9 ways the SECURE Act impacts employer 401(k) plans and what companies need to do NOW
The Setting Every Community Up for Retirement Enhancement Act of 2019, commonly known as the SECURE Act and passed in December, has the laudable goal of ensuring Americans don’t outlive their assets.
From expanding who can participate in company 401(k) plans to allowing penalty-free distributions to cover the birth of a child or adoption, the new law has a lot of new requirements that impact employers.
The following are nine main changes under the SECURE Act and actions companies need to take now:
1. Requiring 401(k) plans to offer participation to long-term, part-time employees
Currently, employers may exclude part-time employees who work less than 1,000 hours per year from plan participation. The Act now makes certain part-time employees eligible to participate in saving for retirement.
Beginning in 2021, the new law allows eligibility for employees who have worked at least 500 hours per year for at least three consecutive plan years. For example, in 2024, after three years of qualifying service, eligible part-time employees must be allowed to make elective deferrals to the plan. Qualifying part-time employees may be excluded from employer contributions and plans may impose age restrictions on eligibility.
Employers will also have a dual eligibility requirement under which an employee must complete one year of service under the 1,000-hour rule or complete 500 hours of service annually for three consecutive years. The part-time employee rule does not apply to union employees.
What to do now: Employers should start developing a mechanism for tracking hours worked by part-time employees so that their systems are in place beginning January 1, 2021, noting that service before 2021 does not count toward eligibility.
This provision will have significant impacts to most employer retirement plans and raises a lot of questions, such as how to address employees that roll in and out of part-time status, how to handle controlled groups of employees entirely excluded from participation, and other questions that will remain unanswered until the IRS provides additional guidance.
2. Allowing employers to establish a new 401(k) plan AFTER the end of a tax year
Under current law, an employer must adopt a 401(k) plan by the end of the employer’s taxable year for the plan to be effective for that year. The Act encourages the adoption of new retirement plans by allowing an employer to adopt a new retirement plan for a taxable year as late as the due date for filing of its tax return for that year, including extensions.
What to do now: This change is effective for taxable years beginning after December 31, 2019, so, unfortunately, employers interested in establishing a 401(k) plan still for 2019 will not yet be able to benefit, but this will become an excellent option for employers beginning in 2020.
3. Increasing the age for required minimum distributions (RMD) from 70.5 to 72
The age to take RMD’s has increased from 70.5 to 72 for individuals who turn 70.5 after December 31, 2019. As the workforce continues to delay retirement, this helps many employees keep saving for retirement and delay some additional tax on these distributions. Under the Act, the first distribution will be required on April 1 of the following year after an employee turns 72.
What you need to do now: (1) Identify all participants with balances in the plan that were born on or after July 1, 1949, who will now start delayed minimum distributions beginning on April 1, 2022. Participants born on or before June 30, 1949, who turn 70 ½ in 2019, will still be required to start RMD’s under the old rules on April 1, 2020. (2) Talk to your plan document provider; this change will require you to make a retroactive plan amendment to your plan document.
4. Permitting penalty-free distributions for the birth or adoption of a child
The Act allows employees to take out up to $5,000 (married couples can each pull $5,000) from their retirement accounts within a year of the birth or finalized adoption of a child without paying the usual 10 percent early-withdrawal penalty. The funds are still subject to income tax unless they are repaid. The distribution will not be treated as a qualified birth or adoption distribution unless the participant includes the name, age, and Taxpayer Identification Number (TIN) of the child or eligible adoptee on the participant’s income tax return for the taxable year.
What to do now: Plan participants can take advantage of this new law for any distributions after Dec. 31, 2019, with a retroactive plan document amendment. Employers will want to talk to their service providers for guidance. Employers will also need to develop educational materials for employees and establish internal processes for how to request and maintain adequate documentation to support birth or adoption distributions.
The Act did not address how the IRS Form 1099-R reporting requirements would be applied to a qualified birth or adoption distribution, so employers will also need to identify what these requirements are before Dec. 31, 2020, to ensure proper compliance.
5. Option to increase automatic contribution caps for employees
The existing law promotes increased participation by allowing employers to automatically enroll employees in their plan at a default salary deferral percentage and increase employees’ deferral percentages on an annual basis if an escalation feature is selected. Currently, employers can increase the deferral percentage annually to a maximum of 10 percent; the Act raises the maximum to 15 percent.
What to do now: This new law provision is optional and requires employers to adopt a plan document amendment to utilize it. Employers interested in this provision should contact their third-party administrators for more information on amending the plan document.
