Each year, our Technical Services Committee creates a Regulatory Update covering the legislative, regulatory, and litigation developments affecting retirement plans. This year, we continue the conversation about the SECURE Act and the new provisions released this year, as well EPCRS changes, DOL updates, and the notable retirement plan fee litigation cases from this year.
This year brought several legislative changes. Here is what we cover about the SECURE Act in this year's Update.
SECURE Act Update
In December of 2019, before the coronavirus pandemic, the Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed. This Act was one of the more substantive enhancements to the retirement system in over a decade.
The changes and enhancements made available through this new law were overshadowed in 2020 by the coronavirus pandemic and the resulting relief available through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. While the SECURE Act is over 18 months old, many plan sponsors are just now contemplating whether to adopt some of the provisions. Also, in the time since its introduction, some provisions have been clarified and updated.
Expanded availability of Multiple Employer Plans through open MEPs
The Act removes the requirement that employers seeking to establish a Multiple Employer Plan (MEP) must share a commonality of interest. This change will allow more employers to combine into one plan and could result in reduced cost and reduced administrative burden. This new type of plan, called a "Pooled Employer Plan" (PEP), became available this year. To offer a PEP, an organization must register with the Department of Labor (DOL).
It is unclear how popular PEPs will become, but as of August 2021, 117 organizations have registered to offer a PEP. Most of which are financial institutions, broker/dealers, registered investment advisors, and recordkeepers. Some local chambers of commerce have also registered.
Tax incentives for small employers
To encourage small employers (100 employees' or less) to add and expand their retirement plan offer, the Act provided two new tax incentives:
- The possible tax credit for starting a new retirement plan was increased from $500 to $5,000.
- A new $500 tax credit was introduced for small employers electing to add auto-enroll to an existing plan.
Lifetime Income Illustrations
The Act requires employers to provide plan participants with two illustrations showing the monthly payments they could receive if they annuitized their full plan balance.
These illustrations must be provided at least once a year and include one projecting a single-life annuity and a second projecting a qualified joint and survivor annuity (payments for the lifetime of the participant and the participant's spouse).
A recent FAQ issued by the DOL addressed some plan sponsor questions about this requirement.
A few of the answers on the FAQ include:
- The effective date for participant-directed individual account plans is Sept. 18, 2021, which means the latest a plan sponsor can include their first illustration is the second quarter 2022 statement.
- Additional illustrations using a different methodology that are being provided by a recordkeeper are allowed. Many providers currently include more comprehensive illustrations than the DOL requirements, adding a projection of future earnings. These illustrations may still be provided, but the FAQ did not state that the additional illustration can replace the illustrations required under the SECURE Act.
Safe-harbor for In-plan Lifetime Annuities
This new safe harbor seeks to increase plan sponsors' willingness to offer a lifetime annuity option within their plan. Without the safe harbor, plan sponsors had been reluctant to offer in-plan annuities due to concerns over the liability associated with their selection of annuity provider.
Adoption of in-plan annuities has been low since the SECURE Act's passage, possibly due to the distractions caused by the pandemic.
Adoption will remain slow but will likely increase over time for two reasons:
- Insurance companies will likely introduce and market new annuity products with features to make them more attractive to plan sponsors.
- As more employees retire, plan sponsors will begin to have an increased focus on the decumulation options available in their plans.
Penalty Free Withdrawals for Birth or Adoption of a Child
Participants are allowed to withdraw up to $5,000 of their retirement savings following the birth or adoption of a child without paying the 10% early withdrawal penalty. Parents have one year following the birth or adoption to complete the withdrawal. Also, the exemption is available for each parent (from their separate accounts) and each child.
Parents having or adopting twins could potentially withdraw up to $20,000 under this provision. While the withdrawal avoids the 10% early withdrawal penalty, the distribution is still taxable.
Participants can repay any amounts distributed, although it is not particularly clear how this is tracked.
This provision seems to be getting more attention in 2021 as employers seek to add this option. There is proposed legislation that would require repayment within three years included in the Securing a Strong Retirement Act.
If this Act were to pass, it would make the option of taking these withdrawals much less attractive.
Additional SECURE Act Enhancements
- Extends the age participants must begin taking Required Minimum Distributions (RMDs) from the year the participant turns 70 ½ to the year they turn 72.
- Changes the RMD rules for non-spouse beneficiaries of deceased participants by requiring all distributions be completed within 10 years of the participant's death.
- Requires employers to allow long-term part-time employees the opportunity to make voluntary contributions to the retirement plan. This does not include employer contributions and does not apply to 403(b) or governmental plans.
- Increases the maximum percentage contribution an employer can require through AutoEnroll and AutoSave from 10% to 15%.
- For employers offering safe-harbor nonelective contributions, the Act simplifies the reporting requirements and makes it easier to add or amend the safe-harbor contributions during the plan year.
- Prohibits plan loans through credit cards.
- Increases penalties for failing to file certain plan returns and for providing required withholding notifications.
- Allows an employer that terminates a 403(b) custodial account to distribute the account 'in-kind' to the participant through an individually owned contract.
To read our full 2021 Regulatory Update, click the button below.
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