House Passes the SECURE Act Which Moves to Senate, Would Affect 401(k) Plans in Big Ways
On Thursday, May 23, 2019, the U.S. House of Representatives passed, by a huge 417 to 3 margin, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”). Although the current climate in Washington is unpredictable at best and because the SECURE Act enjoys wide bipartisan support, pundits forecast that the proposal stands a good chance of passing the Senate in some form before the end of this year’s legislative session. If passed, it is considered likely that President Trump will sign the legislation. Should the proposed legislation become law, it could represent the most significant pension legislation since the Pension Protection Act of 2006.
In its current form, the SECURE Act is an amalgamation of a number of pension-related proposals that have been offered on and off during the course of the past several years. In fact, the Senate presently has a similar bill before it that was introduced last year, entitled the Retirement Enhancement Securities Act (“RESA”). Many of RESA’s provisions could eventually make their way into the SECURE Act, and, of course, the SECURE Act might also be significantly modified through committee or other Congressional action before being finalized.
At present, as passed by the House, the SECURE Act contains the following major provisions that apply directly to 401(k) plans:
- Increase Retirement Plan Access for Smaller Employers. The SECURE Act would make it easier for small employers to provide 401(k) retirement plans for their employees by expanding and simplifying the multiemployer plan rules. Small employers generally would be able to join together to offer 401(k) plans with less fiduciary liability concern and less cost than is presently the case. Moreover, additional tax credits would be available to small employers that offer certain plans to their employees.
- Increase Annuity Options Available Within Retirement Plans. The SECURE Act would also expand the current safe harbor provision that allows 401(k) plan sponsors to select annuity providers for distribution options in the form of annuities. Currently, plan providers have a fiduciary responsibility to scrutinize annuities and their providers.The new rules would generally shift this liability onto insurers, charging them with the duty to provide employers with the appropriate products.
OBSERVATION: Although the SECURE Act provision seeks to expand the use of annuities in 401(k) plans, with the stated goal of providing increased retirement income security to retirees, critics charge that the provision could encourage insurance companies to sell annuity products to plans that may be overly complicated, not adequately communicated, or simply inappropriate for the plan’s general demographic.
- Increase the Required Minimum Distribution Age. Under the SECURE Act, required minimum distributions from 401(k) plans would increase from age 70 ½ to age 72. (RESA would raise the age even further, to age 75.)
- Tax Credit Available for Auto Enrollment Plans. A new tax credit of $500 would be available to help encourage certain small employers to adopt an automatic enrollment feature into their 401(k) plans. This credit is intended to help offset some of the costs of operating a retirement plan – although, as a practical matter, the amount is likely too small to serve as the determining factor for whether or not to adopt a 401(k) plan.
- Penalty-Free Distributions for Childbirth or Adoption. A proposed new exemption from the 10% percent penalty tax for early withdrawals from 401(k) plans would allow an aggregate amount of $5,000 to be distributed from a 401(k) plan in the event of a qualified birth or adoption, provided the distribution occurs within one year of the event.
- Lifetime Income Disclosure for 401(k) Plans. The SECURE Act would require that all defined contribution plans (including 401(k) plans) send a lifetime income disclosure to participants at least once every 12 months, designed to show how much income their lump-sum balance could generate over the participant’s projected retirement span.
In addition to the above, there are a number of other proposed provisions, not all of which directly impact 401(k) plans.
When it comes to prognostications about the chances of legislation being enacted in any particular form in today’s Washington, nobody claims to have a crystal ball. Further, pensions are not exactly the hottest topic in the news today, even though intense lobbying continues unabated. As always, we will be carefully monitoring the situation and will keep you posted accordingly. Remember, specific questions about new or existing law concerning 401(k) plans should be directed to your ERISA counsel or other professional benefits advisors.
The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice.