Top changes the SECURE Act and CARES Act make to retirement plans

The last two years have arguably brought us more changes in the retirement plan world than any two-year stretch in recent history. Plan sponsors need to be aware of the changes and make sure they are updating plan documents and operating plans in accordance with these new regulations. 

The SECURE Act

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) contains numerous provisions to incentivize retirement planning, diversify savings options and increase access to tax-advantaged savings programs. 

Highlighted and summarized below are 10 of the key provisions and legislative changes to be aware of that relate to expanding and preserving retirement savings:

1. Multiple employer plans: pooled employer plans. Allows two or more unrelated employers to join a pooled employer plan, which is a new type of multiple employer plan. These types of plans were effective January 1, 2021, and will be treated as a single plan under ERISA; therefore, they will have a single plan document, one Form 5500 filing, and a single independent plan audit, which benefits smaller employers and associations by providing cost-savings opportunities. The SECURE Act also eliminates the “one bad apple rule” whereby one employer’s disqualification would disqualify the entire multiple employer plan, making these types of plans more attractive. 
2. Increase automatic enrollment safe harbor cap: Increases the automatic enrollment safe harbor elective deferral limit cap from 10% to 15% of pay after the first year of an employee’s deemed election for plan years beginning after December 31, 2019. If employers elect to adopt this change, plan documents will need to be amended to reflect the higher deferral limit cap. 
3. Rules related to election of safe harbor 401(k) status: Removes the requirement to distribute the annual safe harbor notice to eligible employees for the 3% nonelective contribution and simplifies other safe harbor 401(k) election rules, including allowing employers to adopt safe harbor status mid-year using the 3% non-elective option if the election is made anytime prior to the 30^th day before the close of the plan year or using at least a 4% non-elective option if the election is made after that date and the plan is amended no later than the last date of the following plan year. These provisions are effective for plan years beginning after December 31, 2019.
4. Increase in credit limitation for small employer pension plan startup costs and small employer automatic enrollment credit: Increases the tax credit for new plans from the current cap of $500 to $5,000 and provides an additional $500 credit to eligible employers that implement an automatic enrollment feature in their retirement plan design for tax years beginning after December 31, 2019.
5. Repeal of maximum age for traditional IRA contributions: Eliminates the age restriction for IRA contributions for tax years beginning after December 31, 2019. Previously, individuals could not make deductible contributions to their retirement plans in or after any tax year during which they reached age 70.5. 
6. Portability of lifetime income option: Provides for portability of annual or lifetime income options to IRA or other qualified employer plan, if these investment options are discontinued under a plan after December 31, 2019.
7. Treatment of custodial accounts on termination of section 403(b) plans: Allows 403(b) plans with custodial accounts to make an in-kind distribution of the custodial account upon 403(b) plan termination, which is consistent with the 403(b) plan individual annuity contracts termination process, resulting in more simplified termination of 403(b) plans. This provision is retroactively applied for taxable years beginning after December 31, 2008. 
8. Eligibility of long-term part-time employees to participate in qualified plans: This provision mandates employers to cover long-time part-time employees who have not met the plan’s eligibility criteria if the employee has been credited with more than 500 hours of service for three consecutive 12-month periods beginning January 1, 2021, which delays the date by which a part-time employee would first become eligible to enter the plan to January 1, 2024. 
9. Penalty-free withdrawal for birth or adoption: This provision provides a new exemption from early withdrawal penalties for distributions from qualified retirement accounts taken prior to age 59.5 and after December 31, 2019, for birth or adoption expenses up to $5,000 per parent, per child. This withdrawal must be made within one year from the date on which the parent’s child is born or legal adoption of the child is finalized. The parent may later repay the amount withdrawn by contributing funds back into their retirement account. 
10. Increase in age for required minimum distributions: Due to an increase in life expectancy and the need to stretch out retirement funds, the SECURE Act raised the required minimum distribution (RMD) age from 70.5 to 72. This provision only applies to individuals who attain age 70.5 after December 31, 2019, preventing individuals who have reached age 70.5 during 2019 or in a prior year to benefit from this change.

To learn about the additional provisions of the SECURE Act, read our full article: SECURE Act becomes law with significant impact on retirement savings. 

