SECURE Act’s significant retirement plan changes
New law has key provisions affecting employers
The Setting Every Community Up for Retirement Enhancement Act (the SECURE Act) makes significant changes — well over 35 — to the tax code rules impacting employer retirement plans.
As is often the case with new tax code provisions, the full scope and implications of the provisions will not become completely clear until clarifying regulations are issued due to the limited statutory language. Here are several of the key provisions impacting employers.
Encouraging retirement savings
In order to help part-time employees save for retirement, the act mandates Section 401(k) plan participation for part-time employees. If the employee has worked at least 500 hours per year with the employer for at least three consecutive years and is at least 21, he or she must be permitted to make deferrals no later than the earlier of the first day of the first plan year beginning after the date on which the employee satisfied the age and service requirements, or six months after the date on which the individual satisfied these requirements.
However, time worked before 2020 does not count toward the required three-year period and long-term, part-time employees are not required to be eligible to receive employer contributions.
In order to inform employees how their retirement plan account balances will translate into income at retirement, the act requires benefit statements to annually include a lifetime income disclosure. This disclosure will estimate the monthly payments the participant will receive at retirement if the plan account is annuitized to provide a lifetime income stream.
By Dec. 20, 2020, the U.S. Department of Labor will issue a standardized disclosure including the assumptions that employers will use in converting participants’ account balances to lifetime income streams.
The act also includes provisions to facilitate, but not require, retirement plans to offer guaranteed lifetime income options such as annuity products. It encourages employers to offer annuities through insurance contracts by amending ERISA provisions that require fiduciaries to act prudently when selecting an annuity provider.
The act also provides an optional ERISA safe harbor for plan fiduciaries responsible for reviewing the financial capabilities of insurers offering the lifetime income contracts. The act requires any plans taking advantage of a lifetime income product to include a portability feature, so participants will have the ability to roll the annuity investment into an IRA without penalty.
Multiple employer plans
The act significantly changed the existing rules related to multiple employer retirement plans, or MEPs, to allow more employers to participate in them.
MEPs which consist of two or more employers that participate in the same plan, are commonly maintained by employers in the same industry that satisfy a required close relationship test. They are used by professional employer organizations (PEOs) to provide qualified retirement plan benefits to employees working for PEO clients.
The act’s new pooled employer plan rules permit financial services firms, insurance companies and other qualified providers to offer unrelated employers a managed retirement plan option under which the sponsoring provider, rather than the employer, bears the compliance burden of operating the plan.
These new rules are intended to encourage small employers to adopt retirement plans by lowering costs due to economies of scale and by reducing the compliance burden that employers would otherwise bear.
The act increases the business tax credit for retirement plan startup costs to make setting up retirement plans more affordable for small businesses (fewer than
100 employees) and encourages small business owners to adopt automatic enrollment by providing additional tax credits.
The act also amended several tax code provisions to simplify the administration of plans that provide employer safe harbor contributions that permit plans to automatically pass discrimination testing.
Employers can now treat qualified retirement plans adopted after the close of a tax year, but before the due date of its tax return, as having been adopted as of the last day of the prior year. Before the act, a plan established after the close of the year could be effective only for the year adopted. This will allow employers to know the tax savings for the prior year before the adoption of a new plan.
The act also substantially increases (by a factor of 10!) tax code penalties for late filing of retirement plan tax returns on Form 5500 and IRS Form 8955-SSA, used to report and disclose terminated participants’ benefits to the IRS and Social Security Administration.
This article discusses only a few of the SECURE Act and Appropriations Act provisions. Employers and their advisors should review the entire SECURE Act and applicable provisions of the Appropriations Act to determine how they will be impacted.
John E. Rich Jr., who chairs the Tax Department at McLane Middleton, can be reached at 603-628-1438 or firstname.lastname@example.org.