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Infographic: SECURE Act: What Retirement Plan Sponsors Need to Know

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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.

Open MEPs

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.

Lifetime Income

  • 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.

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