House Passes SECURE Act to Ease 401(k) Compliance, Promote Savings

House Passes SECURE Act to Ease 401(k) Compliance, Promote Savings

Measure removes administrative burdens on 401(k) plans and 'frozen' pensions

Stephen Miller, CEBS By Stephen Miller, CEBS May 23, 2019

updated December 20, 2019

Update: SECURE Act Becomes Law

President Donald Trump signed the SECURE Act into law on Dec. 20, 2019, a day after the Senate passed the measure as part of a year-end appropriations package.

Given the overwhelming bipartisan majority by which the SECURE Act was passed by the House in May, supporters were confident that the Senate would quickly do the same, perhaps within days by acclimation. That didn't happen. As HR advisory firm Buck posted in August 2019, "Unfortunately, what seemed like sweet flowers in the spring has withered due to inaction and politics as usual, thus reducing the odds of success unless these initiatives can be attached to bigger 'must pass' legislation later in the year."

Wealth managers, in particular, had lobbied against passage because the legislation, to fund various provisions of the bill, would require nonspouse adult beneficiaries of inherited individual retirement accounts to take all distributions over 10 years instead of during their lifetimes via a "stretch IRA." One op-ed writer intoned with dark foreboding, "Congress Is Coming for Your IRA," as if confiscation of retirement savings was on the congressional agenda. Supporters of the bill noted that IRAs were created, and given significant tax breaks, to help people grow adequate retirement savings—not as a tax-advantaged means of transferring wealth to heirs.

Advocates remained hopeful that the Senate would eventually take up the bill before 2020 electioneering halted further legislative activity, and as 2019 drew to a close, that happened.

With overwhelming bipartisan support and the backing of the Society for Human Resource Management (SHRM), the U.S. House of Representatives approved a bill to promote greater savings through employer-sponsored retirement plans while easing plan administration. The Senate isn't far behind with a similar measure, generating optimism that these changes could become law for the 2020 plan year.

On May 23, the House voted 417 to 3 to pass H.R. 1994, the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The bill contains key provisions from S. 972, the Retirement Enhancement and Savings Act (RESA), which the Senate is expected to consider in coming weeks. After Senate passage, the two bills would be reconciled in a joint committee. Alternatively, the Senate may choose to vote on the SECURE Act rather than on its own version.

"Since similar legislation has passed the Senate in prior years through unanimous bipartisan support, the expectation is that this legislation will become law later in 2019," said Bob Melia, executive director of the Institutional Retirement Income Council, an annuities industry think tank that's been tracking the legislation.

Small Business Incentives

"SHRM applauds the passage of the bipartisan, bicameral SECURE Act by the House of Representatives," said SHRM Chief of Staff Emily M. Dickens. "This legislation will help hard-working Americans prepare for a financially secure future by incentivizing small businesses to set up employer-sponsored retirement plans."

She added, "There is no better way to prepare Americans for retirement than supporting and strengthening employer-sponsored plans."

Among the provisions to encourage employers to become plan sponsors, the SECURE Act would:

  • Increase the business tax credit for plan startup costs to make setting up retirement plans more affordable for small businesses. The tax credit would increase from the current cap of $500 to up to $5,000 in certain circumstances.
  • Encourage small-business owners to adopt automatic enrollment by providing a further $500 tax credit for three years for plans that add auto enrollment of new hires.
  • Simplify rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans.
  • Offer a consolidated Form 5500 for certain defined contribution plans to reduce administrative costs, but also increase penalties for failure to file retirement plan returns such as Forms 5500, required notifications of changes and required withholding notices.

Multiple-Employer Plans

The SECURE Act allows unrelated small employers to band together in an "open" 401(k) multiple-employer plan (MEP), reducing costs and administrative duties that each employer would otherwise bear alone. Under current Department of Labor (DOL) rules, only "closed" MEPs are allowed; participating employers must share common organizational relationships, such as being in the same industry and members of an established trade association.

Last October, the DOL issued a proposed rule that would allow open MEPs, provided through an association retirement plan. [In July 2019, the DOL issued a final rule that would allow open MEPs to be provided through an association retirement plan.] The SECURE Act goes further and would allow open MEPs for small businesses that don't share the same geographic area or a common trade, industry or profession to be administered by what the legislation calls a "pooled plan provider," such as a financial services firm.

