By Katharine Finley, Hall Benefits Law
The end of 2019 and first portion of 2020 ushered in a myriad of legislative and regulatory changes to retirement plans. Late 2019 saw the passage of the Setting Every Community Up for Retirement Act (the “SECURE Act”) which ushered in significant changes effective beginning in 2020. In the midst of rolling out the SECURE Act changes, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was passed and introduced further changes and options for retirement plans. This period of flux is not over yet.
On October 27, 2020, the Securing a Strong Retirement Act of 2020 (the “SECURE 2.0 ACT”) was introduced in the House of Representatives. The SECURE 2.0 Act, in its current form, proposes additional changes that would build upon changes under the SECURE Act. It also proposes changes unrelated to the SECURE Act.
This article does not endeavor to cover the more than 30 changes to retirement plans included in the 132-page SECURE 2.0 Act, but seeks instead to provide insight into the more significant proposed changes and how those changes could change the current retirement system.
Expediting Participation of Long-Term, Part-Time Workers
One major change in the SECURE Act expanded eligibility for elective deferrals to long-term, part-time workers who satisfy modified eligibility criteria. The SECURE Act amended eligibility provisions to provide that 401(k) plans may not require an employee to complete a period of service that extends beyond the close of the earlier of: (i) either (a) attainment of age 21 or (b) completion of a 12-month period during which the employee completed at least 1,000 hours of service (the “410(a) Period”) or (ii) the time period consisting of three consecutive 12-month periods in which the employee completes at least 500 hours of service during each such 12-month period. The SECURE Act requires employers to begin tracking hours to determine whether long-term, part-time workers are eligible under point (ii) beginning on January 1, 2021. This means that the first measurement period would last from January 1, 2021, through December 31, 2023, with the first long-term, part-time workers eligible under this provision on January 1, 2024. (For more information regarding long-term, part-time worker modifications under the SECURE Act, read our prior article delving into this topic and related issues and considerations.)
SECURE Act 2.0 Proposed Change
The SECURE 2.0 Act would expedite the addition of long-term, part-time workers as eligible participants. Rather than having a three-year measurement period, the SECURE 2.0 Act proposes an immediate one-year reduction in the measurement period. This would mean that the initial measurement period would run from January 1, 2021, through December 31, 2022, a two-year measurement period. The first group of long-term, part-time workers would become eligible for participation in the elective deferral of defined contribution plans as of January 1, 2023.
HBL Comments: With the possibility of an even shorter measurement period, employers and plan sponsors must determine how to ensure compliance. Plan sponsors should not assume that employees currently categorized as “part-time” will remain excluded from participation, and they should act now to develop appropriate systems to track hours. Plan sponsors also should consider carefully the possibility that increased participation may bring the plan above the small plan exception to an Independent Qualified Auditor’s Report (“IPQA”) being required with the annual Form 5500 filing.
Not Too Small to Adopt a Retirement Plan or to Reap the Expanded Incentives
The SECURE Act modified existing incentives for small businesses adopting a retirement plan by (i) increasing the limit available as a “qualified startup cost” credit from 50% of qualified startup costs to a cap of $500 up to a maximum potential credit of $5,000 and (ii) creating a new $500 credit for the adoption of an automatic enrollment feature. Together, these credits could total up to $5,500.00 for the first three years the plan or feature is in effect.
SECURE Act 2.0 Proposed Change
The SECURE 2.0 Act would build upon this feature of the SECURE Act in three significant ways. First, it would do so by increasing the 50% cap on the “qualified startup cost” credit to 100% of the costs for employers with up to 50 employees. Second, it would make the “qualified startup cost” credit available to companies that join an existing plan. In this case, the credit would be measured from the year in which they join the existing plan, rather than the credit being strictly limited to the first three years of the plan’s existence. Finally, the SECURE 2.0 Act would also add a new credit permitting employers with up to 50 employees, who establish a defined contribution plan, to be eligible for a credit equal to the percentage of employer contributions to employee retirement accounts, capped at $1,000 with respect to each employee in the plan. This second credit to offset employer contributions phases out over a 5-year period, with the applicable percentage being 100% in the first and second years, 75% in the third year, 50% in the fourth year, and 25% in the fifth year. This tax credit also phases out for employers with between 51 and 100 employees.
HBL Comments: If passed as currently proposed, the SECURE 2.0 Act provides interesting incentives that are more far-reaching than existing credits for small employers to adopt plans. Modifying the qualified startup cost credit to be available for employers who join an existing plan, rather than the credit being limited to entirely new plans, may result in more employers evaluating professional employer organization (“PEO”) and plans offered by such PEO organizations.
To Enroll or Not to Enroll, That May No Longer be the Question
Defined contribution plan sponsors, particularly 401(k) plan sponsors, are no strangers to the automatic enrollment feature that is available. That feature is, however, optional. The SECURE 2.0 Act proposes to make that feature mandatory for new 401(k), 403(b), and SIMPLE plans. Under the proposal, plan sponsors would be required to automatically enroll participants in the plans, upon their satisfaction of eligibility coverage, with an automatic enrollment percentage of at least 3% but no more than 10%. Plan sponsors would then be required to utilize an automatic increase feature to increase contributions by 1% each year, up to a cap of 10%. Employees may opt-out of automatic enrollment. Existing plans would be grandfathered such that this would only apply to newly adopted 401(k), 403(b), or SIMPLE plans. There are exceptions for employer plan sponsors if they have less than a certain number of employees or if the business is new.
