On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act into law. The SECURE Act includes a variety of changes affecting retirement plans — changes that will have a significant impact on those retiring now or well into the future. To help you navigate the new law, we’ve provided some key highlights below.
Auto Enrollment Tax Credit
The SECURE Act provides small businesses with 100 or fewer employees in the preceding tax year a tax credit of $500 per year for the first three years — but only if a plan includes automatic enrollment provisions. The tax credit may also be claimed by employers of existing plans who add automatic enrollment provisions.
Qualified Automatic Contribution Arrangement (QACA)
For automatic enrollment plans that offer a Qualified Automatic Contribution Arrangement (QACA), the automatic escalation cap in the first year is 10% of compensation. The percentage increases to 15% after the first year.
Safe harbor plans
Safe harbor 401(k) plans reward employees with higher retirement contributions. These plans allow owners and highly compensated employees to increase their deferrals while offering a safe harbor employer contribution to eligible plan participants. By providing safe harbor contributions, a plan may be exempt from nondiscrimination testing.
For plan years beginning after December 31, 2019, plans that offer a safe harbor non-elective contribution will no longer be required to provide an annual safe harbor notice to plan participants. However, plan participants must be allowed to make or change their elections at least once per year. For plans offering a safe harbor matching contribution, the annual notices requirement is still in effect and must be distributed to all eligible plan participants at least 30 days before the start of the plan year.
Plan sponsors of existing 401(k) plans without safe harbor provisions may now add a 3% safe harbor non-elective contribution to their plan if they amend their plan 30 days prior to the end of the plan year. A plan sponsor may also add a safe harbor non-elective contribution to their plan after the plan year has started; however, the amendment must be made at least 30 days before the end of the next plan year and the safe harbor non-elective contribution increases to 4% of compensation.
In short, these new timing rules will make it easier for plan sponsors to elect safe harbor provisions and will provide another option to address failed nondiscrimination testing.
Minimum distribution rules
Current law requires that Required Minimum Distributions (RMDs) begin on April 1 following the year the participant reaches age 70 ½. The SECURE Act raises this starting age to 72. This rule is effective for participants turning age 70 ½ after December 31, 2019.
The new law also changes the post-death RMD rules, requiring that distributions be completed by the end of the 10th calendar year after death.
Penalty-free withdrawals for birth or adoption of a child
Under the SECURE Act, participants may take a penalty-free distribution up to $5,000 (there is no 10% IRS penalty, but income taxes apply) in the event of a birth or adoption of a child. The distribution must be made during the one-year period beginning on the date on which the child is born or the adoption is finalized.
Increased IRS penalties for Forms 5500 and 8955-SSA
With the passage of the SECURE Act, the penalties have significantly increased for failing to timely file a Form 5500. The penalty can be assessed up to $250 per day up to a maximum of $150,000 per late filing. The penalty for filing Form 8955-SSA can be assessed up to a daily penalty of $10 per participant, not to exceed $50,000 for failure to file.
Changes that will go into effect beginning in 2021
Effective January 1, 2021, 401(k) plans will be required to adopt new eligibility rules for long-term, part-time workers. If part-time workers have not satisfied the plan’s eligibility rules, the employee must be permitted to participate if they complete three consecutive 12-month periods of service and have been credited with at least 500 hours of service in each of those periods. Employer contributions, including top-heavy contributions, would not be required until the employee satisfies the plan’s normal eligibility requirements.
For plan years beginning after December 31, 2020, the SECURE Act allows unrelated small employers to band together in open 401(k) multiple-employer plans (MEPs) — also referred to as pooled employer plans (PEPs) — which reduce the cost and administrative duties that each employer would incur alone.
How we can help
Changes in legislation mean changes in strategy, especially when it comes to planning your retirement. At CLA, we take current laws into account to help you achieve your long-term financial goals.