible to participate in the plan.

The plan would not be required to make matching or non-elective contributions for these employees, and they would not be included for discrimination or top-heavy testing. In other words the part-time employees could save their own money into the plan.

  • Allows participants to take a penalty-free withdrawal of up to $5,000 upon the birth or adoption of a child. These distributions could be repaid to the plan.
  • Increases the age for required minimum distributions to 72. This would be effective for distributions required to be made after December 31, 2019.
  • Increases the current 10% cap on the automatic enrollment and automatic escalation safe harbor to 15%.

Many of the provisions in SECURE were due to become effective as soon as January 1, 2020. With the late passage of the Act, 401k providers and administrators will be working with the DOL and the IRS to obtain enforcement relief and allow for an orderly implementation.

These new provisions will be incorporated into Plan Documents over the next year. First as an amendment and then ultimately in a full plan restatement as is required by the DOL from time-to-time.

We will be working with our Plan Sponsor clients throughout the year to help them determine if any of these changes have any meaningful changes to their day-to-day operations and will be educating employees on these changes for their own personal planning.   In the meantime, please do not hesitate to reach out with questions.

 

Written by – Chris Thomas, CFP®, AIF®, CPFA

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