6. Enhancements to employer tax credits
- Retirement plan start-up tax credit: The Act provides new incentives for any small business (generally with 100 or fewer employees) starting a qualified retirement plan. The law now offers a three-year tax credit for 50% of annual plan startup and administrative costs. The credit is limited to the greater of $500 or $250 for each eligible non-highly compensated employee up to $5,000 per year for plan years beginning after Dec. 31, 2019, and applies to SEP, SIMPLE, 401(k) and profit-sharing type plans.
- Small employer automatic enrollment tax credit: The Act added a new $500 per year tax credit for three years to any employer adding an automatic contribution enrollment feature to its retirement plan beginning after Dec. 31, 2019. Any sponsor of a new or existing 401(k) or SIMPLE IRA plan is eligible for the credit.
What to do now: Employers looking to take advantage of these new provisions will need to make inquiries of their tax accountants for more information.
7. New lifetime income (annuity) options and disclosures for participants
Among the disclosures plan participants are currently required to receive is a statement (at least annually) detailing the balances of assets held within their retirement accounts. The Act now also requires employers to provide an annual “lifetime income disclosure statement” to plan participants. This statement should show the monthly lifetime benefit that the balance of their accounts will provide if used to purchase a single life or qualified joint survivor annuity.
The new law also makes it easier for 401(k) plan sponsors to offer annuities and other “lifetime income” options to plan participants by taking away some of the associated legal risks. These annuities are now portable, so a participant can roll over a 401(k) annuity to another 401(k) or IRA and avoid surrender charges and fees if the current plan no longer allows that investment option.
What to do now: Wait. These provisions are not effective until the U.S. Department of Labor (DOL) provides models with assumptions and explanations of how these statements should be reported and calculated to limit employers from fiduciary risk. Employers will incur no fiduciary liability by using these new DOL models, which should be out within a year. Employers that offer annuities, or are interested in providing annuities, should discuss their plan’s investment portfolio with the plan’s investment advisor for more information.
8. Changes to non-elective safe harbor plans
The Act encourages employers to create non-elective safe harbor plans by relaxing some of the past administrative and operational requirements. A non-elective safe harbor 401(k) plan is one that provides for a fully vested employer contribution of at least 3 percent of each participant’s compensation annually regardless of whether the participant makes elective deferrals. Beginning Jan. 1, 2020, the law:
- Eliminates the safe harbor notice requirement for non-elective safe harbor 401(k) plans. However, the notice requirement continues to apply to 401(k) plans that meet safe harbor requirements through matching contributions.
- Permits a 401(k) plan to be amended retroactively and become a non-elective safe harbor plan if the amendment is adopted up to 30 days before that plan year ends.
- Permits amending a 401(k) plan retroactively so it becomes a non-elective safe harbor plan for a plan year (even if the amendment does not occur before the 30th day before the close of that plan year). However, the non-elective contribution must be at least 4 percent of participant compensation, and plan adoption happens within 12 months after that plan year ends.
What to do now: Employers interested in adding safe-harbor provisions should evaluate options with their service providers.
9. Increased IRS penalties for failure to file retirement plan returns
The act modifies the penalties for retirement plans in several areas:
- The penalty for failure to timely file IRS Form 5500 “Annual Return/Report of Employee Benefit Plan” increases to $250/day up to $150,000 per year (up from $25 per day to a max of $15,000 per year).
- The penalty for failure to file Form 8955-SSA “Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits” increases to $10 per participant per day up to $50,000 (up from $1 per participant per day to a max of $5,000).
- The penalty for failure to file notification of a change in the status of the plan (such as a change in plan name, a termination of the plan, or a change in name or address of the plan administrator) has increased to $10 for each day the failure that occurs, up to maximum of $10,000 (up from $1/day to a max of $1,000). Notification of a change occurs when the plan sponsor or administrator completes Form 5500, 5500-SF, or 8955-SSA, and, at that time, identifies any changes to the plan on the form.
- Failure to give notice concerning tax withholding to recipients of distributions now results in a penalty of $100 for each failed notice up to $50,000 per year (up from $10 per failed notice to $5,000)
What to do now: Companies should ensure its human resources personnel are diligent in meeting plan reporting and disclosure requirements as noncompliance has grown even more costly.
There are additional technical requirements and other provisions of the Act not discussed in this article. We encourage you to consult your tax advisor and plan service providers for more information.
Kimbarley A. Williams, CPA, and Crystal A. Skotedis, CPA, are co-chairs of Boyer & Ritter’s Employee Benefit Plan Services Group and have extensive experience auditing and managing various types of employee benefit plans. Contact Kim or Crystal at 717-761-7210 or firstname.lastname@example.org / email@example.com.