The bill insulates companies in MEPs from penalties if other members violate fiduciary rules—for example, by failing to funnel employee contributions to the plan on schedule. The so-called "one bad apple" liability risk that a negligent member can pose to an entire plan has been a major stumbling block for MEPs and was not addressed by the DOL proposed rule.

"We're not trying to create a different type of savings vehicle, ;we're trying to develop a way to efficiently and cost-effectively give small employers access to the same type of plans that large and midsize employers have," Bob Holcomb, vice president for legislative and regulatory affairs at retirement plan services firm Empower Retirement, said at a recent Employee Benefit Research Institute (EBRI) policy forum.

There is significant interest in MEPs among small employers who have been wary of offering 401(k) plans due to "the complexity of the administration, the cost of running a plan and concerns around fiduciary responsibility and liability they may be incurring," Holcomb said, adding that the open MEP provisions in the SECURE Act would "go a long way to address those issues."

Some, however, don't favor the use of MEPs. "In truth, index funds and technology have made high-quality 401(k) investments and administration services accessible to employers of any size for very low fees. These highly efficient 401(k) plans can cost much less than a MEP," wrote Eric Droblyen, president and CEO of Employee Fiduciary, a provider of 401(k) services for small businesses.

"MEPs are hard to do," wrote Robert Toth, principal at Toth Law and Toth Consulting in Fort Wayne, Ind. "It is also quite a task to remove an uncooperative MEP member," he noted. Instead, there is a provision in the SECURE Act and RESA that he believes could have a more meaningful impact on small plans seeking the advantages of scale, by permitting a combined annual report for a group of plans.

This change would allow unrelated employers on the same insurance platform to file a single Form 5500. "Under the proposed statutory language, retirement plans participating in a group arrangement could rely upon a single annual report filed by the common plan administrator," Toth noted, and could use a single audit report by an accountant selected by the plan administrator.

[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]

Raised Default Savings Cap

While SECURE Act provisions such as those above will appeal to plan sponsors, "the driving forces appear to be ensuring employees' retirement readiness in a 401(k)-only world," given the decline in defined benefit pensions, said John Lowell, an Atlanta-based actuary and advisor with October Three Consulting.

To promote additional savings, the SECURE Act allows automatic-enrollment safe harbor plans to increase the cap on automatically raising payroll contributions from 10 percent to 15 percent of an employee's paycheck, while giving employees an opportunity to opt out of the increase. The step up is usually made annually either at the beginning of the year or when annual raises are given out.

Lowell called this change one of the most significant reforms in the bill, although, he said, "I wonder how many eligible employees would opt out" of an automatic deferral increase above 10 percent of their pay.

A 10 percent cap may "sound like it's going to be sufficient when you're bringing employees in at a very young age," said Jack VanDerhei, director of Research at EBRI. However, "when you've got midcareer hires who unfortunately may not have had any coverage previously, or who may have cashed out those amounts, then having the ability to get those people escalated up to 15 percent is going to be extremely important" to their retirement security.

Delayed Required Distributions

For 401(k) and other defined contribution plans, the bill allows retirees to delay taking required minimum distributions (RMDs) until age 72, up from the current age of 70 1/2. RMDs are the minimum amount participants must withdraw from their retirement accounts each year, set by actuarial tables.

This change "is geared toward the perception that Americans are working longer and living longer," Lowell said, and will need to make their savings last throughout their retirement years.

"A theoretical $500,000 portfolio, earning 5 percent annually, would have $33,500 more at age 89 if the RMDs started at age 72," CNBC reported.

Participants no longer employed by the 401(k) sponsor are now required to take RMDs on both pretax and Roth 401(k) amounts at age 70 1/2. RMDs are not required from Roth individual retirement accounts (IRAs), however, which is an incentive for some older plan participants to roll over Roth 401(k) funds into a Roth IRA.

If a participant in a 401(k) or similar employer plan is currently working for the plan sponsor and is not an owner-employer (defined as having a 5-percent-or-more ownership interest), then, under the "still working" exception, RMDs can be delayed until April 1 of the year after the participant retires from the plan sponsor.

In-Plan Annuities

In-plan annuities can give participants lifetime income during retirement, but employers "are concerned about being sued for breach of fiduciary duties if the annuity provider they select faces problems years from now, and about what their responsibilities would be for ongoing monitoring and oversight of that provider," said Dominic DeMatties, a partner with law firm Alston & Bird's employee benefits and executive compensation team in Washington, D.C.

