Aegis Retirement Partners is dedicated to keeping our clients up-to-speed on all of the latest SECURE Act news. Here’s the latest:
The SECURE ACT (Setting Every Community Up for Retirement Enhancement) was signed into law on December 20, 2019. Recent CARES Act legislation passed to deliver relief to those impacted by Covid-19 may have upstaged the SECURE Act, but it is important to be aware of the new provisions.
Automatic Enrollment Deferral Limits Increase
Automatic enrollment (AE) plans were first introduced to plan sponsors in the Pension Protection Act (PPA) legislation passed back in 2006. The popularity and utilization of automatic enrollment among 401(k) Plans continues to grow, and resulted in positive improvements in plan usage.
Under PPA, the maximum automatic enrollment deferral escalation was 10%. The SECURE Act increases the cap to 15% of eligible compensation. Plan Sponsors may take advantage of the new “maximum” cap for plan years beginning after 12/31/19.
Safe Harbor Adoption Timing Changes
A safe harbor plan is a great solution for Plan Sponsors looking to eliminate problems caused by testing failures. One challenge, however, has been to identify potential testing issues early, because safe harbor plans are required to be adopted at least 30 days prior to plan year-end. For testing problems identified after the end of a year, there has been no relief, until now!
To eliminate testing problems, The SECURE Act legislation permits Plan Sponsors to adopt a 4% nonelective safe harbor contribution as late as 12 months after the plan year ends. It is important to clarify that this is not a safe harbor “match,” the 4% contribution must be made to all eligible plan participants.
Changes to Minimum Required Distributions (MRD)
The SECURE Act changed the age for MRD to Age 72. This regulation goes into effect on 01/01/2020. Participant’s under age 70.5 prior to 01/01/2020 will not be required to take their minimum required distribution until they attain 72 years of age.
If a participant is age 70.5 or older prior to 01/01/2020, and has already taken a MRD’s in a prior year, they are required to continue taking minimum required distributions (2020 CARES Act exemption not-withstanding). Participant’s born after 07/01/1949 are subject to the new age 72 regulation.
Upcoming as of 01/01/2021– Long-term part-time employees will have a coverage requirement
This provision of the SECURE Act legislation is meant to provide some retirement plan access to long-term part-time employees who might otherwise be completely excluded from participation by the plan’s eligibility rules.
Beginning in 2021, employees who complete at least 500 hours of service for three consecutive eligibility (calendar year) periods are called “long-term part-time employees.” Long-term part-time employees may not be excluded from making employee deferrals. While they must be permitted to make deferrals, they may be required to meet traditional eligibility rules in order to qualify for any employer contributions.
If long-term part-time employees are permitted to receive employer contributions, separate vesting rules will apply using a 500-hour rule, instead of the traditional 1,000-hour requirement, which will require additional administrative & recordkeeping support for tracking.
Since the initial tracking period for long-term part-time employees begins in 2021, the first coverage period will not happen until 2024 (third consecutive eligibility period).
Withdrawal for birth or adoption of a child
The SECURE Act established a new form of distribution after 12/31/2019 for expenses related to Birth or Adoption of a Child. The distribution must be taken within 1 year of the birth/finalization of an adoption. The maximum distribution amount is $5,000. This new provision applies to Defined Contribution, 401(k), 403(b), 457(b), Gov’t 457, and IRA’s. The distribution would be exempt from the 10% excise tax penalty traditionally enforced on premature distributions.
Adoption of a Qualified plan up to tax return timeline change
The SECURE Act increases the length of time Employers may adopt a qualified plan and still deduct contributions, up to the due date of the employer’s tax return, including extensions. Contributions are limited to employer contributions only, (no employee deferrals) prior to the adoption date of the plan.
Tax benefits for startups
The SECURE Act increased the Small Employer Startup Credit to entice more Small Employers (less than 100 employees) to sponsor a qualified retirement plan. The new credit is the lesser of 50% of startup costs, the greater of $500, or the lesser of $250 times the number of Non-Highly Compensated Employees (NHCE), or $5,000. The calculation is complicated, but here is an example:
A startup company with 30 Non-Highly Compensated Employees and startup costs of $12,000
Step 1. 30 NHCE’s X $250 = $7,500
Step 2. Lesser of Step 1 or $5,000 = $5,000
Step 3. Greater of Step 2 or $500 = $5,000
Step 4. Lesser of Step 3 or 50% of start-up costs = $5000
Please consult with your tax professional for additional details.
The IRS has increased its penalties for late filings.
- Form 5500- increased from $25/day to $250/day, capped at $150,000
- Form 8955-SSA- increased from $1/day to $10/day per participant, capped at $50,000
- Withholding notice – increased from $1/day to $10/day per participant, capped at $50,000
The SECURE ACT clearly has a significant impact on the retirement world, and has broadened several plan provisions to add flexibility for plan sponsors.
Aegis Retirement Partners strives to provide the best customer service and the strongest plan design to our clients. If you are interested in more information on the SECURE Act, and what the new regulations will mean for you, please reach out to your dedicated account manager.