Congress recently passed, and the President signed into law, the SECURE Act. This landmark legislation affects the rules for creating and maintaining employer-provided retirement plans. Whether you currently offer your employees a retirement plan, or are planning to do so, you will want to consider how these new rules may affect your current retirement plan, or your decision to create a new one.
Here is a high-level look at some of the more impactful elements of the SECURE Act:
Unrelated employers are more easily allowed to band together to create a single retirement plan.
A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.
New small employer automatic plan enrollment credit.
Automatic enrollment is shown to increase employee participation leading to higher retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.
Increased credit for small employer pension plan start-up costs.
Starting in 2020, the credit, which applies for up to three years, 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 of the eligible employer who are eligible to participate in the plan or (b)$5,000.
Long-term, part-time employee eligibility
Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. Starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year.
Loosen notice requirements and amendment timing rules to facilitate adoption of non-elective contribution 401(k) safe harbor plans.
The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two plan designs (referred to as a “401(k) safe harbor plan”), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either (1) satisfies a matching contribution requirement, or (2) provides for a non-elective contribution to a defined contribution plan of at least 3% of an employee's compensation on behalf of each non-highly compensated employee who is eligible to participate in the plan.
Starting in 2020, the new rules change the non-elective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement but maintain the requirement to allow employees to make or change an election at least once per year.
Increased penalties for failure-to-file retirement plan returns.
Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns. The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000. The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000. The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.
This is a high-level look at the impact of the new SECURE Act. There are additional nuances that your business may need to explore. If you have any questions, please contact Brandi DiGiorgio.