Congress recently enacted the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which is the first significant retirement-related legislation in more than a dozen years. Affecting employers of all sizes, it brings many changes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some changes, however, may increase the burden on employers. This insight looks at several of the most important developments, many of which took effect January 1, 2020.
Greater access to multiple employer plans
Multiple employer plans (MEPs) allow small and midsized unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan.
Currently, MEPs are generally limited to participating employers that share some commonality—for example, same industry or geographic location or use of the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP.
These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP.
PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the Internal Revenue Service (IRS) are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans.
In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation—such as failing to make contributions to the plan on schedule—by one employer participant could jeopardize the MEP’s tax-qualified status. The law lays out certain requirements that a PEP can satisfy to protect its status in such a situation.
The new law also provides an alternative to MEPs for small employers seeking the economies of scale MEPs provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met.
Looser notice and amendment rules on safe harbor plans
As of January 1, 2020, plan sponsors are no longer required to give plan participants notice of making qualified nonelective contributions of at least 3% to all eligible participants before the beginning of the plan year—that is, contributions an employer makes regardless of whether an employee contributes. The requirement to provide advance notice when making safe harbor matching contributions continues.
Plan sponsors also can amend nonelective safe harbor plans with 3% qualified nonelective contributions at any time up to 30 days before the close of the plan year. The amendment can be made within 30 days of the plan’s year end only if it provides for a qualified nonelective contribution of at least 4%, rather than 3%.
Annuities can help reduce the risk that retirees run out of money before the last years of their lives, when healthcare expenses can spike. But many employers have been reluctant to offer annuities for fear of facing lawsuits alleging breach of fiduciary duty if the annuity providers they selected run into financial problems down the road. The SECURE Act preempts this hurdle by immunizing employers from liability, so long as they choose a provider that meets certain requirements, starting December 20, 2019.
The law, however, also requires employers to include a lifetime income disclosure on plan participants’ benefit statements at least annually. The disclosure will show the estimated monthly payments the participant would receive if the total account balance were used to purchase an annuity for the participant and his or her surviving spouse. Currently, there’s no effective date for this requirement, pending guidance for estimating the payments and developing a model disclosure.
Participation by part-time employees
Employers typically have been allowed to exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in 2021, the SECURE Act generally requires employers to allow employees who have worked at least 1,000 hours in one year (about 20 hours per week), or three consecutive years of at least 500 hours and who are at least age 21 at the end of the three-year period, to participate in the employer defined-contribution retirement plan. Employers can, however, exclude the latter category of part-time employees from testing under the nondiscrimination and coverage rules, as well as from the application of the top-heavy rules.
Expanded tax credits
The SECURE Act establishes a new tax credit of up to $500 per year to offset startup costs for new 401(k) and SIMPLE IRA plans with automatic enrollment, beginning in 2020. This credit is on top of the existing plan startup credit and is available for three years. It’s also available to employers that convert an existing plan to one with automatic enrollment.
The new law also boosts the amount of credit available for small employer pension plan startup costs. (A “small employer” is one with no more than 100 employees.) The new law changes the calculation of the flat-dollar-amount limit on the credit to the greater of 1) $500 or 2) the lesser of $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or $5,000.
Like the automatic enrollment tax credit, it’s available beginning in 2020 and applies for up to three years.
Higher automatic enrollment safe harbor cap
Under current law, employers can automatically enroll employees in a 401(k) plan under a safe harbor. Elective deferrals for an automatic contribution arrangement have been limited to 10% of compensation, though.
The law increases the maximum amount of an employee’s compensation that can be automatically deferred after the employee’s first plan year, from 10% to 15% (the cap for the first year in the plan is 10%). The increase is effective for plan years beginning after December 31, 2019.
Previously, tax-qualified retirement plans other than 401(k) plans had to be adopted by December 31 of the tax year for which they were to take effect. The SECURE Act extends the adoption deadline for a tax year to the due date of the employer’s tax return (including extensions), providing more flexibility to make contributions and reduce tax liabilities.
The SECURE Act increases the penalties for failing to file retirement plan tax returns, as follows:
- The penalty for failing to file a Form 5500 is $250 per day, not to exceed $150,000 (up from $25 per day, with a maximum of $15,000).
- The penalty for failing to file a registration statement (IRS Form 8955-SSA) is $10 per participant per day, not to exceed $50,000 (up from $1 per participant per day, with a maximum of $5,000).
- The penalty for failure to provide a notification of change of certain information (for example, the plan name, sponsor, or administrator) is $10 per day, not to exceed $10,000 (up from $1 per day, with a maximum of $1,000).
- The penalty for failing to provide a required withholding notice is $100 for each failure, not to exceed $50,000 for all failures during any calendar year (up from $10 for each failure, with a maximum of $5,000).
The penalty hikes apply for filings, registrations, and notifications required after December 31, 2019.
Promising, but complicated
These and other changes in the SECURE Act are intended to make it easier and less expensive for employers to offer retirement plans to their employees. (The law also contains a number of significant changes for individuals.) Though promising, be warned: the applicable laws and regulations can prove tricky to navigate. If you have any questions regarding the SECURE Act, or would like assistance with any matter involving tax strategic planning or business advisory, contact a PYA executive below at (800) 270-9629.