For many Texas companies a 401(k), 403(b) or other retirement plan is a benefit that employees and recruits have come to expect. When combined with an employer match option, which many of these plans feature, it creates a powerful retirement savings tool. A focused savings plan along with an employer match permits employees to build savings tax-free for years. Although available, it appears many Americans are not taking advantage resulting in inadequate retirement savings. This was confirmed when Transamerica published a retirement survey that found the median household saving is $50,000. To encourage retirement savings, the current administration recently signed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. The purpose is to reduce barriers to participation and incentivize employers who do not already offer a plan to do so. However, there are also several changes plan sponsors need to be aware of including; expanded tax credits, additional disclosures, expanded participation rules, and even an increase in non-compliance penalties. Below is our summary of key SECURE Act changes.
Part-Time Employee Inclusion.
Under prior regulations, part-time workers could only be excluded if they had not worked 1,000 hours in a 12-month period. In order to make retirement savings more accessible to these workers, the Act now permits employees that have completed 500 hours of service in the last three years (and are over 21) the option to participate. It’s important to note these participants can be excluded from safe harbor contributions, nondiscrimination, and top-heavy testing. This change is effective for plan years beginning after December 31, 2020.
In-plan annuities can provide participants with life consistent income during retirement, but many have failed to offer this investment option because of concern about lawsuits should the provider face future issues. To alleviate concerns, the Act has created a safe harbor election employer can take when selecting a group annuity. Under safe harbor rules, employers will be protected from liability if the vendor they select meets established criteria. For the prior seven years, a provider needed to have filed financial statement audits and been licensed with the state insurance commissioner to offer guaranteed retirement income contracts. This change was effective on the date of enactment.
Multiple Employer Plans.
Under prior regulations, multiple employers could come together to create a multiple employer plan (MEP). This combination allowed various employers to share administrative costs and tasks. However, many have been apprehensive to participate because if one employer failed to meet plan requirements then penalties could be imposed on all MEP participants. To overcome the “one bad apple” rule, the Act shields employers from penalties and fines when a participating employer fails to meet established criteria. These changes are effective for plan years beginning after December 31, 2020.
Expanded Tax Incentives.
There were also changes to the tax incentives for those electing to start a plan or adopt an automatic enrollment feature. The Act has increased the tax credit for plan start-up costs from $500 to a maximum of $5,000. It also offers a tax credit of $500 for up to three years for plans that have an automatic enrollment feature. This change is effective for tax years after December 31, 2019.
Plan Loan Limitations.
The Act has eliminated the option for loan distribution to occur through a savings plan credit or other payment card type. This is designed to make it more difficult to use plan loans for everyday or small purchases. The change was effective on the date of enactment.
There is now the opportunity for new parents to make a penalty-free withdrawal of up to $5,000 to cover expenses related to birth or adoption. Note that the withdrawal must be taken within a year of the event. This change is effective for tax years after December 31, 2019.
New Lifetime Income Disclosure.
To make it easy for participants to understand their lifetime income benefits, the Act requires plan sponsors to make an annual lifetime income disclosure. This should include an estimate of monthly payments that would be received if their total balance was used to purchase an annuity. The Secretary of Labor has been directed to create a model disclosure for plan sponsors to follow, however, it has not yet been released. Compliance is required 12 months after the Secretary releases the model, so no compliance timeframe exists yet.
Non-Compliance Penalty Increases.
There has also been a sharp increase to non-compliance penalties, which includes both filing and notification issues. Failing to file a Form 5500 may result in a penalty of $250 per day, not to exceed $150,000 per plan year. Failing to file Form 8955-SSA may result in a penalty of $10 per participant, per day, not to exceed $50,000. Finally, failure to provide income tax withholding notices may result in a penalty of $100 for each failure, not to exceed $50,000 for the calendar year. The Act sharply increased the limit on these penalties, so it’s important for plan sponsors to make timely filings to avoid surprises. These changes are effective for calendars years after December 31, 2019.
Although focused on expanding retirement saving opportunities, there are several modifications that require the attention of plan sponsors. There are many new changes that will impact plan operation and create the need to adopt new plan amendments. Given the expansive nature of the changes, it’s essential to review your situation with a qualified advisor. If you have questions about the SECURE Act or need assistance with a 401(k), or another plan audit, we can help. For additional information, contact Natasha Erskine our Employee Benefit Plan Practice Leader or click here to contact us.