New Opportunities for Workplace Retirement Plans Under the SECURE Act

New Opportunities for Workplace Retirement Plans Under the SECURE Act

The information in BDO alerts is dependent on tax policies at the time they are published. The subject matter in the “Covering long-term part-time employees in 401(k) plans” section of this alert was updated February, 2020.

By now, most employers know that the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) became law on December 20, 2019, as part of a federal budget and spending bill (H.R. 1865). The SECURE Act is landmark legislation that affects the rules for creating and maintaining workplace retirement plans for all employers — including for-profit and tax exempt employers of all sizes. In a nutshell, the SECURE Act eases employers’ administrative burdens for operating workplace retirement plans and encourages plan participation. Some of the SECURE Act changes in the law are most beneficial to smaller employers, while other provisions address changing workforce demographics, such as longer life expectancies and long-term part-time employees in what is often called the “gig” economy.

Whether you currently offer your employees a retirement plan (or are planning to do so), you should consider how these new rules may affect your workplace retirement savings program (or your decision to create a new one). This tax alert summarizes some of the planning opportunities under the SECURE Act for employer-sponsored retirement plans with broad applicability.


Different effective dates for plan documents vs. plan operations.

The SECURE Act makes 30 changes to retirement plan law, affecting tax-qualified defined benefit (DB) plans (such as cash balance plans and traditional pension plans) and defined contribution (DC) plans (such as 401(k) plans, employee stock ownership plans (ESOPs), 403(b) plans and 457(b) plans) and individual retirement accounts (IRAs). Some of these changes are effective immediately, while others are effective in plan or tax years beginning on or after January 1, 2020, 2021, 2022, or later. Generally, amendments to written plan documents are not required until the last day of the 2022 plan year (2024 for governmental plans). However, plan administration must be updated to reflect the SECURE Act’s provisions by the applicable effective date of each change, even if the plan amendment deadline is later.

Employers can expect to hear from their retirement plans’ third-party administrators (TPAs), recordkeepers and other service providers about how SECURE compliance changes to their systems will impact their services, as well as whether any new documents need to be executed to implement SECURE Act changes.


What should employers be doing right now?

The SECURE Act requires employers to take action with respect to certain plan administrative changes, employee notices and plan amendments. Right now, employers should educate themselves about the SECURE Act provisions, prioritize those which have an immediate impact (See our earlier tax alert discussing immediate actions needed by retirement plans to comply with the SECURE Act), evaluate the new features and consider plan design changes.


Opportunities to expand workplace savings.

The SECURE Act encourages workplace retirement plan access and participation in several new ways, which are discussed below.

Increasing QACA auto enrollment safe harbor cap. An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or qualified non-elective contributions (QNEC) safe harbors. Automatic enrollment can be part of a safe harbor plan design called a “qualified automatic contribution arrangement” (QACA). For plan years beginning after December 31, 2019, the SECURE Act increases the maximum default contribution rate under a QACA from 10 percent to 15 percent for years after the participant's first deemed election year.


BDO Insights

  • For the participant's first deemed election year in an automatic enrollment plan, the cap on the default rate remains 10 percent.
  • Employers that use the QACA safe harbor may (but are not required to) increase the cap on automatic enrollment deferrals under their plans.
  • Employers should work closely with their TPA and recordkeeper to ensure changes needed to plan operations and systems are implemented in a timely manner to reflect the increased cap on the QACA default percentage.
  • Retirement professionals generally recommend an annual retirement savings rate of 15 percent for individuals, so increasing the automatic enrollment safe harbor cap from 10 percent to 15 percent reflects this industry trend.
  • This provision (along with other SECURE Act changes) is designed to increase retirement readiness by closing the gap between actual and recommended retirement savings. Evidence indicates many employees continue the QACA without reducing their savings rate. 