The CARES Act

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides certain temporary special rules for expanded use of retirement funds of 401(k), 403(b) and governmental 457(b) retirement savings plans, as well as for IRAs.

Temporary key provisions of the CARES Act impacting retirement plans are summarized below. Many of these provisions apply to a “qualified individual,” which is defined as an individual:

• Who is diagnosed (or whose spouse/dependent is diagnosed) with COVID-19, or
• Who experiences adverse financial consequences from COVID-19 as a result of the individual, individual’s spouse or a member of the individual’s household:
  • Being quarantined, furloughed, laid off or had reduced work hours
  • Being unable to work due to lack of childcare
  • Closing or reducing hours of a business they own or operate
  • Having pay or self-employment income reduced
  • Having a job offer rescinded or start date of job delayed

A plan sponsor may rely on a participant’s self-certification that they have met one of the conditions of a qualified individual to support the participant’s eligibility. 

1. Suspension of RMDs: The CARES Act immediately waived all RMDs otherwise due during 2020 from traditional IRAs and employer-sponsored retirement plans; however, individuals could still request an RMD if they were eligible to receive an RMD. Individuals who received an RMD in 2020 prior to release of this guidance may have been eligible to roll the RMD amount into an IRA or qualified plan without any tax consequences if they met the IRS rules for rollovers. Generally, a rollover must be made within 60 days of the distribution date to avoid taxes, and individuals are allowed one IRA to IRA rollover in a 12-month period. The permissible 60-day rollover period for certain distributions was extended to August 31, 2020.
2. Coronavirus-related distribution option: The CARES Act allowed a new coronavirus-related distribution (CRD) of up to $100,000 for a “qualified individual” between January 1 and December 31, 2020, and waives the 10% early withdrawal tax penalty and 20% mandatory federal income tax withholding that would otherwise apply to such withdrawals from any qualified plan, 403(b) plan or IRA. The distribution is still subject to income tax, but the distributed amount may be included in an individual’s taxable income ratably over a three-year period. Alternatively, if the distributed amount is repaid into any IRA or employer-sponsored retirement plan within three years of receiving the early distribution, it will not be subject to income tax. CRDs may be allowed even if the plan does not allow for in-service distributions; however, the plan must be amended in accordance with the regulations described below to allow CRDs. CRDs are not permitted by defined benefit plans and money purchase plans since these types of plans are not eligible to provide in-service distributions prior to age 59.5. 
3. Increased plan loan limits and extension of loan payment terms: For plans that allow participant loans, the CARES Act increased the maximum participant loan limit for loans granted to a qualified individual between March 27, 2020, and September 22, 2020, from the lesser of $50,000 or 50% of the participant’s vested account balance, to the lesser of $100,000 or 100% of the participant’s vested account balance. In addition, if requested by a qualified individual, repayments of any existing outstanding loans due from March 27, 2020, to December 31, 2020, could be deferred for a period of up to one year, and as a result, five-year loan repayment periods were extended for one year. After the deferral period, loans must be re-amortized to be adjusted for the delay of payments and accrued interest during the deferral period, as well as for the change in the repayment period. 
4. Delay in defined benefit plan funding obligations: Required minimum contributions to defined benefit plans that were otherwise due during 2020 were extended to January 1, 2021 (including quarterly installment payments). The amount of any deferred contributions is increased by the plan’s rate of interest between the original due date and the actual payment date of the contribution.

The provisions for CRDs and increased loan limits and suspended loan payments, which are all optional, as well as the suspension of RMDs and defined benefit plan funding delays, are immediately available to employers. While plans may immediately adopt and implement these provisions, formal plan amendments are not required until the end of the last day of the plan year beginning on or after January 1, 2022 (December 31, 2022 for calendar year-end plans). 

An employer may operate the plan in accordance with these new provisions, as elected, provided a retroactive amendment is adopted by the required deadline and is consistent with how the plan was operated in the interim. Therefore, it is important to keep track of which provisions were implemented and when to ensure execution of accurate amendments. 

Need help implementing these retirement plan provisions?

We understand the difficulties these complex and vast legislative changes impose on businesses and individuals and we’re here to help. Please contact us or reach out to your Wipfli relationship executive for more information or for additional help in understanding the impact the SECURE Act and CARES Act may have on your retirement plan.

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