The government spending bill, which included the Setting Every Community Up for Retirement Enhancement (SECURE) Act, was enacted into law in the closing days of 2019 and provided for several changes to the distribution rules that govern employer-sponsored retirement plans and individual retirement accounts (IRAs). Some of those changes are mandatory for all plans, while others are optional modifications that plan sponsors can choose to implement in order to offer additional flexibility to participants. Here’s an overview of the changes and initial steps to consider.
Some of the more significant mandatory changes to the distribution rules relate to required minimum distributions (RMDs) from employer-sponsored retirement plans and IRAs.
- Congress increased the age at which employer-sponsored retirement plan and IRA participants are required to start taking distributions from 70.5 to 72 years of age, for individuals who reach the age of 70.5 after Dec. 31, 2019. Specific to IRAs, the IRS provided relief to financial institutions that, prior to enactment, were required to provide notice by Jan. 31, 2020, of pending RMDs to those turning 70.5 in 2020. If the institution sends a corrected notice no later than April 15, 2020, the Service won’t treat the issuing institution as having provided an incorrect statement to the participant.
- The SECURE Act also limited the time period for so-called “stretch” provisions related to inherited employer-sponsored defined contribution accounts and IRAs. Prior to the new law, non-spouse beneficiaries who inherited an employer-sponsored defined contribution account or IRA could take distributions over the life expectancy of the beneficiary. The new law capped the stretch provision at 10 years from the date of death of the employee (or IRA owner) for retirement accounts inherited after Jan. 1, 2020, (some exceptions apply for certain classes of individuals, including chronically ill or disabled beneficiaries and children of the decedent under the age of 18). Additionally, for participants in plans maintained under a collective bargaining agreement or governmental plans (e.g. 457, 403(b)), this new rule doesn’t take effect until Jan. 1, 2022.
The SECURE Act also includes several changes that retirement plan sponsors can choose to adopt in order to provide flexibility to their participants.
- The new law allows sponsors to reduce the age for in-service distributions from pensions (e.g., defined benefit plans and money purchase plans) and governmental 457(b) plans. Effective for plan years beginning after Dec. 31, 2019, the age can be reduced from 62 to as low as 59.5. This change aligns rules for these plans with existing rules for 401(k) and profit-sharing plans.
- The SECURE Act also provided sponsors with the ability to offer penalty-free withdrawals from a qualified retirement plan for expenses related to a birth or adoption. If sponsors choose to modify the plan, participants can withdraw up to $5,000 per individual within one year of a qualified birth or adoption without incurring the 10% early-withdrawal penalty. The funds will still have to be included in taxable income in the year they are withdrawn, and the law includes a provision that allows the participant to repay the early distribution. Plans can be modified to allow this penalty relief for distributions made after Dec. 31, 2019.
- The new government spending bill added similar penalty relief for disaster-related early withdrawals, but that provision is more time-limited. Plan sponsors can choose to adopt a provision allowing for penalty-free early withdrawals to cover costs related to losses suffered by individuals whose principal abode is located in a qualified disaster area. As with the birth or adoption provision, participants can repay the early withdrawal but have three years from the date of the distribution to repay the funds. The disaster must have occurred between Jan. 1, 2018 and Feb. 18, 2020 (60 days after enactment of the SECURE Act).
Adapting to the new rules
As with the enactment of any new retirement law by Congress, sponsors need to evaluate whether their plan documents and operations align with new changes. Given the complexity of the retirement plan laws and the relatively recent enactment of these changes, it’ll take some time to finalize plan amendments and plan processes. The law provides for a remedial amendment period that will generally extend into the 2022 plan year, so sponsors can consider acting now to align plan distribution processes to the new rules while the revisions to their plan documents are being made.
To learn more about how the SECURE Act affects your company’s existing plan or how it might affect your ability to create a plan, please contact your Plante Moran advisor.