Covering long-term part-time employees in 401(k) plans. Generally, tax-qualified retirement plans must cover all employees who work at least 1,000 hours per year unless they are not yet age 21. Starting for plan years beginning after December 31, 2023, the SECURE Act will require 401(k) plans (other than collectively bargained plans) to also cover employees who have worked at least 500 hours for three consecutive years (measured for plan years starting after December 31, 2020) – which seems to include seasonal employees. No employer contributions (not even top-heavy minimum contributions) are required until the employee satisfies the plan’s normal eligibility requirements. A special vesting rule that also applies to these individuals seems to provide vesting credit at 500 hours of service (but guidance is needed on how this provision works).


BDO Insights

  • Employers can also continue to impose an age 21 requirement.
  • Employees will not need to be permitted to defer under this new rule before 2024. But as a practical matter, starting January 1, 2021, employers will need to begin tracking hours worked that are less than 1,000 to determine the future eligibility of such employees to join the 401(k) plan.
  • This change would not apply to 403(b) plans.
  • Since studies show that women are more likely than men to work part-time, the new rule may be especially helpful to women in preparing for their retirement.

Relaxed QNEC safe harbor rules. QNEC safe harbor plans generally are deemed to pass certain nondiscrimination tests that would otherwise apply.

Starting in 2020, employers can amend their 401(k) plan into being a QNEC safe harbor plan “mid-year,” so long as the amendment is adopted (1) no later than 30 days before the end of the plan year; or (2) after that date but before the last day for distributing excess contributions for the plan year (i.e., by the close of the following plan year), but only if the QNEC is at least 4 percent (instead of 3 percent) of participants’ compensation. In other words, instead of amending before the end of the current plan year, employers can amend their plan up until the end of the following plan year end if they make a 4-percent contribution to all eligible employees rather than a 3-percent contribution.

Also, starting in 2020, plans that use the QNEC safe harbor are no longer required to give employees a written safe harbor notice before the start of each plan year.


BDO Insights

  • This change gives employers greater flexibility and facilitates plan adoption. Employers will now be able to implement a QNEC safe harbor toward (or even after) year-end, which syncs up better with the business cycle and when employers typically would decide whether to contribute to the retirement plan for that year. Plan sponsors would need to adopt an amendment to implement this feature in a timely manner. This is welcome news for employers, since historically the IRS has been very strict in limiting employers’ ability to implement safe harbor provisions after a plan year has begun.
  • Giving participants advance notice of the matching safe harbor contribution made sense so that they could take full advantage of the match. But since the QNEC safe harbor is funded entirely with employer non-elective (not matching) contributions, giving employees advance notice of the QNEC safe harbor plan design made little sense, because participants would receive the QNEC regardless of whether they made any salary deferrals into the plan. For many years, the retirement plan industry has been asking the IRS to eliminate this unnecessary burden.
  • These new rules do not apply to safe harbor plans that use either the basic or enhanced matching contribution formula to satisfy the safe harbor requirements (since the change only applies to safe harbor plans that use the QNEC safe harbor).
  • Reports indicated that about 30 to 40 percent of 401(k) plans use a safe harbor plan design, so making compliance easier and more flexible will likely increase usage of the QNEC safe harbor.

Delay of required minimum distributions (RMDs). Before the SECURE Act, RMDs generally had to start by April 1 of the calendar year following the calendar year in which an employee reached age 70 ½. The SECURE Act increases the age at which RMDs must begin from age 70 ½ to age 72. This change applies to individuals who attain age 70 ½ after December 31, 2019. The exception that allows active employees who are not 5-percent owners to delay RMDs until separation of employment is unchanged.


