IRS Issues Initial Guidance on The SECURE Act
ERISA and Employee Benefits Update
IRS Issues Initial Guidance on The SECURE Act
In Notice 2020-68 the IRS delivered its first focused guidance to help plan sponsors know how to operate and amend their qualified retirement plans for the changes made by the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 20191. The Notice also addresses a change affecting qualified pension plans included in the Bipartisan American Miners Act of 2019 (the Miners Act), which was passed at the same time as the SECURE Act.
As it relates to qualified plans, the Notice is focused on three provisions of the SECURE Act and one provision of the Miners Act2.
Participation of Long-Term, Part-Time Employees in 401(k) Plans (SECURE Act § 112)
The SECURE Act requires a 401(k) plan to permit long-term part-time (LTPT) employees, defined as employees who have reached age 21 and completed at least 500 hours of service in three consecutive 12-month periods, to enter the plan solely for the purpose of making elective deferrals. Employers are not required to provide any employer contributions and do not have to include LTPT employees in nondiscrimination testing. Employers must begin counting hours for LTPT employees for plan years beginning after December 31, 2020 for eligibility purposes. Thus, no LTPT employee will enter a 401(k) plan until January 1, 2024, at the earliest.
The Notice clarifies that LTPT employees are also entitled to special vesting rights with respect to employer contributions, if any (once they satisfy the plan’s regular eligibility provisions to receive employer contributions). LTPT employees must be credited with a year of vesting service for any year in which they complete 500 or more hours of service, even if the employee later completes 1000 hours of service during a plan year. This even includes years prior to 2021. This may present an administrative challenge for employers because they will need to track this group of LTPT employees and consider hours worked even prior to 2021.
Additional IRS guidance will be needed to fully understand how this requirement will operate. For example, it is not clear whether certain non-service-based exclusions are still permissible (such as excluding an entire division or geographic location), or whether even employees of excluded populations would need to be allowed to defer once they met the criteria for becoming a LTPT employee.
Qualified Birth or Adoption Distributions (SECURE Act § 113)
The SECURE Act allows plans to permit Qualified Birth or Adoption Distributions (QBADs), which are in-service distributions of up to $5,000 for the birth or adoption of a child. The plan sponsor can rely on reasonable representations from participants to establish eligibility for QBADs absent actual knowledge to the contrary. QBADs can be made from elective contributions, qualified non-elective contributions, qualified matching contributions, and safe harbor contributions, as well as other contribution types.
A QBAD is taxable to the participant but is not subject to the 10% early distribution penalty tax. A participant may recontribute the QBAD to a qualified plan if the participant is eligible to make rollovers to that plan. The plan making the distribution must accept the recontribution if the plan permits QBADs and the participant is eligible to make rollovers into the plan.
Plan sponsors are not required to amend their plans to allow for this in-service distribution option. For plans that do not include a QBAD as a distribution option, participants can still take advantage of the tax advantages of a QBAD if they are otherwise eligible for a distribution from the plan and the distribution meets the QBAD requirements (it occurs within one year from the date of the birth or adoption and is appropriately reported on the participant’s individual tax return).
The Notice provides additional detail regarding notice and withholding requirements, requirements for eligible adoptees, what it means to be physically and mentally incapable of self-support, and clarifies that in the case of multiple births, a QBAD is available for each birth (so a participant who has twins could receive two distributions of up to $5,000).
Small Employer Automatic Enrollment Credit (SECURE Act § 105)
The IRS also clarified the rules by which a small employer with fewer than 100 employees can receive a credit for implementing a new eligible automatic contribution arrangement (EACA) over a 3-year credit period. The credit is not applicable to governmental or tax-exempt employers. The credit is available for the first three years in which the plan implements the EACA, if those taxable years begin after December 31, 2019.
Reduction in Minimum Age for In-Service Distributions (Miners Act § 104)
The Miners Act decreased the minimum age at which a defined benefit or money purchase pension plan may permit in-service distributions from age 62 to 59-1/2. Plans are not required to permit in-service distributions or to permit them at the minimum age. This change does not affect the rules governing the determination of a plan’s normal retirement age.
Action Items and Plan Amendments
Although many of the SECURE Act provisions are already operationally effective, the Notice reiterates that qualified plans have until December 31, 2022 (for a calendar year plan) to make amendments relating to these changes and obtain associated anti-cutback relief where applicable, as long as the plan is operated in conformity with the amendment and the amendment is retroactively effective to the date the changes were required or implemented (if optional)3. This extended amendment deadline applies to both required and discretionary amendments, and to both pre-approved and individually designed plans.
Most plan sponsors have been awaiting further guidance before amending their plans for these changes, and have delayed implementing discretionary operational changes. Although the initial guidance provided in the Notice is helpful, plan sponsors will need much more guidance to fully implement many of the SECURE Act provisions and appropriately amend their plans. For now, it is anticipated that most plan sponsors will continue to await further guidance.
For more information on the SECURE Act, see our prior alert here.
 The IRS provided some transitional guidance relating to the payment of required minimum distributions in early 2020 immediately following the passage of the SECURE Act in Notice 2020-51, available at https://www.irs.gov/pub/irs-drop/n-20-51.pdf.
 The Notice also addresses two other SECURE Act provisions that are not discussed further here – a provision repealing the maximum age for making traditional IRA contributions, and a provision permitting excluded difficulty of care payments to be taken into account as compensation for certain purposes.
 For non-calendar year plans, the amendment deadline is the last day of the first plan year beginning after January 1, 2022. Calendar year governmental plans have until December 31, 2024.