Insights for fiduciaries

Government spending bill makes extensive changes to 401(k) plan rules

The government spending bill signed into law on Friday, December 20, 2019, includes a set of provisions referred to as the SECURE Act, that make a number of changes to the rules governing 401(k) plans. The goal of these provisions is to help increase retirement savings and ease compliance with certain retirement plan rules.

Parts of the legislation will be implemented over time, while others take effect immediately. Most notably for businesses considering starting a retirement plan, the small business tax credit was dramatically expanded which will help offset the start-up costs for new retirement plans, and it is effective for plans beginning in January 2020.

The SECURE Act includes nearly thirty changes to retirement savings law. We highlight the key changes impacting employer-sponsored retirement plans below.

  • Requires plans to cover certain longer-service, part-time employees who can currently be excluded from coverage (generally effective in 2021)
  • Requires benefit statements to include estimates of the monthly income an employee could receive in retirement if the account balance were converted into an annuity (effective after the Department of Labor issues rules, model disclosures and specified assumptions)
  • Provides a fiduciary safe harbor for selecting a lifetime income investment provider, such as an annuity provider, as (or as part of) a plan investment option (effective immediately)
  • Requires portability of lifetime income investments held in plans, such as annuities, to other plans, to IRAs, or as a plan distribution (generally effective in 2020)
  • Increases starting date for minimum required distributions from plans from age 70½ to age 72 (generally effective in 2020 for individuals who had not already reached age 70½)
  • Caps the amount of time over which beneficiaries may take plan distributions (5 years or 10 years, depending on the beneficiary; exceptions for certain beneficiaries such as spouses and minor children) (generally effective in 2020)
  • For safe harbor 401(k) plans, provides greater flexibility to elect into the minimum non-elective contribution safe harbor (generally effective 2020)
  • Increases the small business plan startup tax credit that will now be capped at $250 times the number of non-highly compensated employees eligible to participate in the plan up to a $5,000 annual maximum (the credit is still limited to 50% of the start-up costs); it also adds a small business automatic enrollment tax credit of $500 per year (generally effective 2020)
  • Creates a new form of plan—“Pooled Employer Plan”—that would permit greater flexibility to combine unrelated businesses into a single retirement plan for purposes of achieving economies of scale and other efficiencies. The development of Pooled Employer Plans will depend in part on the issuance of guidance on specific aspects of the new rules from both the Treasury and the DOL, and in part on whether firms decide to sponsor these types of plans. (effective 2021)

As with any significant legislation, it will take some time for the retirement industry to implement certain changes, so you should expect additional information in the coming weeks and months.

For additional information about the SECURE ACT or any other questions, please contact your UBS Financial Advisor.