BDO Insights

  • This change is designed to match RMDs with trends in delayed retirement and increased life expectancies. However, its prospective nature does not help individuals already in RMD pay status. Participants who attained age 70 ½ before January 1, 2020, will continue to receive RMDs on their current schedule.
  • Accordingly, 5-percent owners and other participants who are no longer active employees and who have attained age 70 ½ during 2019 will still need to receive the 2019 RMD payments by April 1, 2020, and the 2020 RMD by December 31, 2020, notwithstanding the fact that they might not yet be age 72 on December 31, 2020.
  • An individual who attains age 70 ½ in 2020 will not be required to take an RMD from a tax-qualified retirement plan for the 2020 calendar year. Any distribution that such an individual does receive before age 72 will be subject to the regular income tax and withholding rules (including rollover rules) that generally apply to retirement plan distributions.
  • Delaying RMDs is not mandatory and the plan sponsor can choose to retain its plan feature that provides distributions at age 70 ½.
  • Action Plan: Plan sponsors will need to evaluate the new RMD rules to determine if they want to delay RMDs as allowed. If elected, procedures need to be changed immediately and the plan documents amended before the remedial amendment period.
  • Plans will need to coordinate with TPAs and record keepers to update policies and procedures for notifying participants of an upcoming RMD trigger date and update any routine notices sent to participants regarding RMDs. For example, distribution reporting will probably need to be updated beginning January 1, 2020, for participants who turn 70 ½ in 2020 to ensure that distributions between age 70 ½ and 72 are treated as being eligible for tax-free rollover and the mandatory 20-percent withholding is deducted (if not rolled over).

Elimination of extended payouts to young beneficiaries. For distributions made with respect to DC plan participants who die after December 31, 2019 (December 31, 2021 for collectively bargained and governmental plans), the SECURE Act changes the RMD rules to generally require that all distributions (except for payments to certain beneficiaries) must be made by the end of the 10th calendar year following the year the participant died. “Eligible designated beneficiaries” are not subject to the new 10-year rule. Eligible designated beneficiaries include the surviving spouse, minor children, certain chronically ill or disabled beneficiaries, and individual beneficiaries who are not more than 10 years younger than the deceased participant. Eligible designated beneficiaries may continue to receive RMDs over their life expectancy, provided however, that the account balance must be distributed within 10 years after the death of the eligible designated beneficiary or, in the case of an eligible beneficiary who was a minor child, within 10 years after such child reaches the age of majority (determined under applicable state law).

This change in the law eliminates what is often referred to as a “stretch payment.” Such payments typically were structured so that, upon the participant’s death, RMDs would be paid over the life expectancy of a much younger designated beneficiary (such as the participant’s grandchild). Smaller annual RMDs resulted, which allowed for continued tax deferral on the retirement account assets while they continue to appreciate.


BDO Insights

  • This change eliminates the tax benefit of naming grandchildren or any beneficiary more than 10 years junior as the beneficiary for retirement funds unless the beneficiary meets the exception.
  • The new post-death DC plan distribution rule does not apply to DB plans.
  • Action Plan: Plan language regarding beneficiary designations and RMD should be reviewed in light of the SECURE Act.
  • Participants should rethink beneficiary designations in light of the lost benefits of stretching distributions over generations.

Employers can adopt a retirement plan up until their tax return due date, plus extensions. One of the most welcome SECURE Act changes for employers is that, for tax years beginning in 2020, employers can retroactively adopt a new qualified retirement plan as late as the employer’s extended federal income tax filing deadline.  Except for salary deferral plans (because salary deferrals can only be made prospectively), the new plan can be retroactively effective as of the beginning of the tax year for which the tax return is being filed.


BDO Insights

  • This gives employers an alternative to adopting a Simplified Employee Pension (SEP). For example, calendar-year unincorporated business owners could establish a DB or DC plan for the 2020 tax year anytime up until October 15, 2021, if they extended the due date of their federal income tax filing. For a calendar year partnership, S-corporation or limited liability company (LLC), the deadline to adopt DB or DC plan and make a prior year contribution would be September 15, 2021. But due to DB plan funding rules, calendar year C corporations would need to adopt a DB plan by September 15, 2021 (even though they technically have until October 15, 2021 to file their extended tax return), if they want the employer’s contribution to the plan to count as a deduction for the prior year (since those contributions must be made by September 15, 2021). Calendar year C corporations could adopt and fund a DC plan by October 15, 2021, effective for the 2020 tax year.
  • One other consideration is that if an employer retroactively adopts a plan, the plan would still need to file a Form 5500 for its initial plan year in a timely manner. Depending on when the employer adopts the plan, it may be too late to file a Form 5558 to extend the due date of the Form 5500, which means that the due date for the initial Form 5500 would be the due date of the employer’s federal income tax return. Depending on facts and circumstances, the employer may not have much time to prepare and file the Form 5500.
  • Even though this change in the law allows retroactive effective dates and income tax deductions, complex retirement plan rules nevertheless apply for both plan documents and operation. Hasty decisions to implement without proper lead-time often results in funding and compliance problems.

Increased tax credits for having a retirement plan. Effective for tax years beginning after December 31, 2019, small employers (i.e., employers with 100 or fewer employees) may be entitled to a new non- tax credit of up to $500 per year for the first three years that they put in place an automatic enrollment feature in a DC plan (like a 401(k) plan or SIMPLE IRA). Automatic enrollment has been shown to increase employee participation and result in higher retirement savings.

The automatic enrollment tax credit is in addition to an existing tax credit for small employers that start a retirement plan, such as a tax-qualified retirement plan, Simplified Employee Pension (SEP) or SIMPLE. Effective for tax years beginning after December 31, 2019, the SECURE Act increases the small employer tax credit to encourage small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500, or (2) the lesser of: (a) $250 multiplied by the number of non-highly compensated employees (NHCEs) who are eligible to participate in the plan, or (b) $5,000. The credit applies for up to three years.


BDO Insights

  • Employers who already have a retirement plan can claim the credit if they add an automatic enrollment feature to an existing plan.
  • The automatic enrollment credit is in addition to the tax credit for employers that start retirement plans. Tax credits are generally better than tax deductions because they reduce the amount of tax owed on a dollar-by-dollar basis.
  • These tax credits are non-refundable, so they can only be used to reduce tax owed.
  • These tax credits are intended to help small employers cope with the financial costs of starting or maintaining a workplace retirement savings plan as a way of increasing access to (and participation in) such programs. Studies show that payroll deduction workplace retirement savings plans are the most effective way to save for retirement.
  • It appears that employers who put a new plan in place in 2019 (or earlier) can increase their credit for 2020 (and later) years, so long as they are still within the three-year start-up period to which the credit applies.
  • BDO can help employers decide which plans may be the best fit for their workforce and assist in implementing the program, including advising on how to make the most out of these new tax credits.

Lifetime income (annuity) options in DC plans. As workplace retirement benefits have shifted over the years from being mostly provided by traditional DB plans to being primarily offered through DC plans, and as the workforce lives and works longer, the retirement industry has emphasized the need to educate DC plan participants about the importance of lifetime distribution options, so they do not outlive their retirement savings. The SECURE Act made three changes in the law to address lifetime income issues.

  • The SECURE Act encourages DC plan sponsors to offer lifetime income during retirement by creating a new ERISA fiduciary safe harbor for employers that include such options in their plans. The new safe harbor became effective on December 20, 2019. For more on the new fiduciary safe harbor, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.
  • The SECURE Act allows DC plan participants to make in-service, direct trustee-to-trustee transfers of lifetime income investments (or annuity transfers) to an IRA or other retirement plan or to receive a distribution of that investment option if the plan discontinues offering that particular investment option. The transfer or distribution must be made within 90 days after the date when the lifetime income product is no longer authorized to be held as an investment option under the plan. This change is effective for plan years beginning after December 31, 2019; before this change in the law, with certain exceptions, participants generally could not make in-service transfers or take a distribution of just one investment option.

BDO Insights

  • This change in the law allowing for portability of lifetime income investment options gives DC plans flexibility to try out a lifetime income investment without having to worry about being stuck with it forever.
  • It also enables participants to potentially avoid surrender charges and other fees or penalties that would otherwise apply upon liquidation of the investment if the plan sponsor eliminates the investment option from the investment lineup (assuming the participant can find an IRA or other retirement plan that is willing to accept a direct trustee-to-trustee transfer of the investment or is willing to take a distribution of the investment option).
  • Plans that intend to offer lifetime income investment options will likely need an amendment to permit these types of in-service and in-kind distributions.
  • Employers may also want to consider whether their DC plan should be amended to accept in-kind transfers of lifetime income investments (such as a rollover from an employee’s prior employer’s plan).
  • Employers should also be alert that lifetime income investment options may be acquired through mergers or acquisitions (if a legacy plan was terminated or if a plan merger is undertaken).
  • The SECURE Act requires DC plans to eventually provide participants with an annual benefit statement showing hypothetical lifetime income disclosures illustrating the monthly amount a participant would receive if his or her DC plan account provided a lifetime annuity benefit. The required disclosure will estimate the monthly annuity income payments that the participant would receive if the participant's account balance was used to purchase a qualified joint and survivor annuity (with a spouse the same age) and a single life annuity (even if the plan doesn’t actually offer those forms of benefit). But the new disclosures won’t be required until at least 12 months after the later of when the Department of Labor (DOL) issues either (1) an interim final rule regarding these disclosures or (2) model disclosures and assumptions for converting account balances into lifetime annuity streams (note that SECURE directs the DOL to issue these by December 31, 2021). The SECURE Act also relieves plan fiduciaries, plan sponsors or anyone else who provides lifetime income disclosures from ERISA fiduciary liability based on the DOL’s model disclosures and assumptions.

Increased IRS retirement plan penalties. To pay for some of the SECURE Act provisions, some of the more common potential IRS maximum penalties related to retirement plans have increased significantly (i.e., by 10 times). These changes are generally effective for returns, statements and notices required to be filed or provided beginning after December 31, 2019, for the following failures:

  • The IRS penalty for failure to timely file a Form 5500 or a Form 5310-A (to report certain transfers, mergers or spin-offs) has increased from $25 per day (capped at $15,000 per year) to $250 per day (capped at $150,000).
  • The IRS penalty for failure to file a Form 8955-SSA has increased from $1 per participant multiplied by the number of days the failure occurred (up to a maximum of $5,000) to $10 per participant multiplied the number of days the failure occurred (up to a maximum of $50,000).
  • The IRS penalty for failure to file a required notification of changes in a plan’s Form 8955-SSA has increased from $1 per day to $10 per day (up to $10,000).
  • The IRS penalty for failure to provide participants with a required notice regarding withholding on periodic and nonperiodic pension plan payments has increased from $10 to $100 per failure.
  • The IRS penalty for failure to file a Form 8822-B (to register a change in plan name or plan administrator name/address) will increase from $1 per day (up to $1,000) to $10 per day (up to $10,000).
  • The IRS penalty for failure to timely file and pay the prohibited transaction excise tax reported on Form 5330 (used to report and pay the prohibited transaction excise tax related to employee benefit plans) was increased from the lesser of $330 or 100 percent of the amount due to $400 or 100 percent of the amount due.

BDO Insight

These increases affect IRS penalties only and have no effect on the much higher DOL penalties. For example, the maximum DOL penalty for failure to timely file a Form 5500 is currently $2,233 (with no maximum). The IRS and DOL have amnesty programs that can reduce late filing penalties significantly. BDO can help employers obtain relief through those programs and with mitigating potential penalty risks. Because correction through an amnesty program generally cannot be started once the employer has been notified of an examination, submitting a filing under those programs is advisable as soon as possible if errors occurred.


Penalty-free (not tax free) withdrawals for child birth or adoption. Usually, in-service withdrawals from a DC plan before age 59 ½ are subject to a 10-percent early withdrawal penalty, unless an exception applies. Withdrawals that are “eligible rollover distributions” are also subject to mandatory 20-percent federal income tax withholding. But for distributions made after December 31, 2019, the SECURE Act creates a new exception to the early withdrawal penalty and mandatory withholding rule for participants who take withdrawals from DC plans of up to $5,000 within one year after the birth of the participant’s child (or after the adoption is finalized) that is used for expenses related to the birth or adoption. Plans may allow such distributions to be repaid with after-tax dollars at any time — essentially allowing retirement plan participants to restore the full amount of the distribution to their plan accounts. So, if a participant withdrew $5,000 as a qualified birth or adoption expense, he or she could recontribute the full $5,000 back into the plan (even years later), even though the participant paid income tax on the distribution. For more on these rules, please see our previous tax alert on SECURE Act issues for individuals.


BDO Insight

The $5,000 limit is per individual. So, a married couple may each separately receive a $5,000 qualified birth or adoption distribution from an eligible retirement plan.
Employers should consider whether to offer these special distributions. Plan amendments and updates to forms and communications may be needed if the distributions are allowed.


Retirement plan disaster relief. Congress finally provided special retirement plan disaster relief for the 2018 California wildfires and other major disasters that occurred between January 1, 2018, and February 18, 2020. This relief is similar to relief provided for 2016 and 2017 hurricanes and California wildfires, but is not an extension of (or additional relief) for those earlier disasters. For more on the these rules, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.
Pooled employer DC plans. For plan years after December 31, 2020, the SECURE Act provides new rules that will allow unrelated employers with no common interest to participate in a “pooled employer plan” (PEP). PEPs would be limited to DC plans that satisfy certain ERISA fiduciary and registration requirements. A PEP must be sponsored by a “pooled plan provider” (PPP), like a financial services company, TPA, insurance company, record keeper, or similar entity (and PPPs will be subject to a $1 million bond). The PPP must serve as the plan’s ERISA plan administrator and named fiduciary and will have other duties, such as ensuring that all parties are properly licensed and bonded (beyond just “handling funds,” which is required for ERISA bonds). The SECURE Act clarifies that an employer who adopts a PEP will be acting as an ERISA fiduciary in deciding to join the PEP and will be remain responsible for monitoring the PPP and other plan fiduciaries. The adopting employer will remain the PEP’s investment fiduciary unless the PEP delegates investment management duties to someone else.

PEPs will be treated as a single ERISA plan, which means the plans will have a single plan document, one Form 5500 filing and a single independent plan audit. However, PEPs are not required to be audited until they either cover 1,000 participants or any adopting employer has more than 100 participants. SECURE continues the multiple employer plan (MEP) requirement that the Form 5500 must include a list of adopting employers and show the percentage of current year contributions and plan accounts for adopting employer’s participants.

A MEP is a plan (that is not a collectively bargained plan) maintained by two or more unrelated employers. Historically, DOL rules permitted only “closed” MEPs, where the participating employers shared a common interest. In 2019, the DOL expanded that rule to allow “association retirement plans” (ARPs), allowing looser affiliations to satisfy the common interest requirement. But ARPs were not true “open” MEPs. Similarly, the IRS recently proposed regulations that would provide some relief from the “one bad apple” rule. Under that rule, if just one participating employer failed to satisfy any of the many tax-qualified plan rules, the entire MEP could be disqualified. The SECURE Act goes further than both the DOL and IRS relief, since it will allow unrelated small employers with no common interest to participate in PEPs and will not disqualify the entire PEP if one participating employer fails a qualification requirement.


BDO Insights

  • Small to mid-size employers who either do not have a workplace retirement plan or who currently maintain their own DC plan but who are frustrated by the burden of running the plan may want to keep an eye on how PEPs develop, since PEPs may provide the same (or similar) benefits, rights and features at reduced cost and also reduce the employer’s potential ERISA liability exposure. It is likely that many PEP offerings are being prepared to launch effective January 1, 2021, and beyond. The SECURE Act directs the IRS to issue model PEP documents.
  • Employers who currently participate in a state-run automatic IRA program (such as CalSavers, OregonSaves, Illinois Secure Choice, etc.) may want to consider whether joining a PEP may increase retirement savings.
  • PEPs will clearly allocate responsibility between the pooled plan provider and the adopting employers, which the employer community and retirement plan industry have been requesting for many years.
  • The SECURE Act creates a new form of plan — PEPs, which do not apply to ARPs or “open” or “closed” MEPs, including professional employer organization (PEO) MEPs. Existing MEPs will not be considered PEPs unless they have a PPP, elect to be a PEP and satisfy all other requirements. Guidance on whether (and how) an existing MEP could be converted into a PEP would be helpful.
  • The SECURE Act allows PEPs to use electronic disclosures to participating employers and participants, which will simplify plan administration and reduce costs.

