The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) was enacted last year as part of the Further Consolidated Appropriations Act of 2020. The SECURE Act provisions include a number of changes affecting employee benefit plans. However, most of the changes are either optional or will not affect plans in 2020. This article highlights actions plan sponsors should take in 2020 to comply with required changes in the SECURE Act.
- Required Minimum Distributions — Prior to the SECURE Act, distributions from tax-qualified plans were required to be made by April 1 of the calendar year following the year in which the employee turns age 70½ (or retires, if later, and not a 5% owner). Under the SECURE Act, the rule continues to apply, but age 70½ is generally replaced with age 72. The change applies to employees who turn 70½ after December 31, 2019 (that is, those born after June 30, 1949). Plan sponsors should review their procedures to ensure that required minimum distributions are being made in accordance with the change. This change will likely require changes to plan documents, summary plan descriptions, distribution forms, special tax notices for distributions, and other participant communications.
- Post-Death Distributions — Distributions must generally be paid out following the death of a participant in accordance with the plan terms and Internal Revenue Code Section 401(a)(9). In general, prior to the SECURE Act, the rules permitted distributions to be made over a beneficiary’s life expectancy. In the context of an IRA, this was sometimes referred to as a “stretch IRA.” Under the SECURE Act, for defined contribution plans, distributions after the death of the participant generally must be made by the end of the tenth calendar year following the year of death (or the fifth calendar year following the year of death if the beneficiary is not a designated beneficiary and the participant had not reached the required beginning date). However, payments may still be made over the beneficiary’s life expectancy if the beneficiary is (1) a surviving spouse, (2) a disabled or chronically ill individual (or certain trusts for such individuals), (3) a beneficiary no more than ten years younger than the participant, or (4) a minor child of the participant (generally, until the child reaches majority). The change applies to deaths occurring after December 31, 2019, and there are special rules that apply for beneficiaries where the employee died prior to January 1, 2020. There are also special delayed effective dates for collectively bargained and governmental plans, and special grandfathered relief for certain commercial annuities. Plan sponsors should review their plan terms and procedures for compliance with these new rules. This change will likely need to be reflected in plan documents, summary plan descriptions, beneficiary designation forms, distribution forms and notices, and participant/beneficiary communications.
The SECURE Act generally provides for a plan amendment deadline of the last day of the 2022 plan year (2024 for governmental plans). However, plans should comply with the changes in operation as of January 1, 2020. It is important to note that this article does not address optional changes that could apply in 2020 such as the new in-service withdrawal option for birth or adoption expenses.
If you have any questions about these changes, please contact one of the attorneys in the Employee Benefits and Executive Compensation Group at Bradley.