SECURE Act noncompliance can come with penalties for plan sponsors. Passed in late December 2019, the SECURE Act was designed to help American workers in achieving financial security in retirement. The resulting landmark legislation contains several provisions beneficial to 401(k) plan sponsors and employees.
However, plan sponsors must be careful. The SECURE Act contains several “noncompliance traps” that come with substantial penalties for failing to meet certain filing and notification requirements. This is according to an article from 401kSpecialist by Laurie C. Wieder, Vice President with Virginia-based Alliant Wealth Advisors’ Qualified Plans Division. As of January 1, 2020, the penalties for filing certain reports and registrations, and not providing certain notifications are significantly higher – thanks to SECURE Act noncompliance provisions.
Form 5500, a form that must be filed annually with the IRS comes with upgraded requirements. It pertains to plan contributions and assets, investments and plan operations, and it’s due on the last day of the seventh month after the end of a plan year. It’s possible to file an extension, then file the Form 5500 two and a half months later. The way that would work for a plan with a calendar plan year that ends 12/31 is the Form 5500 would be due July 31st, and with an extension, October 15th.
Under the SECURE Act, noncompliance has become more expensive. Plan sponsors who file late and don’t file an extension, or who miss the extension deadline face a $250 per-day penalty vs. the previous $25 per-day penalty. In addition, the SECURE Act noncompliance maximum penalty has gone up ten-fold, from $15,000 to $150,000.
The penalties for failing to report other plan changes related to participants and operations have become more expensive as well. As an example, plans that are subject to vesting schedules must register information about separated participants with deferred vesting benefits using Form 8955-SSA. These are due at the same time the Form 5500 is filed. In addition, employers are required to notify the IRS of plan changes within 60 days of their occurrence. Two such instances include changes related to parties responsible for the plan or a change in the plan sponsor’s address.
Another requirement plan sponsors must comply with is on the topic of withholding notices, known as 402(f) notices, to participants who are seeking distributions from their retirement plan accounts. These notices explain to participants the benefit of rolling over their distributions and related tax consequences, and early withdrawal penalties should the participant decide not to roll over the distribution.
The notice must be provided no less than 30 days and no more than 180 days before the distribution is to be made. However, participants can elect to waive the 30-day period. Under the SECURE Act, failure to provide a withholding notice in a timely manner comes with a $100 penalty for each failure, and a maximum $50,000 annual penalty for all failures within a plan year. These reflect a huge increase in the penalties, from $10 per failure and a maximum plan year penalty of $5,000.
It has never been more important for plan sponsors to hire knowledgeable service providers to avoid a SECURE Act noncompliance mistake! Plan sponsors need to partner with knowledgeable service providers who can help ensure compliance when it comes to necessary plan forms, registrations, and notifications. However, as Ms. Wieder cautioned, plan sponsors must make sure their service providers — whether new or existing — understand the new rules, and sponsors should carefully consider the guidance they receive related to filing necessary reports and forms, distribution required notices, and understanding all requirements and deadlines.
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