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As you know, the goal of our nation’s retirement system is to create more opportunities for American workers to save and to make it easier for employers to start and maintain benefit plans. With this in mind, Congress just passed, and the President signed, the SECURE Act. SECURE stands for Setting Every Community Up for Retirement Enhancement.
This is the most comprehensive and far-reaching update to retirement plans in more than a decade and many, but not all, of its features are effective in 2020. Some headlines about the Act cover its introduction of Pooled Employer Plans or PEPs that allow unrelated employers to band together to participate in a single plan. The Act also provides updated guidance for those companies who sponsor and manage multiple employer plans. The details of these are complex and beyond the scope of this chat as we focus on the more immediate impacts your clients and prospects may experience. As always, don’t hesitate to reach out to talk to us about your clients’ needs and questions. We’re here to help. So, let’s get into it.
To encourage more plan startups, the deadline to establish a new 401(k) plan is now extended from the last day of the tax year until the due date of the year’s tax return including extensions. The SECURE Act also expands tax credits in two ways for small businesses:
The first is for starting a new plan. Under the Act, a small business of up to 100 employees, can now claim a tax credit for the first three years of a new plan to offset startup costs of up to $5,000 per year for the first three years. That’s a maximum credit of $15,000 over three years.
There’s an additional $500 tax credit available for small businesses that add an automatic enrollment feature to a new or existing 401(k) plan. The credit is available for each of the first three years the feature is effective.
The Act makes a few welcome changes to the popular 401k safe harbor plan which use a nonelective contribution formula:
- It eliminates the annual safe harbor notice requirement
- It allows a plan to add a 3% safe harbor nonelective contribution any time up to 30 days before the end of the plan year. And it allows a plan to add a safe harbor nonelective contribution after the 30th day before the end of the plan years as long as two conditions are met. One, the amendment to adopt safe harbor 401(k) status is made by the end of the following plan year. And two, the nonelective contribution is at least 4%.
These changes streamline safe harbor plan administration and benefit plan participants.
The SECURE Act makes important changes to distribution rules.
It Increases what’s known as the Required Minimum Distribution or RMD Age from 70½ to 72. This applies to distributions that are made after December 31, 2019 for people who turn 70½ beginning January 1, 2020.
The new rules also allow for distributions of up to $5,000 for expenses related to the birth or adoption of a child to be made without penalty. And, these special distributions are eligible to be repaid to the retirement plan account to help keep a saver on track for long term success.
The Act requires employers to include long-term, part-time workers in defined contribution plans. To be eligible, employees must have at least 500 hours of service each year, for three consecutive years, and be 21 or older. While these employees may now participate, they can be excluded from safe harbor contributions, nondiscrimination and top-heavy requirements. There are also exceptions to this new requirement for collectively bargained plans.
New benefit statements will now need to include a lifetime income estimate that illustrates the monthly payments plan participants could expect to receive in retirement based on their account balance. This estimate must be provided at least annually whether or not the plan includes an annuity distribution option. Translating retirement balances to projected monthly income is widely applauded as an important way to help people plan realistically for their future. This particular change won’t take effect until at least 2021 as the Department of Labor has not yet issued final guidance on the specific requirements of these disclosures.
Not everything in the new Act is a plus for employers. It’s important to note that the government just increased late filing penalties for Form 5500 to $250 per day (not to exceed $150,000.) Also, late filing of Form 8955-SSA is increased to $10 per participant per day, not to exceed $50,000. As always, it's essential that clients help keep plan information is current so that required filings are made timely.
There’s more to the SECURE Act than the key highlights we’ve talked about in this brief overview. Give us a call to talk about your retirement plan practice and how we can help you succeed.