SECURE Act Changes for Retirement Plan Sponsors
SECURE Act changes could be helpful to many plan sponsors and plan participants. Signed into law in late December 2019, the SECURE Act, short for the Setting Every Community Up for Retirement Enhancement Act, is the most significant piece of retirement-focused legislation passed in more than a decade. With it comes a variety of retirement plan changes designed to help employers who sponsor a tax-qualified retirement plan, or those intending to do so.
Carol Buckmann, founding partner of the New York-based law firm Cohen & Buckmann, recently authored an article highlighting how the new SECURE Act rules impact current and potential 401(k) plan sponsors. Following are points from Ms. Buckmann’s article concerning the SECURE Act:
If you currently offer a 401(k) plan:
- Effective immediately, 401(k) plan participants can no longer take loans from their retirement account by credit card. In addition, existing programs that permit such activity must be sun-set.
- Plan sponsors with safe harbor plans may have additional flexibility. The SECURE Act provides 401(k) plan sponsors more time to decide if they want to adopt a safe harbor plan with nonelective contributions. (Previously, 401(k) plan sponsors who wanted to do so had to send a “maybe notice” to employees. Sponsors could reserve the right to determine if they wanted to have a safe harbor plan for the succeeding plan year. In addition, 401(k) plan sponsors had to make the decision at least three months before the year-end.) Under the SECURE Act, the “maybe notice” requirement is eliminated. Plan sponsors can decide to elect to implement a nonelective safe harbor 401(k) plan mid-year, or even after the end of the plan year. However, if a plan sponsor makes the decision later than 30 days before the end of the plan year, they must make a nonelective contribution of at least 4% of pay, Ms. Buckmann explained. The notice requirements for safe harbor plans with matching contributions did not change under the SECURE Act.
- If your safe harbor plan has automatic enrollment, known as a qualified automatic contribution arrangement (QACA), the maximum auto-enrollment contribution under auto-escalation increases from 10% to 15%.
The above changes are effective for 401(k) plan years beginning on and after January 1, 2020.
- In addition, the SECURE Act permits long-term, part-time employees to participate in 401(k) plans as of 2021. These employees are defined as those who have completed more than 500 hours of service in three consecutive eligibility years. They do not need to include prior service. Part-time employees must be included in eligibility requirements. However, it will not be mandatory for 401(k) plan sponsors to provide employer matching contributions. Part-time employees also are excluded from nondiscrimination testing. Ms. Buckmann cautioned, “This new rule expands access to 401(k) coverage at the expense of complicating plan administration.”
If you don’t currently offer a 401(k) plan but are considering adopting one:
- You have more time to adopt a qualified retirement plan. The current law says that employers who wanted to make deductible contributions for the year had to adopt a qualified plan by the last day of the year. It created confusion because individual retirement accounts (IRAs) can be adopted after the end of the tax year and up to the tax return due date. As of the 2020 tax year, plan sponsors will be able to adopt both qualified plans and IRAs up to their tax return due date. The new provision offers flexibility for employers who are considering offering 401(k) plans. However, it does not permit employees to make retroactive 401(k) plan contributions. Ms. Buckmann notes, the new provision also does not benefit plan sponsors who inadvertently adopted their plans too late in prior plan years.
- Small employers may also receive a higher tax credit for starting a new retirement plan — up from $500 per year to as much as $5,000 per year for three years. The SECURE Act also allows for an annual $500 tax credit for up to three years for small employers who adopt new plans with automatic enrollment.
- By far the biggest change and incentive for small business owners to offer retirement plans brought about by the SECURE Act is the availability of open Multiple Employer Plans, called Pooled Employer Plans (PEPs). PEPs will be available beginning in 2021. According to Ms. Buckmann, PEPs are a significant step in improving small employer retirement plan offerings. In addition, PEPs relieve adopting employers of much — but not all — of their fiduciary duties.
The SECURE Act introduces sweeping changes designed to help improve the retirement readiness and future financial security of tens of millions of Americans. Plan sponsors should continue to monitor these developments closely and respond to changes accordingly, especially those that have become effective immediately, or will go into effect in 2020.