The Setting Every Community Up for Retirement Enhancement (SECURE) Act, signed into law on Dec. 20, 2019 by President Trump, is the most expansive piece of retirement legislation since the Pension Protection Act of 2006. Effective Jan. 1, 2020, the law will have some impact on nearly every retirement plan and participants with numerous provisions intended to increase retirement security, expand plan coverage, encourage retirement savings and decrease plan costs. It offers small businesses tax incentives to set up automatic enrollment in retirement plans for its workers, or allows them to join multiple employer plans, where they can band together with other companies to offer retirement accounts to their employees in the first place.
Here are nine key provisions of the act, along with recommendations and action items for employer consideration.
- Through Pooled Employer Plans (PEPs), completely unrelated small- to- mid-sized employers can pool together to offer defined contribution retirement plans.
Action: For certain employers, a MEP / PEP could reduce administrative burdens associated with sponsoring your own plan and provide a lower cost option by leveraging the buying power of the “pool.” New rules do not go into effect until 2021 and IRS regulations will be crucial in determining whether a PEP is a sensible option for your business.
- 403(b) custodial accounts may be distributed in-kind to participants or beneficiaries in the event of a plan termination.
Action: If you sponsor a 403(b) retirement plan, stay tuned for important updates. The Treasury Department is expected to issue guidance within six months of the enactment of the SECURE Act. The guidance must be retroactively effective for all plan years beginning after Dec. 31, 2008.
- Employers with 401(k) plans relying on the Safe Harbor Non-Elective Contribution option will no longer be required to provide the safe-harbor notice before the beginning of each plan year. If your plan is not a Safe Harbor plan, you can amend it to include the Safe Harbor Non-Elective option any time prior to 30 days before plan year end. If you’re willing to increase your Safe Harbor Non-Elective Contribution from 3% to 4%, your plan can be amended retroactively by the end of the following plan year into a Safe Harbor Non-Elective plan.
Action: If your organization struggles with meeting testing requirements, consider the Safe Harbor Non-Elective (3% fully vested contribution to each eligible employee) as a method to help with nondiscrimination testing requirements. The ability to retroactively amend your plan into a Safe Harbor Non-Elective plan can also benefit organizations who fail the ADP test after the end of the year.
- Employers now have until the due date of their tax return, including extensions, to adopt a retirement plan and treat it as in effect as of close of the year. This applies to taxable years beginning after Dec. 31, 2020.
Action: This change creates a unique opportunity to seize additional tax deductions by retroactively adopting a plan when appropriate. Consult your tax advisor to determine if this option is right for your business.
- The cap for auto-enrollment contributions in retirement plans with Qualified Automatic Contribution Arrangements (QACAs) from 10% of pay to 15% of pay to encourage retirement savings. This is effective for plan years beginning after Dec. 31, 2019.
Action: Work with your retirement plan advisor to evaluate your existing plan design and determine if any changes should be made to auto-enrollment or auto-escalation values. Employees still have the ability to opt out of the contribution or escalation.
- Employers maintaining a 401(k) plan will be required to offer participation in the salary deferral feature to any non-union employee who worked more than 1,000 hours in one year or 500 hours over three consecutive years. This new requirement only applies to the 401(k) feature of the plan.
Action: Evaluate which, if any, of your employees will meet this criteria. Hours worked in periods beginning before Jan. 1, 2021 will not be considered for this feature to allow you time to set up hours tracking processes. Once you determine eligible employees, prepare and distribute appropriate communications to inform them of how and when they can enroll.
- For the first three years that a small employer (100 employees or less) offers a qualified retirement plan, the employer can receive an annual start-up credit of $250 per non-highly compensated employee eligible to participate, up to $5,000. If the plan includes auto-enrollment, an additional credit of up to $500 is available.
Action: If you’re a small business owner and do not sponsor a retirement plan, consider establishing one to take advantage of newly increased tax credits. The credit applies to employers with up to 100 employees over a three-year period beginning after Dec. 31, 2019 and applies to SEP, SIMPLE, 401(k) and profit-sharing plan types.
- The Act expands and makes permanent relief from certain coverage and nondiscrimination rules for defined benefit plans that are closed to new participants or frozen. The broader relief offers more options for compliance and covers more areas of the law, including the 401(a)(26) minimum participation rules.
Action: If you sponsor a frozen or closed defined benefit plan, it is important to work with your actuary to determine how the Act will impact your plan and its compliance over the coming years. The expanded relief is retroactively effective for plan years beginning after Dec. 31, 2013.
- The minimum allowable age for in-service distributions from defined benefit and money-purchase plans is reduced from 62 to 59 ½.
Action: The change to the minimum allowable age for in-service distributions may allow for greater flexibility for phased retirement, and your actuary can help you determine if this is applicable for your organization.
Whether the SECURE Act ends up being a game changer is yet to be seen. However, armed with the knowledge of its key components, employers, and employees alike can be prepared and make adjustments for what lies ahead.
If you have any questions or would like more information on the SECURE Act and how it may affect your plan, please contact us.
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