SECURE Act Noncompliance Comes with Penalties
SECURE Act Noncompliance can result in Penalties for Plan sponsors. Passed in late December 2019, the SECURE Act is designed to help more American workers achieve financial security in retirement. As such, this landmark legislation contains several provisions that are beneficial to 401(k) plan sponsors and employees.
However, plan sponsors need to be careful, as the SECURE Act also contains several “noncompliance traps” that come with hefty penalties for failing to meet certain filing and notification requirements, according to an article penned for 401kSpecialist by Laurie C. Wieder, PPC, Vice President with Virginia-based Alliant Wealth Advisors’ Qualified Plans Division. Specifically, 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.
One such report is the Form 5500, a form that must be filed annually with the IRS. 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 31, and with an extension,
October 15. Under the SECURE Act noncompliance becomes a lot 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 gotten steeper as well. For example, plans 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.
The penalties for late filing of participant registrations and plan changes have also increased ten-fold. The fines per participant for late registration statements are now $10 (they used to be $1), and the maximum fine for any plan year is $50,000 — an increase from $5,000 previously. Tardy plan change reports carry daily fines of $10 to a maximum of $10,000 (from a $1 daily penalty and $1,000 maximum penalty).
Another requirement plan sponsors must comply with is providing withholding notices, commonly 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 timely comes with a $100 penalty for each failure, and a maximum $50,000 annual penalty for all failures within a plan year. These again reflect a ten-fold increase in the penalties, from $10 per failure and a maximum plan year penalty of $5,000.
Keep in mind, these are just the IRS penalties plan sponsors could potentially face under the SECURE Act. The Department of Labor also has the authority to assess penalties. The fine for a late filing of the Form 5500, for example, has a maximum daily rate that’s adjusted for inflation each year. As of January 15, 2020, it is $2,233.
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.