SECURE Act changes loom

Kevin Price

Remember 2019? It was in December of that year — which seems now like quite a while ago — the SECURE Act was signed into law. The Setting Every Community Up for Retirement Enhancement Act was designed to make it easier for people to save for retirement and makes retirement plans more accessible to more people.

As the coronavirus pandemic rages around the world, the SECURE Act might have slipped off your radar in favor of other pressing issues. Make no mistake, though, the law is still out there and requires your attention. 

Plan sponsors have until the last day of the 2022 plan year — Dec. 31, 2022 for calendar-year plans — to adopt the amendments required by the act. However, operational compliance is required during the period between the actual plan amendment date and effective date for required changes. 

Here are just two of the items that demand the attention of 401(k) plan sponsors. Because many of the words and phrases in this article have specific legal meanings, consult the plan attorney to ensure your plan complies with these and other provisions.

Eligibility for long-term part-timers. In the decades prior to the SECURE Act, plans could set a year of service for eligibility purposes at a minimum of 1,000 hours worked during a plan year. Under the SECURE Act, the required hours have been reduced. Employees who are at least 21 years old and work at least 500 hours in three consecutive 12-month periods must be allowed to make salary deferrals in the 401(k) plan. 

The definition of a year of vesting service also changed to reflect the 500-hour minimum rather than the former 1,000 hours in a plan year requirement. 

These rules become effective for plan years that begin after Dec. 31, 2020. 

While these long-term, part-time employees can make salary deferrals, they’re not required to be included in employer matching contributions or other contributions from the employer.

This is a forward-, not backward-, looking provision. Sponsors should start tracking the hours of their part-time staff for the plan year beginning after Dec. 31, 2020. Workers who accumulate at least 500 hours of service during the first, second and third years after that date must be allowed to begin salary deferrals in the plan during the subsequent plan year. For a calendar year plan, then, deferrals would be allowed during the 2024 plan year from employees with at least 500 hours of service in 2021, 2022 and 2023.

It’s worth noting employees included in the plan only because of this provision — those with less than 1,000 hours of service — don’t need to be included in the plan’s nondiscrimination tests, including top-heavy testing. As before, employees with at least 1,000 hours of service who meet the age requirement must be included in the tests.

Lifetime income disclosures. Along with disclosures about vesting status and investments, plans will soon be required to include a new disclosure about lifetime income. 

To meet this requirement, the disclosure must describe the participant’s balance in terms of a monthly annuity that could be purchased with the participant’s account balance. The U.S. Department of Labor was expected to release interim rules, including a model disclosure statement and assumptions on which the annuity figure should be based. If the disclosure meets legal requirements, the plan and its fiduciaries will be protected against liability arising from it. 

Expect the first disclosure to be required 12 months after the labor department issues its interim rules, likely sometime during 2021.