Combined Form 5500s for DC Plans. Effective for plan years beginning after December 31, 2021, DC plans can file a consolidated Form 5500 if all the plans have the same trustee, named fiduciary, plan administrator, plan year and investment options.


BDO Insight

Small employers should watch this development, which may streamline their Form 5500 filing requirements. An employer does not need to participate in a PEP to be able to file a single Form 5500 for multiple plans. But the DOL and IRS will need to issue guidance and a consolidated Form 5500 no later than January 1, 2022, since the SECURE Act merely says that members of a “group of plans” can file a consolidated Form 5500. It appears that the consolidated reporting is not meant to apply only to controlled groups or affiliated service groups. Rather, it appears intended to cover unrelated employers or even PEOs, as a form of MEP/PEP (for reporting purposes only, not for plan document or operation purposes).

Nondiscrimination testing relief for closed DB plans. The SECURE Act included long-awaited, permanent nondiscrimination testing relief for DB plans that are closed to new participants. The relief applies to plans that were closed as of April 5, 2017, or that have been in operation but have not made any increases to the coverage or value of benefits for the closed class for five years before the freeze can now meet nondiscrimination, minimum coverage, and minimum participation rules by cross-testing the benefits with the employer's DC plans. For more on the these rules, please see our previous tax alert on immediate actions for plan sponsors under the SECURE Act.

Lower in-service withdrawal ages for certain plans. The SECURE Act provides that defined benefit plans (including hybrids like cash balance plans) and 457(b) plans can now allow in-service withdrawals at age 59 ½.


BDO Insights

  • Although lowering the age for in-service distributions seems contrary to the trend of keeping retirement savings in the retirement system, it was enacted to enable so-called “phased retirement” where full-time employees switch to part-time or make other arrangements with their employer to continue working as an independent contractor.
  • The Pension Protection Act of 2006 lowered in-service distributions from DB plans to age 62. The SECURE Act takes that one step further and reduces the in-service distribution age even lower to age 59 ½.
  • Lowering the age for in-service distributions is an optional (not mandatory) plan design change that will likely require a plan amendment.

403(b) plan terminations. The SECURE Act directs the IRS to issue guidance by June 20, 2020 (within six months after enactment), providing that individual 403(b) custodial accounts may be distributed in-kind to a participant or beneficiary when the 403(b) plan terminates. The guidance will be retroactively effective for tax years beginning after December 31, 2008.


BDO Insights

  • This change in the law means that terminated 403(b) custodial accounts will be treated the same as terminated 403(b) annuities (in other words, a 403(b) plan is allowed to distribute individual custodial accounts to participants and those accounts can continue to be tax-free until amounts are withdrawn from those accounts).
  • In Revenue Ruling 2011-17, the IRS clarified that a terminating 403(b) plan may consider an annuity contract to be distributed (in-kind) upon the establishment of a fully paid individual annuity contract to the plan participant. Such individual annuity contracts would hold the benefit until properly distributed. But the Revenue Ruling did not afford the same treatment to 403(b)(7) custodial accounts, so the SECURE Act addresses that issue.
  • The retroactive effective date syncs up with other important IRS 403(b) plan guidance, including final regulations that require a written plan document effective for tax years beginning after December 31, 2008.

Changes for individuals. Self-employed individuals may want to review our other SECURE Act tax alert, which provides an overview of the most significant changes for individuals.



Many of the SECURE Act retirement plan changes in the law apply to both large and small employers, including for-profit and non-profit employers. Some of the changes are especially helpful to small employers. Almost all tax-qualified retirement plans will need to be reviewed for possible amendments and operational changes to reflect the SECURE Act. While further guidance on many of the SECURE Act provisions is needed, employers should review their plan documents and systems in the meantime to determine what, if any, amendments will need to be made, what operations need to be changed, and what systems or processes should be updated. Employers may want to consult with BDO on how to address the SECURE Act to take advantage of new opportunities and minimize the impact of unfavorable changes.


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