To address the 401(k) plan "annuity conundrum," the SECURE Act creates a safe harbor that employers can use when choosing a group annuity to include as an investment within a defined contribution plan, with new provider-selection rules. For instance, the legislation would protect employers from liability if they select an annuity provider that, among other requirements, for the preceding seven years has:

  • Been licensed by the state insurance commissioner to offer guaranteed retirement income contracts.
  • Filed audited financial statements in accordance state laws.
  • Maintained reserves that satisfy all the statutory requirements of all states where the annuity provider does business.

The SECURE Act also increases the portability of annuity investments by letting employees who take another job or retire move their annuity to another 401(k) plan or to an IRA without surrender charges and fees.

Traditionally, plan sponsors have focused on helping participants to make appropriate decisions about investing their assets, Holcomb said, but once participants have accumulated significant account balances "our new focus should be on helping make sure their retirement savings lasts a lifetime." He added, "both the portability and the annuity-selection safe harbor [provisions] are important first steps."

Easing the way for in-plan annuities "will enhance retirement readiness and retirement security for all Americans," Melia said.

Some are critical of using annuities in defined contribution plans, pointing to their complexity and high fees. "There will come a time where we will point back to this as the start of a trend toward high-cost annuities being offered in 401(k) plans to the detriment of retirement savers," Barbara Roper, director of investor protection at the Consumer Federation of America, told the New York Times.

SHRM's 2018 Employee Benefits survey report found that 8 percent of HR professionals polled last year offered an in-plan annuity option at their organizations.

Other 401(k) Changes

The SECURE Act would also:

  • Allow 529 education savings plan participants to withdraw up to $10,000 from these plans to repay student loans.
  • Require plan sponsors to annually disclose on 401(k) statements an estimate of the monthly payments participants would receive if their total account balance were used to purchase an annuity for the participant and the participant's surviving spouse. The Secretary of Labor is directed to develop a model disclosure.
  • Require employers to include long-term, part-time workers as participants in defined contribution plans except in the case of collectively bargained plans. Eligible employees would include those who completed at least 500 hours of service each year for three consecutive years.
  • Provide penalty-free withdrawals from retirement plans of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.
  • Prohibit the distribution of plan loans through savings plan credit cards so that funds are not easily available for routine or small purchases.
  • Permit employers to add a safe-harbor feature to their existing 401(k) plans once the year has started if they make at least a 4 percent of pay contribution to employees, instead of the regular 3 percent. This flexibility would help employers to correct failed ADP/ACP or top heavy tests by shifting to a safe-harbor plan and making a 4 percent nonelective contribution to participants.
  • Extend the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return, giving employers additional time to cover their employees with a profit-sharing contribution. 
  • Convert custodial accounts from terminated 403(b) plans into IRAs.
  • Impose a new 10-year distribution maximum for death benefits from IRAs and defined contribution plans for nonspouse beneficiaries. Currently, spending down from inherited accounts can be stretched over the life of beneficiaries to mitigate taxes. This provision is intended to generate tax revenue and offset the cost of the act's tax credits.

Just prior to the House vote, Democrats removed a provision that would have allowed 529 plans pay for homeschooling expenses. Some Senate Republicans have objected to the removal, which could stall Senate action on the bill.

Relief for Frozen Pension Plans

The SECURE Act addresses long-standing issues affecting pension plans that are frozen to exclude new hires.

As part of the transition from defined benefit pensions to 401(k)-type defined contribution plans, "many employers have closed their traditional defined benefit plans to new employees but continue to allow existing employees to accrue benefits under the plan," DeMatties said. "Over time, the group of employees that continues to accrue benefits under the traditional defined benefit plan generally becomes older and higher paid, which frequently can result in difficulty satisfying the tax code's nondiscrimination requirements" that prohibit retirement plans from favoring high-income employees.

If certain conditions are met, the SECURE Act would modify these nondiscrimination rules to permit older, longer-service and generally higher-paid employees to continue to accrue benefits under a defined benefit plan, even though younger, shorter-service and generally lower-paid employees do not accrue these benefits.


Retirement Savings in the U.S.

According to the Federal Reserve's annual Report on the Economic Well-Being of U.S. Households, released May 23, among adults not yet retired:

  • 54 percent have money in a defined contribution plan such as a 401(k) or 403(b).
  • 42 percent have savings outside of a retirement account.
  • 33 percent have an IRA.
  • 22 percent have a defined benefit pension.

One-quarter of adults in the U.S. say they have no retirement savings whatsoever.



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