HBL Comments: This proposal is clearly focused on broadening the base of employees who participate in qualified retirement plans and take advantage of savings opportunities. However, this poses a potential administrative burden regarding individuals who do not opt-out prior to the first deferral into the plan and then wish to opt-out and have their contributions removed from the plan. The Internal Revenue Code permits such withdrawals within 90 days of the date of the first elective contribution, but this puts a time-based limitation on participants that they will need to be aware of to withdraw that amount. If this change is adopted, plan sponsors and third-party administrators will need to be sure to communicate this feature clearly to participants, including the applicable time limits regarding opting out and requesting a withdrawal of their funds.
Relief and Added Options for Older Participants
The SECURE 2.0 Act proposes to provide relief to older retirement participants and to increase the options available to such individuals. Interestingly, though not altogether surprisingly, three of these proposals focus on changes to required minimum distributions as recently modified under the SECURE Act. First, the SECURE 2.0 Act proposes increasing the required beginning date at which required minimum distributions must begin to be distributed from age 72 to 75. Notably, this age was just raised from 70 ½ in the SECURE Act. The additional increase under the SECURE 2.0 Act would permit older participants to keep their money in the plan and to realize additional earnings for three additional years. The SECURE 2.0 Act also proposes an exemption from the required minimum distribution provisions for individuals with $100,000 or less in their retirement plans or individual retirement accounts. This exemption would not apply to defined benefit plans. Plan sponsors would also be entitled to rely on certification from a participant regarding whether their other savings in individual retirement accounts or with other employers results in a balance more than $100,000. Finally, the SECURE 2.0 Act proposes to allow individuals to satisfy required minimum distribution rules through distributions from employer-sponsored plans (e.g., 401(k) plans) to charities. Individuals are already permitted to satisfy required minimum distribution rules through distributions from individual retirement accounts directly to a charity, so this would expand that rule to cover employer-sponsored plans as well.
SECURE Act 2.0: Increase in Catch-Up Contribution Limits
Unrelated to the required minimum distribution features, the SECURE 2.0 Act proposes to add a higher catch-up limit to apply to individuals aged 60 or older. Currently, individuals aged 50 or older may make a $6,500 catch up contribution for employer-sponsored retirement plans generally ($3,000 for SIMPLE plans), adjusted each year for inflation. The SECURE 2.0 Act would increase the limit for those aged 60 or older such that those individuals may contribute up to an additional $10,000 to employer-sponsored retirement plans ($5,000 to SIMPLE plans) in addition to the general contribution limits.
HBL Comments: The impacts of these changes would largely benefit participants, who would then have further opportunities to save and more choices to consider when engaging in retirement planning. Plan sponsors, however, will need to be prepared to incorporate these changes from an administrative standpoint. The extension of the required beginning date and the ability of older participants to increase contributions may also result in an increase in overall plan assets. Plan sponsors could face a situation where reevaluation of investment management and investment options would be appropriate, depending on the level of increased assets as a result of these changes.
Student Loan Match
Matching contributions under the current system are almost exclusively based on the elective deferrals participants make to employer-sponsored retirement plans. The SECURE 2.0 Act proposes to change that by allowing employers to base matching contributions with respect to “qualified student loan payments” made by their employees. The definition of “qualified student loan payments” is broad and includes any indebtedness incurred by the employee solely to pay qualified higher education expenses. This is not proposed as a mandatory change but as a purely voluntary change.
HBL Comments: Employer plan sponsors should carefully consider whether to incorporate this feature. Incorporating this change may significantly increase the number of employees participating in the plan and receiving matching contributions, for employers with younger workforces. Employer plan sponsors should also consider how this would impact nondiscrimination testing of the employer matching contributions. The SECURE 2.0 Act does note that these matching contributions will not be considered as unavailable to employees solely because they do not have student loan debt on which to make payments. However, the matching contributions will still be considered for nondiscrimination testing purposes. If the employee demographic would result in an increase in matching contributions for non-highly compensated individuals as a result of incorporating this change, then it may be worth considering the change depending on historic testing results. If this change is adopted, employer plan sponsors will need to strategically consider whether to incorporate this feature and should consult with their third-party administrators or counsel regarding potential impacts of adopting this change.
In Conclusion:
The SECURE 2.0 Act proposes significant changes to the retirement plan landscape. Some provisions would be mandatory, such as the changes to the required beginning date and required minimum distribution rules, modifications to the long-term, part-time employee eligibility measurement period, and the automatic enrollment feature for new plans. Employer plan sponsors will need to ensure that they are ready to incorporate these changes if the SECURE 2.0 Act is passed, particularly since the effective date for most of these changes is the plan year beginning after December 31, 2020. The SECURE 2.0 Act also proposes voluntary changes that are certainly worth consideration.
The SECURE 2.0 Act proposes a plan amendment date of the last day of the first plan year beginning on or after January 1, 2022. For calendar year plans, this would be by December 31, 2023. As a result, employer plan sponsors will have time to consider the voluntary changes and adopt amendments formalizing the required changes. Of course, compliance with the required changes will be necessary prior to the formal amendment.
Hall Benefits Law, LLC
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