On December 20, 2019, President Trump signed into law the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act), which is the most extensive retirement legislation since the 2006 Pension Protection Act. The SECURE Act includes many changes that will impact both participants and Plan Sponsors. We have addressed some important provisions that can affect your Plan as early as 2020.
Make Sure To File On Time
Effective for forms due after 2019, a late 5500 filing can cost you up to $250 a day, up to $150,000 per plan year. Prior to the SECURE Act the penalty was $25 a day with a maximum of $15,000. Filing the Form 8955-SSA late will now cost you up to $10 per participant up to a maximum of $50,000. This is an increase from the $1 per participant with a maximum of $5,000 penalty prior to the SECURE Act.
Increased Auto-Enrollment Cap
To encourage increased savings, the SECURE Act raised the maximum deferral rate for automatic escalation from 10% to 15%. Your Plan will have to be amended to take advantage of the increase.
Small Business Incentives
In an effort to make it more affordable for small businesses to set up retirement plans, the SECURE Act increased the tax credit to help with Plan startup costs during the first three years. The credit increased from $500 to a maximum of $5,000 per year depending on the number of non-highly compensated employees.
In addition to increasing the startup cost tax credit, The SECURE Act also created a new tax credit of up to $500 per year for employers to set up or convert an existing plan to a new 401(k) plan that includes automatic enrollment.
These changes can save potential Plan Sponsors up to $16,500 over the course of three years.
Safe Harbor Changes
To simplify the safe harbor 401(k) rules, the SECURE Act removed the requirement to provide participants with an annual notice of safe harbor status before the beginning of the plan year for non-elective contribution safe harbor plans. The Act did not remove the notice requirement for Plans with a safe harbor match provision.
Having trouble passing your discrimination testing? The SECURE Act now allows employers to add a safe harbor provision up to 30 days before the end of the Plan year to provide a 3% nonelective contribution or as late as the end of the following Plan year if a 4% contribution is provided.
Adopt a New Plan after Your Year End
Not only does the Secure Act give you more incentives to establish a new Plan, but it also gives you more time. Prior to the Secure Act, employers had until the last day of their tax year to adopt a new plan. Now, employers have until the tax return due date (including extensions) to establish a new Plan.
Age Limits Changed
To be more in line with the aging working force and increased life expectancy rates, the SECURE Act eliminated the age limit for traditional IRAs. Employees can now contribute as long as they are working, regardless of age. The Act also increased the required minimum distribution (RMD) age to 72. This increase in age will affect any participant that will turn 70 ½ after December 31, 2019.
New Penalty Free Distribution Allowance
Typically, any distribution taken before you reached 59 1/2 would be assessed a 10% early withdrawal penalty. The Secure Act allows an exception for new parents. Starting in 2020, participants can take a $5,000 withdrawal penalty for a qualified birth or adoption. The distribution is based on individual retirement accounts, so a two parent household could take out up to $10,000.
The Secure Act contains several new incentives to increase participation and adoption of employer sponsored retirement Plans. It also includes many changes that will take effect after 2020. Some of which are the inclusion of long-term part time employees in eligibility, the creation of open MEPS (Multiple Employer Plans) and allowance of combined annual reports for groups of Plans, annual disclosure of projected income required by Plan Sponsors, and several more. Our Employee Benefit Services team would be glad to discuss your needs and objectives, and work with you to meet them. Contact us today.
About the Author
Erica is a native of Tallahassee, Florida and a 2008 cum laude graduate of West Virginia University with a Bachelor’s of Science in Accounting. Erica joined the firm in 2008 and is an active member of our audit team. Her experience and focus includes defined contribution, defined benefit, ESOP, money purchase, and cash balance plans.
She obtained the AICPA’s Advanced Defined Contribution Plan Certificate in 2016. Erica’s recent continuing education includes the AICPA Employee Benefit Conference in 2018.