By John Markley
As part of the Reconciliation Act signed on December 20, 2019, the SECURE Act became law! Many are describing the SECURE Act as the most significant retirement plan legislation in 13 years from the date of the Pension Protection Act. However, the Pension Protection Act of 2006 primarily impacted Defined Benefit Plans, so we would suggest that the time frame between major retirement plan legislation is even longer. The SECURE Act provisions are wide ranging and difficult to fit into one article, so let’s look at the Act from the viewpoint of a current Plan Sponsor and then an employer who is considering the implementation of a 401(k) Plan.
Current Plan Sponsor
The Act was intended to encourage employers without a Plan to establish a 401(k) Plan. However, there are major provisions for employers who already have a 401(k) Plan. Those provisions are (in the order that the provision is included in the SECURE Act):
- Auto escalation maximum increased from 10% to 15%
- Enhanced methods to pass the 401(k) non-discrimination test –First, for Plans that satisfy the safe harbor requirements via a Non-Elective Safe Harbor contribution, a safe harbor notice will no longer be required. Also, an employer will have flexibility to wait until November 30 (for a calendar year plan) to declare that they will be making a Non-Elective Safe Harbor contribution of at least 3% of compensation and longer if the employer is willing to make a Non-Elective Safe Harbor contribution of at least 4%of compensation.
- A Plan that implements Automatic Enrollment will be eligible fora $500 tax credit for 3 years.
- 401(k) loans through credit cards will no longer be permitted
- Lifetime income (annuity) options will have portability to be transferred outside of a 401(k) Plan
- “Permanent” part time employees (work less than 1,000 hours)will be required to be included in the 401(k) Plan
- Long term part-time employees must be included for elective deferral purposes only in a 401(k) Plan as long as they work 3 consecutive 12-month periods with at least 500 hours in each period
- Distributions from a 401(k) Plan for birth or adoption will be penalty free
- The beginning date for Minimum Required Distributions will be age 72 instead of age 70 ½
- 401(k) Employee statements will be required to illustrate a lifetime equivalent benefit at least annually
- There will be a fiduciary safe harbor for employers that include an annuity option in their 401(k) Plan
- The penalties for late filing of IRS Form 5500 will increase.
Employers Implementing a Plan in 2020 and Later
The SECURE Act is intended to encourage employers without a Plan currently to implement a 401(k) Plan. The incentives are many, following are a few highlights:
- Multiple Employer Plans (MEPs) are now expanded to include “Open” MEPs. Open MEPs, now referred to as Pooled Employer Plans or PEPs, can combine 401(k) Plans of different employers into a single Plan. Open means that the employers do not need to be in the same industry or in a specific geographic area. In a separate provision, the SECURE Act clarifies that a single IRS Form 5500 can be filed for a PEP.
- Tax credits for implementing a 401(k) Plan are increased.Tax credits for implementing a Plan can be as much as$5,000 for each of the first three years to cover 50% of implementation and administrative costs.
- The due date for implementing a Plan for a specific year is extended from the end of the year to the tax due date, with extensions, for filing the tax return for the employer. To be effective in 2019, a calendar year employer needed to have implemented a Plan by December 31, 2019. With the SECURE Act, an employer could implement a Plan by September 15, 2021, the extended tax return due date, to be effective for 2020.
As the IRS develops regulations, details will be forthcoming. We hope that this article helps employers understand the magnitude of the SECURE Act.
For Advisors that want to learn how to navigate the SECURE Act, be sure to join our SECURE Act webinar on January 23, 2020 at 1 PM EST.