Defined Benefit Plan Provisions of the SECURE Act

On December 20, as part of the Further Consolidated Appropriations Act, President Trump signed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) into law. It is the most substantial piece of retirement plan legislation enacted since the Pension Protection Act of 2006 (PPA). The Act aims to improve retirement security through expanded workplace plan coverage, protections for older, longer service workers, reduced employer administrative burdens, and various other provisions.

Most provisions of the SECURE ACT impact defined contribution (DC) plans, such as 401(k) plans. However, there are some very important provisions that apply particularly to defined benefit (DB) plans and others that apply to DB plans because they affect all retirement plans. Below is an overview of some of the more important provisions impacting DB plans that were included in the SECURE Act and sister legislation.

Testing Relief for Frozen Plans

One of the most anticipated and most important changes for DB plans is the testing relief granted for frozen plans. Frozen plans come in two varieties: (1) a “soft” freeze where participation was closed to future employees after a certain date, but existing participants continued to accrue benefits (also referred to as a “closed plan”) and (2) a “hard” freeze where benefit accruals were ceased for all participants.

As the population in a plan that freezes participation dwindles over time, the concentration of highly compensated employees covered under the plan can become much higher than that of the employer’s overall workforce. Complying with IRS coverage and nondiscrimination requirements often required aggregation with the employer’s DC plan, which in turn often required a higher level of contributions for employees (“minimum gateway allocation”) that employers were either unwilling or unable to provide. Furthermore, minimum participation requirements meant that any qualified DB plan had to benefit at least 50 employees (or 40% of employees for smaller employers), which became problematic and forced many employers to hard freeze their closed plans.

Limited temporary relief to nondiscrimination rules was granted in 2013. While it was extended for the years thereafter, the pension industry clamored for permanent relief including relief from minimum participation requirements, which had been lacking from the temporary relief.

The SECURE Act provides permanent limited relief to both nondiscrimination and minimum participation requirements effective as of the date of enactment. However, employers have the option to retroactively apply it to plan years beginning after 2013.

It is important to note that this relief is not a “free pass” exemption for coverage; nondiscrimination requirements, such as testing must still be performed and satisfied. This relief is a modification to the testing rules which will enable closed plans to satisfy the requirements and protect and continue benefits for older, longer service employees.

Nondiscrimination

• A closed DB plan that must be aggregated with a DC plan to satisfy coverage and, therefore, nondiscrimination, may test on the basis of benefits (i.e., “cross-test” the DC plan) without having to provide the minimum gateway allocation. This temporary relief is now permanent.
• In addition to aggregating and cross-testing DC non-elective (e.g., safe harbor and profit sharing) contributions, matching, 403(b), and ESOP contributions may now be included. These portions are generally otherwise required to be disaggregated for all coverage and nondiscrimination testing. Furthermore, if matching contributions are aggregated for such testing, then elective deferrals must also be aggregated.
• A plan qualifies for this relief if the plan provides benefits to a closed class of participants, and:
  • the plan satisfied coverage and nondiscrimination for the plan year of closure and the next 2 plan years without relief;
  • any subsequent amendment to change the closed class or benefits provided thereto does not discriminate significantly in favor of highly compensated employees*; and
  • the plan was closed before April 5, 2017 or the plan was in effect for at least 5 years prior to closing and there was no substantial increase in the coverage or value of benefits, rights, or features during the 5-year period preceding the closure date.
• When plans are aggregated for coverage and nondiscrimination, benefits, rights, or features must also be nondiscriminatory. This requirement will be deemed satisfied if:
  • the plan satisfied benefits, rights, or features nondiscrimination requirements for the plan year of closure and the 2 succeeding plan years;
  • any subsequent amendment to change a benefit, right, or feature does not discriminate significantly in favor of highly compensated employees*; and
  • the plan was closed before April 5, 2017 or the plan was in effect for at least 5 years prior to closing and there was no substantial increase in the coverage or value of benefits, rights, or features during the 5-year period preceding the closure date.
• The above provisions (*) appear to leave open the option to amend a plan that was hard frozen before April 5, 2017 to provide accruals to the previous closed class of participants provided such amendment does not significantly discriminate in favor of highly compensated employees.
• In a related provision applicable to DC plans, similar modified nondiscrimination relief applies to such plans that provide DB replacement contributions that are designed to make up for frozen or reduced DB accruals for a closed class of participants.

