The SECURE Act contains several requirements and optional provisions that 401(k) plan sponsors will need to consider and implement.  The following describes provisions of the Act that will require plan amendments when and if adopted.

Penalty Free Distribution in Cases of Birth or Adoption.   The Act permits a plan to provide a $5,000 distribution to a participant within one year following a birth or adoption of a child.  No early distribution penalty applies.  In cases of adoption, any child up to age 18 or who is physically or mentally incapable of self-support is considered an “eligible adoptee.”  The Act allows for repayment of the distribution. This optional provision of the Act is now effective.

Required Beginning Date Increased to Age 72.  The Internal Revenue Code prohibits a plan participant from indefinitely deferring receipt of plan distributions (and corresponding taxable income).  For those who attain age 70½ in 2019 or earlier, the Code requires a participant to receive minimum distributions on the later of the date the individual retires or April 1 of the following year.  Five percent owners are not able to defer distributions until retirement.  Effective for participants who attain age 70½ on or after January 1, 2020, the required beginning date age is raised to 72.

Modification of Beneficiary Distribution Timing Rules.  Prior to January 1, 2020 a death benefit beneficiary could stretch benefit payments over their lifetime in order to defer taxable income for as long as possible. Now, a death benefit must generally be completely distributed within 10 years of the participant’s death. Exceptions include spouses, disabled or chronically ill beneficiaries, minor children until the age of 18 and beneficiaries not more than 10 years younger than the participant.  This provision will require a plan amendment.

Required Participation for Part-Time Employees.  A 401(k) plan will be required to allow any employee who has attained 21 years of age and worked at least 500 hours for three consecutive years to participate in the plan.  These employees can be excluded from non-discrimination, coverage and top-heavy testing.  The required participation only applies to elective deferrals, so there will be no requirement to provide these employees with matching or profit sharing contributions. The provision is effective January 1, 2021 for calendar year plans, but no period of employment before January 1, 2021 will count towards participation eligibility.

The Act does not require formal plan amendments until December 31, 2022, at the earliest, for calendar year plans, as long as the plan is administered in accordance with applicable changes prior to that date. It is anticipated that the IRS will issue regulations related to the foregoing and all other provisions of the Act.