As we are all keenly aware, things have changed dramatically
since January. In that January blog, we mentioned that SECURE contained the
first RMD changes since the Worker, Retiree, and Employer Recovery Act (WRERA)
of 2009. On March 27, 2020, Congress passed and the President signed the
Coronavirus Aid, Relief, and Economic Security (CARES) Act, which includes,
among many other relief items, a change very similar to the WRERA waiver of
RMDs in 2009.
“Required minimum distributions (RMDs) for 2020 are waived for profit sharing, money purchase, 401(k), 403(b) and governmental 457(b) plans. Applies to all RMDs due during 2020, including 2019 initial RMDs due by April 1, 2020.
2020 eligible rollover treatment. If any portion of a distribution made during 2020 would have been treated as a RMD absent this temporary waiver, it is eligible for rollover. However, the 20% federal income tax withholding can be ignored and the distribution is exempt from the IRC Section 402(f) notice requirements (rollover rights explanation).”
The main difference from the WRERA RMD waiver is that the CARES Act allowed for a waiver of all 2019 RMDs due to be paid in 2020. However, because of the timing, most of these RMDs have already been distributed from retirement plan accounts, as the deadline for distribution was April 1, 2020.
If sponsors elect to apply the waiver, they will need to amend their plan documents for this and all other CARES Act provisions by the end of the plan year starting on or after January 1, 2022.
On December 20, 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act became law as part of the Further Consolidated Appropriations Act, 2020. Most SECURE provisions are for defined contribution (DC) pension plans. However, the SECURE Act also provides relief for the nondiscrimination and minimum coverage requirements applicable to closed defined benefit (DB) pension plans. This is good news for plan sponsors who wish to continue providing accruals in closed DB plans. The relief generally falls into one of two categories: (1) deemed compliance, and (2) additional testing flexibility under the coverage and nondiscrimination regulations for those situations that will require continued testing.
Below are some key provisions related to the nondiscrimination testing requirements under Treasury Regulation 1.401(a)(4) that are modified by the SECURE Act:
A closed DB plan can be aggregated with a DC plan for testing on a benefits basis without satisfying a gateway requirement.1 Prior to the enactment of the SECURE Act, the high cost to meet a gateway could lead to premature plan freezes. The closed group needs to meet the following requirements for testing relief:
For the plan year in which the closed group closes and the two succeeding plan years, the plan meets the coverage and nondiscrimination requirements of 410(b) and 401(a)(4)
After the date the closed group was closed, any plan amendment that modifies the closed group or the benefits does not significantly discriminate in favor of highly compensated employees (HCEs)
The closed group was created before April 5, 2017, or the plan has been in effect for at least five years as of the date the closed group is created and there has not been a substantial increase in the coverage or value of the benefit, right, or features (BRFs)
Matching and nonelective contributions in a 401(k) or a 403(b) plan can be used in the general test;2 further, matching contributions can be treated as if they are nonelective contributions.
DC plans with different plan years are allowed to be aggregated with a DB plan.
DC plans with different BRFs are allowed to be aggregated with a DB plan.
A closed DB plan is deemed to satisfy the nondiscrimination requirements for BRFs under 1.401(a)(4)-4 if the plan meets the requirements as noted above.
A closed DB plan is deemed to satisfy the requirements for minimum participation3 under §401(a)(26) if the plan amendment was adopted prior to April 5, 2017:
To cease all benefit accruals
To provide future benefit accruals only to a closed group
Prior to the SECURE Act,
the Internal Revenue Service (IRS) had provided regulatory guidance that was meant
to alleviate some of the difficulties in satisfying these technical tests. While
plan sponsors appreciated the effort, the regulatory guidance was temporary and
limited, which is why the SECURE Act addressed these issues. During the last
few years, plan sponsors had implemented some or all of following changes to
their DB plans to meet the nondiscrimination and minimum coverage requirements:
Provided additional nonelective
contributions under the DC plan at a potentially significant cost to employers
in order to continue DB accruals
in the DB plan for some non-HCEs who were previously not eligible under the
Froze accruals for
participants who are HCEs
Froze accruals for all
participants under the plan
Plan sponsors can elect to apply the relief provisions of the Secure Act retroactively for plan years beginning after December 31, 2013. However, in certain situations, the plan document must be formally amended. Plan sponsors may amend their plans to provide previously eliminated BRFs or to provide benefit accruals to a closed group if a sponsor is forced to change a plan because of prior testing limitations that were relieved as a result of the SECURE Act.
1 The minimum aggregate allocation gateway, as described under Treasury Regulation §1.401(a)(4)-9(b)(2)(v)(D), requires each benefiting non- HCE to receive aggregate benefits from the combined DB/DC plan at a minimum level determined by the highest benefiting HCE as follows:
Highest value of combined DB/DC benefits for a HCE
Minimum value provided to each non-HCE benefiting under the
combined DB/DC plan
Less than 15%
1/3 of the value to the
highest benefiting HCE
15% to 25%
25% to 30%
30% to 35%
A plan is permitted to treat each non-HCE who benefits under the DB plan as having the same value of benefits under the DB plan by replacing the individual DB benefit by the average of benefits for all non-HCEs. The individual DC benefit value (if any) is then added to the average DB value for non-HCEs to determine whether the gateway requirement above has been passed.
2 The nondiscrimination regulations outline “safe harbor” formulas for providing benefits in a DB plan, or participant allocations in a DC plan. If the benefits or allocations are not provided using a safe harbor approach, then the benefits or allocations are subject to the general test in order to demonstrate that the benefits do not discriminate in favor of HCEs.
3 Minimum participation rules under §401(a)(26) require a DB plan to benefit the lesser of 50 employees or 40% of all employees within a controlled group.
In this article, Milliman actuary Ian Laverty takes a deep dive into changes stemming from the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and provides additional insight into the new law, particularly as it relates to individual annuity contracts. The changes made by SECURE that open up opportunities for individual annuity carriers relate to two primary topics: fiduciary responsibility and portability.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act will lead to technical and administrative actions that defined benefit (DB) pension plan sponsors should explore. In this article, Milliman’s Vanessa Vaag and Mary Hart summarize mandatory and voluntary changes arising from the SECURE Act related to human resource administration and DB plan calculations that plan sponsors must address.
Retirement plan sponsors and their third-party administrator
(TPA) business partners need to understand the implications of two SECURE Act
provisions involving complex changes to human resources (HR) administration
systems and savings plan calculation engines. One is a mandatory change
concerning long-time part-time employees who may qualify to participate in an
employer’s retirement plan if they meet the requisite hours worked for three
consecutive years. The second is a voluntary change related to qualified birth
or adoption distributions.
In this article, Milliman consultants Charles Clark and Deborah Lachner explain some of the complexities resulting from these provisions and highlight actions plan sponsors can take to avoid being caught off guard.
The SECURE Act has now made it significantly more attractive and less restrictive for employers to offer annuities within their defined contribution (DC) retirement plans. This provision presents a growth opportunity for the annuity industry. In this article, Milliman actuary Ian Laverty highlights those opportunities and provides an overview of the fiduciary and portability changes created by the SECURE Act.
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