Minimum Participation

• A closed or hard frozen DB plan will be deemed to satisfy minimum participation if:
  • it was amended to provide future benefit accruals to a closed class of participants or to ceased all benefit accruals;
  • it satisfied minimum participation as of the date of closure or hard freeze; and
  • it had not substantially increased the coverage or value of benefits for the 5-year period preceding the freeze date, or the plan must have been frozen before April 5, 2017.

Minimum Distributions

All plans, including DB plans, are subject to Required Minimum Distribution rules (RMDs). Under these rules, plans are required to begin distributions no later than the April 1st of the plan year following the later of the plan year in which the participant attains age 70½ or retires, except that more than 5% owners must commence whether or not they are retired.

The SECURE Act pushes back the applicable age to 72 effective for participants who attain age 70½ after December 31, 2019. IMPORTANT, employers should not lose sight of the fact that participants who attained age 70½ during 2019 or retired in 2019 after already having attained age 70½ still have a required beginning date of April 1, 2020.

Employers may presumably amend their plan to require commencement at age 70½, but should note that such distributions would not be considered RMDs. This provision would be relevant for plans that offer lump sums, as tax withholding rules and rollover eligibility differ for distributions that are/are not RMDs.

Employers should also note that although the SECURE Act changed the RMD rules on post-death distributions from DC plans (and IRAs); the new requirements do not apply to DB plans.

Employers should be aware that information regarding the date at which RMDs begin is often included in benefit distribution forms that are provided to participants who are considering retirement. Thus, it will be important to review and update those forms, as applicable. In addition, please note that, as of the date of this communication, information related to the change in RMD has not yet been updated on the IRS website and references to such have not been updated in the “Special Tax Notice” required under IRC 402(f) for lump sum distributions.

In-Service Distributions

Included in the Appropriations Act, along with the SECURE Act, was the Bipartisan American Miners Act of 2019 (BAMA). Although SECURE was a tough act to follow with respect to retirement industry impact, BAMA lowered the permissible in-service distribution age in DB plans from the PPA-enacted age of 62 to 59½, providing some uniformity with in-service 401(k) rules and penalty-free IRA withdrawals. This revenue raising provision also applies to governmental 457(b) plans and helps pay for the retired coal miners bail-out provided by BAMA.

New Plan Adoption

Effective for plans adopted for tax years beginning after December 31, 2019, employers (including self-employed employers) may adopt new retirement plans up to their tax return due date, including extensions. This provision is particularly important to small employers, self-employed individuals, and their accountants and financial advisers.

Also, a change to the rules for DC 401(k) safe harbor non-elective plan designs, eliminating the advance notice requirement and expanding implementation timing, will greatly enhance the ability of small employers to add cash balance defined benefit plans to their retirement programs. Note, however, that the rules regarding safe harbor matching arrangements have not changed.

Other Miscellaneous DB Provisions

There are other miscellaneous provisions that affect a very limited population of DB plans:

• alternative minimum funding standards for frozen community newspaper plans
• modification to PBGC premiums for cooperative and small employer charity (CSEC) plans

Amendments

Plan amendments will generally be required to be adopted by the last day of the first plan year that begins after December 31, 2021, which is December 31, 2022 for calendar year plans.

Some of the more important provisions impacting DB plans that were included in the SECURE Act and sister legislation generally take effect on January 1, 2020, unless otherwise noted. If you have any questions regarding these or other provisions and how they may apply to your particular circumstances, please contact your BPAS team.

Ken Prell is Vice President and Chief Learning Officer with BPAS Actuarial & Pension Services