The Setting Every Community Up for Retirement Enhancement (SECURE) Act signed into law by President Trump in December 2019 contains several provisions that impact qualified retirement plans. Below are the most significant changes that will impact employers and plan sponsors.
Increase in Tax Incentives for Starting a Plan
If your business does not already maintain a 401(k) or profit sharing plan, the SECURE Act includes incentives for you to start a plan in 2020. The tax credit available to small businesses for adopting a qualified plan has increased to $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan up to a $5,000 annual maximum. This credit applies for up to three years. A non-highly compensated employee is generally someone who owns 5% or less of the business either directly or indirectly and had gross compensation less than $125,000 in 2019. This credit is still limited to 50% of the qualifying start-up costs. Qualifying costs include expenses incurred for establishing or administering the plan, including retirement-related education of the employees.
Tax Credit for Automatic Enrollment
If the newly adopted plan includes an automatic enrollment feature, there is an additional credit of $500 available for tax years beginning after December 31, 2019. This credit is available for three tax years. Employers that already have a plan in place can add automatic enrollment and receive the same credit.
Extension of Time to Adopt a Plan
Effective for taxable years beginning after December 31, 2019, employers are now able to adopt a qualified retirement plan after the close of their taxable year, but must adopt prior to the filing due date, including extensions. Employers that adopt by the filing due date are able to treat the plan as in effect for the prior taxable year.
Prior to the SECURE Act, an employer had the ability to exclude part-time employees as long as it was stated in the plan’s legal documents that part-time employees were to be excluded and the part-time employee had never completed the statutory eligibility requirements under the Internal Revenue Code. The statutory requirements are attaining the age of 21 and completing of one year of service which includes 1,000 hours during that year.
Effective for plan years beginning after December 31, 2020, employers will be required to offer part-time employees that have been credited with at least 500 hours of service in three consecutive 12-month periods and are at least age 21 by the end of the last 12-month period, the opportunity to participate in the elective deferral, 401(k), portion of the plan. The 12-month determination periods will begin after December 31, 2020. Employers are not required to make non-elective or matching contributions for these employees even if the employer is providing those contributions to other employees.
Impact on Required Minimum Distributions (RMDs)
The SECURE Act increased the age for required minimum distributions from 70 ½ to 72 for individuals turning 70 ½ after 2019.
Automatic Enrollment Safe Harbor Increase
The 10% cap for the automatic enrollment safe harbor has been increased to 15% for plan years beginning after December 31, 2019.
Changes to Safe Harbor 401(k) Rules
Plans that utilize the safe harbor provisions found in code section 401(k)(12) provide their highly compensated employees the ability to maximize their 401(k) contributions to the limits set by the IRS instead of being subject to limitations on their 401(k) contributions as a result of lack of participation from the non-highly compensated employees. The 401(k) limit for 2020 is $19,500 if under 50 with a catch-up of $6,500 for those 50 and above on December 31, 2020. A safe harbor plan requires a fully vested employer contribution to non-highly compensated employees in the form of a minimum match or non-elective contribution. Historically, the employer was required to adopt the safe harbor provisions in their plan document and provide a notice to the eligible employees at least 30 days prior to the beginning of the plan year.
Effective for plan years beginning after December 31, 2019, employers can adopt the safe harbor non-elective provision as late as the last day of the plan year following the year that the provision will be applicable. If the amendment is executed within 30 days of the plan year close or in the following plan year, then the minimum required non-elective contribution is 4% of eligible plan compensation for all eligible employees. If the amendment is adopted during the plan year prior to 30 days from the last day of the plan year, the required contribution is only 3% of eligible plan compensation for all eligible employees. This amendment does not apply to safe harbor matching contributions. Going forward the 30-day notice requirement only applies to safe harbor matching contributions.
Additional Changes Incorporated in the SECURE Act
- Permitting penalty-free withdrawals from a qualified retirement plan and IRAs for the birth or adoption of a child;
- Requiring consolidated filings of Form 5500 for similar plans;
- Revising requirements for multiple employer plans to make it easier for small businesses to offer such plans to their employees by allowing otherwise completely unrelated employers to join in the same plan; and
- Requiring beneficiaries of IRAs and qualified plans to withdraw all money from inherited accounts within 10 years.
The SECURE Act is intended to make it easier for employees to save for their retirement. These provisions will make retirement plans more accessible to all employees.
Please let us know if you are interested in discussing any of the items listed above, or if you have any other qualified retirement plan issues or concerns that require assistance.