I know that you’re all excited to hear the nitty-gritty details of the Setting Every Community Up for Retirement Act or SECURE Act, and that’s why you’ve found yourself here, reading this. What I wanted to do was summarize and explain as much and as little as possible, and give you a place that you could come back to and reference throughout this year and onward.
I will list what is changing relative to the 401(k) industry. There are many other aspects of the SECURE Act that affect multiple industries, and so I want to keep it specific. If you want to look over the SECURE Act yourself, you can find a copy here.
Main Takeways of the SECURE Act
- Gives employer tax credit for costs related to setting up a 401(k) plan. This lasts three years from startup.
- Having auto-enrollment can further increase an employer’s tax credit.
- Qualified Automatic Contribution Arrangement (QACA) can auto-increase beyond 10% (up to 15%).
- Part-time employees that normally would never meet statutory eligibility requirements now have a way that they can enter the plan without being kept out (3 consecutive years of 500 hours is the key).
- Pooled Employer Plans or PEPs can come out into the sunlight. No longer does the similar employer type requirement have to be in place to group employers into a multiple employer plan. There are requirements on this (you’ll have to read it to find out though).
- RMD age is being moved to 72 from 70 1/2.
- Employers are encouraged to have an annuity provision in the retirement plan without the added liability pressure if such an annuity provider were to fail.
- “Bad Apple” rule removed for MEPs (and PEPs).
- “Stretch” IRAs are gone.
- 529 accounts can be used to help repay up to $10,000 in student loan debt.
Safe Harbor Auto-Enrollment Increase from 10% to 15%
The Safe Harbor Auto-Enrollment feature, also known as the Qualified Automatic Contribution Arrangement (QACA) gets an allowance for employers to increase beyond 10% all the way to 15%. This is big for retirement savings, but might not make some employees happy. Remember, auto-enrollment has an opt out election, and the point is to pay attention to your retirement savings!
Example: If you have an employee auto-enrolled and you increase their rate of deferrals by 1% each year until 10% (because it was the previous cap), you can now change this to cap at 15%. In other words, if Bob was auto-enrolled at 6% in 2009, and his deferral increased by 1% each year, he would be capped at 10% by 2013. With this change you can amend your plan document to increase that cap to 15%, and Bob (if he didn’t opt out) could have additional increases each year of 1% until 2025.
Safe Harbor Non-Elective Provision and Notice
You can now amend a plan anytime during the year to add a Safe Harbor Non-Elective provision and you don’t have to send out a Safe Harbor Notice. Hooray! If you add the provision less than 30 days before the end of the plan year, then the minimum employer contribution, which is normally 3%, must be 4%. Essentially, this will cost you more if you put off making the change. You can also amend to add the Safe Harbor Non-Elective if “the plan is amended no later than the last day for distributing excess contributions for the plan year.”
This change was meant to simplify the Safe Harbor Non-Elective provision. As the Safe Harbor Non-Elective is an employer contribution to all eligible participants (whether participating or not) and it is a percentage of annual compensation, it makes sense to remove some of the “red tape” with sending notices and allowing employers to add this without waiting a whole year.
Increase Tax Credit for Small Business Startup Costs
Previously there was some limitation to what a small business could write off in terms of sponsoring a retirement plan. This allows small businesses to save even more with an increase to the credit that can be claimed. The flat dollar amount calculation on savings is the greater of “(1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000.” You can apply this credit each year for up to three years.
This means you can save up to $5,000 (see previously mentioned calculation) in tax credits for a retirement plan. In other words, there is no better time than now to start up a 401(k) plan!
Auto-Enrollment Tax Credit
Looks like tax credits are raining from above! In addition to the increased tax credit for startup costs, if you have an auto-enrollment provision in your retirement plan you can claim a tax credit of up to $500. This doesn’t just apply to startup retirement plans either, if you have an existing 401(k) plan and you add auto-enrollment, this credit is available to you.
Part-Time Eligibility Change (500 hours, 3 consecutive years)
Normally the statutory requirement of one-year, 1,000 hours would have to be met before participation could start in the retirement plan. This change means that even an employee that never worked the 1,000 hours in a 12-month time span, could still be eligible to join the retirement plan if at least 500 hours were worked each year in three consecutive years.
The plan sponsor does have the option to exclude employees from participation if the latter requirement isn’t met (500 hours each year in three consecutive years) without being penalized with nondiscrimination and coverage rules and from the application of Top Heavy.
Pooled Employer Plan (PEP)
Some may be familiar with an “Open MEP,” and some may not. The Pooled Employer Plan or PEP is essentially a replacement for the Open MEP through this legislation’s clarification. The PEP did exist before, but there were some limitations. Originally, there would have to be a relationship or commonality between the employers to join together as a group and start a multiple employer plan. An Open MEP was something set up to allow those differing employers to group together for investment savings and to consolidate certain services, but there wasn’t the one Form 5500 filing.
With the PEP you can file one Form 5500 and utilize one document (similar to a “closed MEP”). Grouping together companies into a PEP requires that there is someone designated as the administrator role, such as a 3(16) administrator to act as a fiduciary over the plan. Additionally, those employers that are participating would be protected from what is termed as the “bad apple rule.” In other words, if there is a compliance-related issue, such as late payroll submissions, it wouldn’t affect the whole PEP.
Stay tuned on this one as further details will be provided by the IRS and DOL. This is effective after December 31, 2020.
