The SECURE Act revisited Pt. 1 - Plan Sponsors

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019. It was the most sweeping change to the retirement industry passage of the Pension Protection Act (PPA) in 2006. Most of the provisions took effect almost immediately on January 1, 2020, leaving plan sponsors scrambling to implement them, while a few others weren’t effective until a year later.

The SECURE Act provides more access to retirement plans for more people, allows participants more options in retirement, and provides small businesses with incentives to offer and additional options to establish new 401(k) plans. With all the provisions now effective, here’s what Plan Sponsors need to know:

  • Increased Tax credits for Small Employers
  • Changes to Auto-enrollment plans
  • Changes to 401(k) safe harbor plans
  • Changes to qualified plan adoption timing
  • Participation by part-time employees
  • Expanded opportunities for 401(k) plans with Pooled Employer Plans (PEPs)
  • Increased filing penalties

Increased Tax credits for Small Employers

Until SECURE, the tax credit available for sponsors to put a new plan in place was $500 per year for three years. Not bad, we’ll take it, and remains the absolute minimum credit still available for new plans, but neither here nor there for most employers considering such a complicated and potentially expensive benefit program. This credit has now been increased up to ten-fold, or $5,000, per year for three years; a healthy improvement! Before you go scrambling to put a plan in place, though, be aware that this credit is based on a couple of factors: 1) The number of non-highly compensated employees (NHCE, basically non-Owners and those making less than $130,000/yr.) who will be covered and, 2) the amount of what’s loosely defined as “startup costs.” The credit for three years is $250 for each covered NHCE and 50% of “startup costs” up to the $5,000 limit plus an extra $500 if the new plan is an auto-enrollment plan. Now that’s more like it.

Changes to Auto-enrollment plans

To encourage additional employee savings, SECURE provides that safe harbor plans that have auto-enrollment can increase the cap on contributions from 10% to 15% of pay beginning with the second year of participation. Employees who don’t want to contribute that much can opt-out of the increase.

Changes to 401(k) safe harbor plans

While most plan sponsors wouldn’t necessarily be aware, SECURE definitely improved the way safe harbor 401(k) plans can be amended and implemented which was sorely needed (and widely celebrated!) in the TPA community. Until SECURE, safe harbor plans were restricted almost completely from adopting any kind of amendment mid-year and new safe harbor plans needed to be in place at least three months before the end of the plan year (October 1 for calendar year plans).

Don’t know about safe harbor plans? Here’s a good place to find out more: Safe Harbor 401k Plans - 10 Questions Answered.

Thanks to SECURE, safe harbor plans may now be amended with confidence. Sure, there’s a flow-chart to be sure the IRS is on board with the amendment, but at least reasonable changes can be made without your TPA needing to warn you about the potential for disaster!

Another big improvement is the opportunity for existing plans to adopt a safe harbor provision mid- or even post-plan year. The primary benefit of the safe harbor provision is that is provides a deemed “pass” on the non-discrimination test for payroll deferral contributions. As is sometimes the case, significant changes to the company demographic such as heavy turnover or the hiring of Owner relatives can surprise Sponsors who haven’t needed a safe harbor provision in the past into realizing they have a testing issue. When corrective distribution of deferrals from key employees or expensive company contributions used to be the only way to cure this issue, Sponsors now have a third option: Adopt a non-elective safe harbor provision as late as the due date of their corporate tax return. This still means an immediately-vested company contribution is required, but it’s limited to 4% of employee compensation whereas the alternative could be much higher. Sponsors who are able to predict this testing issue in advance may adopt the non-elective safe harbor provision as late as 30 days before the end of the plan year and keep the required contribution down to the typical 3% of compensation.

Finally, the mandatory safe harbor notice may also be a thing of the past for Sponsors maintaining a non-elective safe harbor plan- cool! BRI still recommends this notice is issued, however, if your plan is considering making a discretionary match contribution within the framework of the ACP test safe harbor. Plans that fail to issue the safe harbor notice any given year may no longer rely on the deemed pass for the ACP test that might otherwise have been provided by the safe harbor provision. Safe harbor match plans must still provide the annual notice.

Changes to qualified plan adoption timing

Sponsors who realize they would have appreciated a retirement program in the prior year in order to reduce their taxable income formerly only really had the option to retroactively adopt a SEP. SECURE now extends the opportunity to adopt a profit sharing plan, instead! It’s a better program in most cases since it provides more flexibility not only for the eligibility requirement and vesting but also the contribution allocation. Besides, if you always knew you wanted a 401(k) someday, then found yourself putting a SEP in place only to fund it this one time then terminate it and adopt the plan you should have had last year just seems like a dumb exercise. Not sure which way to go? How might a profit sharing plan be better or worse than a SEP? Give us a call and we’d be happy to help you weigh your options!

Participation by part-time employees

Until now, employees frequently had to meet an age and service requirement before they could contribute to their company’s 401(k) plan, as onerous as 1,000 hours of service in a year and age 21. This meant that many part-time employees might never become eligible to participate.

Part of the push of the SECURE Act is to provide more Americans with access to a payroll- deferral option to better prepare for their eventual retirement. In this effort, Congress decided that employees who are age 21 and have at least 500 hours of service each year for three years starting from the 2021 plan year should have access to their Employer’s 401(k) plan. This means, as early as 2024, many employees who have not met the eligibility requirements to participate in their Employer’s plan will have the opportunity to make payroll-deferral contributions. Concerns about impacts to the aforementioned non-discrimination test on deferrals, other negative testing ramifications, or increased benefit requirements need not worry: These employees are still excluded from these tests and are not required to receive matching contributions on their deferrals. How these employees might affect employers on the verge of becoming a “large plan” subject to independent audit and a full Form 5500, though, is still pending direction from the IRS. Stay tuned!

Expanded opportunities for 401(k) plans with Pooled Employer Plans (PEPs)

PEPs are the new kid on the block, created by the SECURE Act effective January 1, 2021. They’re designed to give small employers who would prefer to not maintain a 401(k) of their own an opportunity to band together and get economies of scale by participating in a single, pooled 401(k) – with such items as plan administration, compliance, a single plan document, a single Form 5500, and only one plan audit (for plans with 100+ participants). Issues with plans covering multiple employers, such as what happens when one of the Sponsors fails to meet their funding obligations, have been assuaged somewhat as well. I’m sure this concept will be the stuff of future blog posts as well since this is such a dynamic and interesting subject concerning how retirement plans are structured and maintained in the future!

Increased filing penalties

Penalties for late filings of Form 5500 and other forms and notices are not new. What are new are the increases in penalties under SECURE:

Timely filing of Form 5500 – up to $250 per day, not to exceed $150,000 for a plan year
Failure to file Form 8955-SSA – up to $10 per participant per day, not to exceed $50,000
Failure to provide income tax withholding notices – up to $100 for each failure, not to exceed $50,000 per calendar year

Hey Everybody, let’s not be late on our 5500s, shall we? Sheesh. That said, if you’re late on your filing or didn’t realize you needed to satisfy this requirement until it was too late, give us a call at (916) 922-3200; maximum penalties to fix two or more late returns is only $1,500 plus preparation fees if you follow the right procedure and do it before the IRS tells you to! We’re here to help!