How the SECURE Act Impacts Retirement Plans - Part 2: Employer-Provided Plans


Continuing the discussion on the “Setting Every Community Up for Retirement Enhancement” Act (the “SECURE Act”), part of H.R. 1865, this post will elaborate on some of the most important changes made to employer-provided retirement plans. To see how the SECURE Act will impact individual plans, see Part 1.


Revised Requirements for Multiemployer Retirement Plans

Beginning in 2021, the barriers to creating and maintaining a single plan maintained by two or more employers, a multiemployer retirement plan (MEP), will be reduced. For example, the failure of one employer in an MEP to meet plan requirements will not cause all plans to fail—eliminating the “one bad apple” rule. Further, employers no longer have to share a common characteristic to form an MEP but may instead be wholly unrelated.

Small Employer Auto-Enrollment Credit

The SECURE Act creates a new tax credit of up to $500 per year for employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. Employers who convert an existing plan to a plan with automatic enrollment may also obtain the credit. This credit is available for three years and is in addition to an existing plan start-up credit.

Increased Credit for Small Employer Retirement Plan Start-Up Costs

Previously the credit provided to employers starting retirement plans was capped at $500. Now, the credit is the greater of
(1) $500, or (2) the lesser of:
(a) $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
(b) $5,000.

This is in addition to the $500 credit mentioned above for auto-enrollment plans. This credit is available during the first three years of the retirement plan.

Raised Auto-Enrollment Safe Harbor Default Savings Cap

The actual deferral percentage (ADP) test, an annual nondiscrimination test, applies to elective deferrals under 401(k) plans. The ADP test is satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs, one of which is auto-enrollment, and also meets other requirements.

Starting in 2020, the cap on raising payroll contributions under an automatic enrollment safe harbor plan is increased from 10% to 15%, but only for years after the participant’s first deemed election year. For the first deemed election year, the savings cap is 10%. Employees may opt-out of the increase.

Part-Time Employee Participation in 401(k) Plans

Employers are currently permitted to exclude part-time employees (i.e, those working less than 1,000 hours per year) from certain retirement plans offered to full-time employees. However, beginning in 2021, most employers maintaining a 401(k) plan will be required to have a dual eligibility requirement, which is met if an employee completes either one-year-of-service meeting the 1,000-hour rule or three consecutive years of service completing at least 500 hours of service per year. Service completed prior to 2021 will not be considered.

Employers will be permitted to exclude employees who are only eligible because of the new 500-hour rule from testing under the nondiscrimination and coverage rules and from the application of the top-heavy rules.

Required Disclosure of Lifetime Income on Benefit Statements

Though the start date is still to be determined, the rules will require plan participants’ benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure must include an illustration of the monthly payments the participant would receive if the total account balance was used to provide a lifetime income stream, including a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity.

Failure-to-File Penalties Increased

Beginning in 2020, the penalty for failing to file a Form 5500 is increased from $25 per day, not to exceed $15,000 per plan year, to $250 per day, not to exceed $150,000 per plan year.

A taxpayer’s failure to file a registration statement, Form 8955-SSA, now incurs a penalty of $10 per participant per day, not to exceed $50,000, which is up from a daily penalty of $1 per participant, not to exceed $5,000.

Failing to file a required notification of change will now result in a penalty of $10 per day, not to exceed $10,000.

Failing to provide income tax withholding notices results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during the calendar year, which is up from $10 for each failure, not to exceed $5,000.

Simplified Rules Relating to Qualified Non-elective Contributions

The ADP test is satisfied if a 401(k) plan:

  • includes certain minimum matching or non-elective contributions under one of two plan designs (both, a “401(k) safe harbor plan”),
  • meets a notice requirement, and
  • contains certain rights and features.

Under one 401(k) safe harbor plan, the test is met by either satisfying a matching contribution requirement or providing a non-elective contribution to a defined contribution plan. The contribution must be at least 3% of an employee’s compensation for each non-highly compensated employee eligible to participate.

The new rules change the non-elective contribution safe harbor by eliminating the notice requirement. The rules require employers to allow employees to make or change an election at least once per year. However, the rules now permit changes to non-elective status any time before 30 days before the close of the plan year. Any amendments after that time are allowed if the amendment provides (1) a non-elective contribution of at least 4% of compensation for all eligible employees, and (2) the plan is amended no later than the last day for distributing excess contributions for the plan year.

Expanded Portability of Lifetime Income Options

The new rules allow certain retirement plans to make direct trustee-to-trustee transfers of a lifetime income investment or distributions of a qualified plan annuity to another employer-sponsored retirement plan or IRA if the investment is no longer authorized to be held as an investment option under the plan in place.

Loans through Credit Cards Barred

Beginning in 2020, plan loans may no longer be distributed through credit cards or similar arrangements. This was changed to limit the use of plan loans for small or routine purchases.

Modified Nondiscrimination Rules for Closed Pension Plans

The nondiscrimination rules relating to closed pension plans (i.e., those no longer taking new entrants) will now permit existing participants to continue to accrue benefits, thereby protecting longer-service employees.

Flexibility for Employers to Adopt a Retirement Plan

To provide flexibility for employers who are considering adopting a retirement plan, employers can now treat qualified plans adopted after the close of the tax year, but before the due date for filing its tax return (including extensions), as having been adopted as of the last day of the preceding tax year.

Fiduciary Safe Harbor for Selecting Annuity Providers

When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan “fiduciary” and must discharge his or her duties solely in the interests of plan participants and beneficiaries—the “prudence requirement.” As of December 20, 2019, the date of enactment, plan sponsors now have a clear, optional safe harbor to satisfy the prudence requirement in selecting an insurer for a guaranteed retirement income contract. The safe harbor protects the sponsor from liability for any losses to participants or beneficiaries that may result due to the insurer’s future inability to satisfy its financial obligations.

The SECURE Act brought about many other changes, in addition to those mentioned above. If you have any questions about how this may affect you or your business, do not hesitate to call a member of the Tax Practice group.

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