By Ashley Stilwell
The Setting Every Community Up for Retirement Enhancement Act (SECURE Act), passed on December 20, 2019, contains several changes that directly impact 401(k) plan sponsors. The SECURE Act is aimed at preventing older Americans from outliving their assets and offers them greater access to tax-advantaged accounts. Below are some key provisions included in the SECURE Act along with details on how these provisions affect 401(k) plan sponsors.
Pooled Employer Plans (PEP)/Multiple Employer Plans (MEP)
This provision gives smaller, unrelated businesses the opportunity to join together in order to be treated as a single plan for ERISA purposes. The benefits include lower fees and liability protection for employers. In order to be considered as a PEP/MEP, a plan must be deemed as a defined contribution plan and be sponsored by a Pooled Plan Provider.
Increase in Auto Enrollment Safe Harbor
The SECURE Act increases the maximum automatic contribution deferral rate from 10% to 15% for 401(k) plans with a Qualified Automatic Contribution Arrangement (QACA) which includes a special safe harbor provision that exempts the 401(k) plan from annual discrimination tests. If a new participant is enrolled in the plan year beginning after December 31, 2019 the deferral rate remains at 10% for the participant’s first year.
Simplification of Safe Harbor Rules
The SECURE Act eliminates the safe harbor notice requirement and maintains the requirement to allow employees to make or change an election at least one time a year. It also provides for amendments to a nonelective status at any time before the 30th day before the close of the plan year. Exceptions to this include if an amendment provides nonelective contributions for at least 4% of compensation for all eligible employees for that plan year and the plan is amended no later than the last day for distributing excess contributions for the plan year by the close of the following plan year.
This required provision allows part-time employees who do not meet the 1,000-hour requirement a chance to be included in the 401(k) plan. For plan entry, part-time employees must work 500 hours each year for three consecutive years, starting in 2020. Employers who are 401(k) plan sponsors can elect to exclude the part-time employees meeting the 500-hour requirement from the nondiscrimination, coverage, and top-heavy rules.
Childbirth and Adoption Expenses
Participants are allowed to take a $5,000 distribution for eligible childbirth and adoption expenses within one year of birth or adoption finalization via this required provision. The distribution is not subject to the 10% early withdrawal penalty and 401(k) plan participants can recontribute the distribution amount back to the plan.
Required Minimum Distributions (RMDs)
The Act increases the age limit for RMDs from 70 ½ to 72. This change does not apply to participants who had already reached age 70 ½ by December 31, 2019.
Consolidated Form 5500
This offers a group of related plans the opportunity to file a consolidated Form 5500 to reduce administrative costs. In order to use the consolidated form, you must be a defined contribution plan with the same trustee, named fiduciary, administrator, plan year, and investment options.
Increase in Penalties
If a 401(k) plan sponsor fails to file Form 5500, they may incur a greater penalty, as the IRS penalty increased from $25 per day (with a maximum of $15,000) to $250 per day (with a maximum of $150,000). The ERISA penalty for failure to file Form 5500 remains unchanged at $2,200 per day. Failure to file Form 8955-SSA (registration statement) increased from $1 per participant per day (with a maximum of $5,000) to $10 per participant per day (with a maximum of $50,000).
All of the SECURE Act provisions listed above, except for Pooled Employer Plans/Multiple Employer Plans are effective for 401(k) plan years beginning after December 31, 2019. Changes related to Pooled Employer Plans/Multiple Employer Plans are effective for plan years beginning after December 31, 2020.
401(k) plan sponsors must amend their plans by the first plan year beginning on or after January 1, 2022.
If you have additional questions on how The SECURE Act’s changes impact you as a 401(k) plan sponsor, please contact your Untracht Early advisor for more details.