Plan Design Opportunities for Employers Under the SECURE Act

In a previous blog, we discussed the potential changes under the Setting Every Community Up for Retirement Enhancement (SECURE) Act of interest to plan participants. This blog focuses on the provisions in the Act (which has passed the House and is pending in the Senate) that open up new plan design opportunities and ease of administration for plan sponsors. The most important is the creation of “pooled employer plans” that unrelated employers can join, plus there are changes to encourage small plans and safe harbor plans, all with the goal of expanding coverage of retirement plans to millions of employees who currently have none available.

Pooled Employer Plans

The Act sanctions “Pooled Employer Plans” that are treated as a single plan under ERISA. Pooled Employer Plans would be allowed starting in 2021. The concept of allowing small employers to join together to enjoy economies of scale and lower administrative costs has been the core of previous, unsuccessful bills. Unlike the similarly inspired Association Retirement Plans, employers in a pooled plan would not need to share any commonality of interest, so these multiple employer plans are also referred to as “open MEPs.”

The Act requires a pooled plan to have a provider that is a financial institution and is the fiduciary and administrator of the plan, thus easing the fiduciary responsibility of employers that choose to join them. It also provides relief from an IRS interpretation, sometimes called the “one bad apple” rule, which endangered the qualification of the entire plan if a single employer violated any of the requirements for a qualified plan. Under the Act, the pooled plan would be required to spin off the offending employer’s accounts into a separate plan or individual IRAs.

Small Employer Tax Credit

As a direct incentive for small employers without retirement plans to set up plans or join pooled plans, the Act increases the tax credit for new small employer (under 100 employees) plans from $500 to up to $5,000 per year for three years. Small employers that adopt an auto-enrollment feature are eligible for a separate $500 tax credit for three years.

Lifetime Income Products

While 401(k) plans have replaced pension plans as the main retirement plan for most employees, they lack the ability of pension plans to provide guaranteed lifetime benefits. In addition, few 401(k) plans offer annuity options to participants for a variety of reasons, including concerns about fiduciary liability if the insurer cannot pay the benefits for decades into the future. The Act helps limit employers’ fiduciary liability in choosing a secure annuity provider for the plan. While an employer (or other plan fiduciary) must still make an objective search for a lifetime income provider, rather than making its own assessment of the insurer’s financial capability (or hiring an expert to do so), the employer can rely on the provider’s representations that show that its financial condition is properly regulated by a state authority.

The Act also addresses portability concerns. If a plan ceases offering the lifetime income option, a participant would be allowed to roll over the product to an IRA or take an in-kind distribution. The fact remains, however, that few participants choose an annuity distribution when offered. Thus plan sponsors may feel no great need to add them to their plans.

Safe Harbor and Auto-Increase Plans

The Act contains small changes to encourage safe harbor plans that provide a flat “nonelective” contribution of at least 3% to all employees (rather than a matching contribution). It eliminates the annual notice requirement for such plans, although they must still provide an effective opportunity for employee deferrals. It also allows regular 401(k) plans to convert to a nonelective safe harbor plan as late as 30 days before the end of the plan year, or even after the end of the plan year if the employer makes a 4% contribution instead. The Act also encourages qualified automatic contribution arrangements (QACAs), which have an auto-increase feature that continuously raises an employee’s contribution percentage up to 10% unless they opt out. Such plans will be able to increase up to a deferral rate of 15% rather than the current 10%. These provisions would be effective in 2020.

403(b) Plans

Although 403(b) plans of schools and non-profits are like 401(k) plans in many ways, they do not get much attention in the Act. The most important change for 403(b) plans directs the IRS issue guidance allowing distribution of custodial accounts upon termination of a 403(b) plan, which has been a persistent obstacle for employers wanting to switch to a 401(k) plan. That provision is effective retroactive to 2009.