The Setting Every Community Up for Retirement Enhancement Act of 2019, or the SECURE Act, is a new law designed to encourage retirement savings and improve retirement security. The year-end legislation provides updates on plan design changes, lifetime income, open MEPs, and nondiscrimination testing.
Plan Design Changes
- Automation: For plans with a qualified automatic contribution arrangement, the maximum threshold for automatic escalation increases from 10% to 15% after the first year. The minimum automatic default stays at 3%.
- Eligibility: Employees who work at least 500 hours for three consecutive years require access to salary deferrals, not employer contributions.
- Payouts: The act:
- Extends the required minimum distribution age from 70.5 to 72.
- Allows pension in-service distributions as early as 59.5.
- Accelerates distributions to non-spouse beneficiaries, so payouts after the death of a plan participant occur over ten years rather than a lifetime.
- Streamlined Administration:
- No participant notice is required at adoption or ongoing for non-elective 401(k) plan safe harbors only.
- DC plans in a related “group” of plans can file a single, consolidated Form 5500 for all plans in the related group.
The SECURE Act encourages employers from all industries and sizes to come together and offer defined contribution plans through an open multiple employer plan (MEP). While MEPs have been around for many years, the removal of two requirements may further the plan’s adoption going forward.
- Common Nexus: Historically, employers needed a common tie such as industry or geography to come together. There is no longer a commonality requirement.
- One Bad Apple: For example, if one employer participating in an open MEP submitted incorrect data or did not administer the plan in accordance with its terms, the entire plan could potentially be disqualified. Plan participants are no longer subject to the one bad apple concept.
Open multiple employer plans are distinguished from multi-employer plans, which are often known as Taft-Hartley plans.
Nondiscrimination Testing Relief
Retirement plans with grandfather provisions in frozen or closed pensions or “make whole” provisions in a DC plan risked facing nondiscrimination testing. The Act provides relief to a variety of nondiscrimination testing issues:
- Benefits, rights, and features
- Coverage testing
- “Cross-testing gateway”
After three years of testing after the transition event, the results are deemed to pass on an ongoing basis, assuming that there aren’t significant enough changes that warrant a re-look.
- Safe Harbor Provider Selection: The SECURE Act helps mitigate the fiduciary concerns associated with lifetime income as it provides an optional safe harbor for the selection of an annuity provider.
- Transferability: The act also allows participants to take their lifetime income exposure and either transfer it to another qualified plan or transfer it into an IRA account.
- Mandatory Projections: New annual disclosures will require plans to show monthly income benefit illustrations. This mandatory projection may help shift participants’ mindsets from viewing their defined contribution savings as a lump sum account balance and more as a monthly income stream.
To learn more about the SECURE Act retirement bill, read Six Key Themes of the SECURE Act and Other Retirement Plan Provisions, or watch Aon’s SECURE Act webinar.
Investment advice and consulting services provided by Aon Hewitt Investment Consulting, Inc. (“AHIC”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto.
This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on AHIC’s understanding of current laws and interpretation.
This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon AHIC’s preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. AHIC disclaims any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. AHIC reserves all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of AHIC.
Aon Hewitt Investment Consulting, Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. AHIC is also registered with the Commodity Futures Trading Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association. The AHIC ADV Form Part 2A disclosure statement is available upon written request to: Aon Hewitt Investment Consulting, Inc., 200 E. Randolph Street, Suite 700 Chicago, IL 60601, ATTN: AHIC Compliance Ocer© Aon plc 2020. All rights reserved.