ASPPA Webcast Addresses FAQs on the SECURE ACT

It may feel like almost another lifetime since the SECURE Act became law a mere four months ago, but it’s still relatively new and there is plenty of dust still settling. A recent ASPPA webcast addressed matters raised in questions concerning the new law.

 

In the recent webcast, “Frequently Asked Questions on the Secure Act,” Robert Richter and Robert Kaplan provided answers regarding uncertainties and issues that have arisen concerning the measure. Richter and Kaplan are Retirement Education Counsel and Director of Technical Education at the American Retirement Association, respectively.

 

The SECURE Act is really part of a larger bill, the Further Consolidated Appropriations Act, 2020 (H.R. 1865, as amended). That’s important, Kaplan said, because when one conducts research about provisions in the SECURE Act, one also may need to look at other provisions of the larger measure. For instance, he said, the SECURE Act is in Division O of H.R. 1865, but there also are provisions of the latter relevant to retirement plans in its Division M. “Remember that there are other parts of the bill,” he said.

Small Employer Startup Credit

 

The Small Employer Startup Credit, which is intended as an incentive for small businesses to offer a retirement plan, effective for plan years after Dec. 31, 2019 increased the amount of the credit to the lesser of:

 

“Of all the items in the bill, that’s the one we’ve seen the most questions on,” said Richter. “This is probably not a year in which people will have a lot of money to use,” remarked Kaplan, “but when the economy bounces back, the credit probably will be taken advantage of more.”

 

 

Kaplan noted that there also have been many questions concerning the new distributable event, and that it is not merely a tack-on to the events for which there may be a hardship distribution. The SECURE Act provides that a distribution may be made from a defined contribution plan—including a 403(b) and 457 plan, as well as an IRA—for qualified child birth or adoption expenses.

 

But there are some gray areas concerning the new event. For instance, a plan is not required to make it available to participants simply because the law permits it. In addition, proof of birth or adoption is not entirely clear. “There is a lot of good faith that the distribution will be used for what it is pulled for,” said Kaplan. He and Richter said that a “birth certificate or adoption papers would be the safest requirement for now” and noted that in order to be exempt from the excise tax, the participant must include the child’s Social Security number on the tax return. Plans “may want to also require the participant to certify that he or she will properly comply with this requirement,” they added.

 

However, those distributions must be repaid. “Taking the money out is easy,” said Kaplan, “but putting it back in…” He and Richter noted that if the loan came from the plan, then the plan must allow a participant to repay it. However, a plan cannot accept a repayment if the loan did not come from the plan or it was not made to a participant.

 

There may be limits on what a plan can and cannot accept, but there is no limit on the amount of time a loan recipient can take to pay it back.

 

“The repayment portion of the law is the most troublesome,” said Richter. Kaplan added that “We need a lot guidance on the repayment issue.”

 

Until that guidance comes, Richter told attendees that it would be best to “tread lightly.” And Kaplan added, that it is “very important to document, document, document.” He suggested having clients make sure that they keep a record in the plan’s permanent records. “Documentation is so important,” he said.

 

 

The changes the SECURE Act made to the ages at which RMDs must be made have created a peculiar situation. “Participants will have to deal with two sets of rules, depending on when you were born,” said Richter. Among the uncertainties, he observed, is when the age of majority is—a factor relevant to the applicability of an exception to the new rules concerning RMDs concerning a participant who dies after Dec. 31, 2019.
 

“It’s quite a mess,” Richter said. The IRS, Richter said, is “acutely aware” of the need for additional guidance in light on RMDs in light of the SECURE Act.

 

 

The SECURE Act includes a provision that eliminates the annual safe harbor notice for ADP safe harbor using the nonelective contribution. “We’re jumping up and down with joy that the annual safe harbor notice is not necessary anymore,” Kaplan said, but he added a caveat that it is “a very limited elimination of the safe harbor notice requirement.” For instance, he noted, the SECURE Act does not eliminate the notice requirement if using a match to satisfy the ADP safe harbor. And he and Richter noted that plans still must provide each eligible employee with an effective opportunity to make or change an election, nor did the law repeal the annual notice requirement for Eligible Automatic Contribution Arrangements (EACAs).

 

The safe harbor notice is another area in which IRS guidance would be helpful, Kaplan and Richter indicated. For example, they said, it probably would be OK for a plan to reduce or terminate the safe harbor nonelective contribution during the year, but they said IRS guidance is needed on that matter. “

 

 

Richter and Kaplan noted that the SECURE Act provides that plans will be required to cover “long-term part-time” employees, which means part-time employees who have three consecutive 12-month periods with more than 500 hours of service and who meet the age requirement.

 

However, they said, the provision applies to 401(k) plans only. Furthermore, it only requires employers to allow long-term part-time employees to defer, and may elect to exclude those employees for determining coverage, nondiscrimination and top heavy status.

 

They added that they think this is another area in which IRS guidance is needed, and expressed confidence that that would happen. “I think we’ll get sufficient guidance before it becomes effective,” said Kaplan. The provision is effective for plan years beginning after Dec. 31, 2020.

 

 

Some of the dust may not settle anytime soon, Kaplan indicated. “Many of the things discussed today are things we want clarifications about from the IRS,” he said, “but due to the virus, we are likely to have a delay in guidance.”

 

 

The ASPPA webinar “Frequently Asked Questions on the Secure Act” is available on demand. It can be accessed here.