Significant Changes for Employer-Sponsored Plans and IRAs
On December 20, 2019, the President signed into law the Further Consolidated Appropriations Act, 2020, which includes the Setting Every Community Up for Retirement Enhancement (SECURE) Act provisions previously passed by the House in April 2019. This is one of the most comprehensive retirement plan reforms in more than a decade, and this is a brief overview of some highlights. Many of the provisions are effective January 1, 2020.
Congress has attempted to pass major retirement reform legislation for the past few years. The House of Representative initially passed the SECURE Act in May by an almost unanimous vote but then it foundered in the Senate. At the end of the 2019 legislative session, the SECURE Act provisions were included as part of the $1.4 trillion spending bill, which passed by significant margins. The SECURE Act includes numerous changes that will impact both plan sponsors and participants. Changes are intended to incentivize employers—particularly small businesses—to offer retirement plans and promote retirement savings.
New Incentives to Establish or Enhance Employer Plans
Increased Tax Credits. For startup plans, the tax credit for the first three years of the plan is equal to $250 per eligible non-highly compensated employee, subject to a minimum credit of $500 and a maximum of $5,000. Small employers who add automatic enrollment to their plans may also be eligible for an additional $500 tax credit per year for up to three years. These changes are effective for 2020.
Our take: We welcome these tax credits as they encourage small businesses to establish retirement plans to benefit their employees. Additionally, the incentive for adding an automatic enrollment feature is a win-win and we believe it will result in better outcomes and higher account balances for participants.
Deadline to Setup New Plan. An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year. Previously, the deadline was the last day of their business year. This change is effective for 2020.
Our take: This is another welcome change that we believe will result in greater adoption of retirement plans by small businesses. Just like an individual has up until her tax return deadline to establish an IRA effective for the prior year, now businesses will have the same flexibility to establish a qualified retirement plan.
Open Multiple Employer Plans (MEPs). One of the most significant changes is the creation of Pooled Employer Plans (PEPs) that will be treated as a single ERISA plan—often referred to as Open Multiple Employer Plans (MEPs). Currently, where a plan is sponsored by a group of employers that are not under common control, the employers must have certain “commonality” of interests, or the arrangement may be treated as multiple component plans for ERISA purposes. Even though the recent Department of Labor regulation on “Association Retirement Plans” relaxed the commonality requirement significantly, a limited commonality requirement remained nonetheless. As a result, Open MEPs (which are generally offered by service providers and open to any employer who wishes to adopt them) remain subject to potential treatment as multiple ERISA plans. The SECURE Act goes further by abolishing the commonality requirement entirely. There are not a lot of details yet so please stay tuned as further guidance is published. These changes are effective for 2021.
Our take: AdvisorTrust, our affiliated trust company, is ready to serve as a Pooled Plan Provider for these PEPs. Please read more below for why AdvisorTrust is uniquely positioned to serve in this role and take on these responsibilities.
Safe Harbor 401(k) Enhancements. Employers will have more flexibility to add non-elective safe harbor contributions mid-year. An existing 401(k) plan can be amended to add a safe harbor non-elective feature after the plan year has already started, as long as it is effective at least 30 days before the end of the year, and the sponsor makes a 4% contribution (rather than the normal 3%) for that initial year.
The SECURE Act eliminates the notice requirement for safe harbor plans that make non-elective contributions to employees. The automatic deferral cap for plans that rely on the Qualified Automatic Contribution Arrangement (QACA) safe harbor will increase to 15% from 10%. These changes are effective for 2020.
Our take: These enhancements offer significant flexibility and we expect they will be embraced by TPAs and employers alike. This may result in greater adoption of plans with a safe harbor feature, which benefits both highly compensated employees and non-highly compensated employees alike.
Other Changes Affecting Employer Plans
Participation by Less than Full-Time Employees. Employees who have three consecutive 12-month periods of at least 500 hours of service and satisfy the plan’s minimum age requirement must be allowed to make deferral contributions ─ in addition to employees who have fulfilled the general one year of service requirement by working at least 1,000 hours during one 12-month period. This group can be disregarded for nondiscrimination testing. These changes are effective for 2021, but no 12-month period that begins before January 1, 2021 shall be taken into account.
Our take: There are significant questions about the applicability to existing plans and whether they will be grandfathered. We are awaiting additional guidance on this point and expect that before the January 1, 2021 effective date.
Required Minimum Distributions (RMDs). The age at which required minimum distributions must generally begin will be increased to age 72 from age 70 ½. These changes are effective for distributions required in 2020 and later years, for those who reach age 70½ in 2020 or a later year.
Our take: Similar to the change for participation by less than full-time employees, there are significant questions about the applicability to existing participants who have begun RMDs but not yet attained age 72. We are awaiting additional guidance on this point and expect that this year.
Increase in Penalties for Reporting Failures. For Form 5500, the IRS penalty for late filing is increased to $250 per day up to a maximum of $150,000 per late filing. For Form 8955-SSA, the IRS penalty is increased to $10 per participant per day up to a maximum of $50,000 for failure to file. These changes are effective January 1, 2020.
Birth/adoption excise tax exception. Penalty-free retirement plan withdrawals for a birth or adoption. These changes are effective January 1, 2020.
Insurance/annuity safe harbor and portability. An objective fiduciary safe harbor for the selection of a lifetime income provider is being added to encourage employers to offer in-plan annuity options. The SECURE Act also provides for tax-advantaged portability for a lifetime income product from one plan to another or between plans and IRAs to help avoid surrender charges and penalties where the lifetime income product is removed from a particular plan. The safe harbor is effective as of the date of enactment and the portability provisions are effective January 1, 2020.
Lifetime income disclosure. A separate provision also requires participant lifetime income disclosures illustrating the monthly payments if the participant’s account balance was used to provide lifetime income in an annuity. These changes are effective for benefit statements provided more than 12 months after the Department of Labor provides guidance, which must be completed within one year of the date of enactment.
Certain Changes to IRAs
The SECURE Act also repeals the maximum age for IRA contributions (so an individual can make traditional IRA contributions at any age) and eliminates the stretch IRA. As to the latter, non-spouse beneficiaries of inherited IRAs will be required to take their benefits in income on an accelerated basis which can have estate planning implications for individuals and families. These changes are effective January 1, 2020.
Except for PEPs and a few other changes, most provisions of the SECURE Act go into effect on January 1, 2020. In the coming months, TPAs, retirement plan advisors and plan sponsors should consider how the SECURE Act will impact the administration of their plans. There will be much more to come on interpretation of the SECURE Act over the next few months