“Bad Apple” Rule Removed
This rule is all in the name. If a multiple employer plan (MEP) or pooled employer plan (PEP) has one particular employer in the plan that is a “bad apple” and has compliance issues that would normally cause disqualification on the plan level, it now only affects that employer specifically. I would caution to say that this would need to be pretty cut-and-dry.
For example, if you had an employer that constantly submitted payrolls late and contributions were never timely, then with the “bad apple” rule removed, the correction and issue would be with that specific employer and not the whole MEP or PEP.
Increase on RMD Age
No longer do the 70 1/2 year olds have to worry themselves about the required minimum distribution (RMD) (as long as they turn 70 1/2 after December 31, 2019). The age has been increased to 72 years of age for RMDs.
529 Expanded Use
The 529 account can be used to cover up to $10,000 in qualified student loan repayments, private elementary school, secondary school, or religious schools.
Removal of “Stretch” IRA
I don’t know if you remember the discussion about MItt Romney’s loaded IRA, and the confusion on how he could have over a hundred million in an IRA. Well, the SECURE Act has closed that “loophole.” The “Stretch” part of the IRA means essentially that withdrawals from beneficiaries from an inherited IRA can no longer be put off for decades.
Now most beneficiaries must be required to withdraw from the IRA 10 years after the IRA holder’s death.
There are exempt beneficiaries from this rule, and those are the following: spouse (surviving), chronically ill, those no more than ten years younger than the IRA holder, and minor children. Grandchildren are not included. If the criteria is no longer met for these exempt beneficiaries, well, then they are subject to the 10-year rule.
Penalty-Free Withdrawals for Birth or Adoption
This one is straightforward enough. If you withdraw funds from your retirement plan for “qualified birth or adoption” you won’t have to pay that pesky early withdrawal penalty (10%). This is up to an aggregated $5,000 amount and within a year from child birth or adoption.
Group Plan Form 5500 Reporting Consolidation
The IRS and DOL will allow consolidation on a group of plans, in other words only one Form 5500 instead of multiple. Certain criteria must be met for this, which include the following: same investment options, same fiduciary/administrator, same trustee, same plan year, and that they are all defined contribution plans.
This would be effective for plans starting after December 31, 2021.
Removal of Age Limit on Traditional IRA Contributions
Individuals can continue to contribute to a traditional IRA regardless of whether they are age 70 1/2 or 97. In other words, the SECURE Act removed the age restrictions on contributions into traditional IRAs.
Allowance of Plan Adoption After the Plan Year End
No more year-end rush to start a 401(k) plan! Now you can start a 401(k) plan for the prior year as long as it’s before your employer tax filings are completed. This is for a traditional startup 401(k) plan and not for Safe Harbor Match plans. The best way this applies to the small business owner is if you wanted to start a 401(k) plan and allocate a profit-sharing contribution relative to the prior year, you could do it without worrying about the previous December 31st deadline.
Lifetime Income Disclosure
This is a new requirement that participants in a defined contribution plan receive at least once in a 12-month time frame, which would illustrate the monthly payout with the current account balance in relation to lifetime income streams. This would include a qualified joint and survivor annuity for the participant and the participant’s spouse, and a single life annuity. The Secretary of Labor has been directed to provide a model disclosure, and at that time would clarify this requirement.
Portability of Lifetime Income Option
This allows participants to have a trustee-to-trustee transfer of lifetime income investments or distributions of lifetime income investments into a qualified retirement plan or IRA in “the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan.
This is to help retain the lifetime income investments and effectively prevent the surrender charges and fees.
Safe Harbor Lifetime Income Provider
If a plan sponsor decides to include an annuity product in their defined contribution plan, they are considered to have met safe harbor fiduciary duties if the following criteria is met with the insurer: the search for the insurer was thorough and analytical, the financial capability of the insurer is reviewed and confirmed satisfactorily under state insurance laws, the objective is the same, all costs comparison analysis is performed of the benefits offered, and the product features along with administration services are done under contract.
If this criteria is met, the plan sponsor is not liable for losses whether incurred through distribution of the benefit, or because the insurer is unable to satisfy any obligations under the established contract.
Increased Penalties for Filing Failures
In an effort to encourage accurate and timely filing, penalties have increased from lesser of $400 or 100% of the tax due. The Form 5500 filing increases to $250 a day, not to exceed $150,000. If a registration statement hasn’t been filed, it would bring a penalty of $2 per participant a day, but would not exceed $10,000. If there is no filing of a required notification of change, the penalty is $2 per day, but not to exceed $5,000 per failure.
If the required withholding notice isn’t provided, the penalty is $100 per failure, but would not exceed $50,000 including all failures during the calendar year.
Repeal of Affordable Care Act Taxes
The bill includes a full repeal of the health insurer tax (HIT), Cadillac tax, and the medical device tax.
Ultimately, there will be updates to this new law, and this is only a summary of some of the key provisions. There is quite a bit to unravel and understand. My hope is to give you an idea of the good and the bad.
More importantly, this new legislation focuses on the benefits found in the retirement plan, and allows small businesses a better opportunity to sponsor a 401(k) plan, while giving more people the ability to save for retirement.
If you are interested in sponsoring a low-cost 401(k) plan that adheres to the established retirement rules and laws, I suggest looking at 401go.com. Not only can you save a tremendous amount on 401(k) plan fees, but now with the SECURE Act you can also get a tax credit to boot!
