3 ways the SECURE Act affects company retirement plans
Most benefits executives by now are aware that the SECURE Act has become law. As expected, there are pros and cons to the new legislation, but it's the details in this wide-ranging act that could trip up retirement plan sponsors if they don't review the fine print.
The SECURE Act (which stands for Setting Every Community Up for Retirement Enhancement) contains a wide variety of provisions, many of which are aimed at simplifying issues that have incensed individual taxpayers and plan sponsors for years. Other sections of the law are designed to enhance the adoption of retirement plans by employers that currently don't have one so more American workers can save for the future.
As with any legislation, there are always revenue and compliance issues to consider and surprise twists in how the provisions interact with existing law and regulation. Here are three key areas benefit sponsors should review so they don't make mistakes managing their retirement plans:
1. Plan adoption deadlines (for plan tax years beginning after Dec. 31, 2019)
Prior law: Before the SECURE Act became law of the land, employers had until the last day of their tax year to adopt a retirement plan for that year.
While most CEOs or business owners had a clear line of sight on company profits by that time, many executives often were reluctant to create a retirement plan before closing the books.
What changed: For plan years beginning after Dec. 31, 2019, employers now can establish a retirement plan after the end of the tax year for the previous year.
Under this provision, plans that are adopted before the due date of the employer's tax return – plus any extension – are deemed to have been established on the last day of the tax year.
What it means: The change allows employees to receive contributions based on their wages for the previous year and to begin contributing to the company retirement plan. It also provides employers the flexibility to adopt a plan after closing the books and evaluate the financial impact of contributing to a plan.
Potential stumbling blocks: Benefits executives who are considering the adoption of a defined benefit plan need to know that the funding deadline (under Internal Revenue Code section §412) is September 15. Some due dates for extended tax returns can be September 15 and October 15, which means employers must have all the plan paperwork done, notifications sent to employees and have the plan funded by those dates or the IRS will levy a 10 percent tax.
Additionally, plan sponsors must remember that some plans can't be adopted retroactively, such as a 401(k), because there is no mechanism for retroactive deferral contributions.
2. Late adoption of safe harbor plans (for plan years after 2019)
Prior law: Previously, Oct. 1 was the deadline for starting a new safe harbor 401(k) plan. Existing plans also had to amend a safe harbor provision by January 1 of the year the provision was enacted.
What changed: A safe harbor plan can now be adopted, or an existing plan can be amended to add safe harbor provisions, any time up to 30 days before the end of the plan year by providing a 3 percent non-elective contribution.
This intra-year adoption is not available for plans using a safe harbor matching contribution to satisfy actual deferral percentage (ADP) or qualified automatic contribution arrangements requirements by the IRS.
The SECURE act also allows a safe harbor plan to be adopted after this 30-day requirement – all the way to the end of the following plan year – if the non-elective contribution is increased to at least 4 percent of an employee's compensation.
What it means: For new plans, the new rule provides an additional two months (all of October and November) in the decision-making process where the non-elective contribution is being considered.
For an existing plan, a mid-year amendment to add a safe harbor provision is now allowed in the case of non-elective contributions.
Potential stumbling blocks: None. The new law provides employers more time to decide if they want to adopt or transition to a safe harbor. The Act also offers some relief to traditional 401(k) plans if an employer has failed the ADP testing of deferrals.
There is now an option to retroactively convert the plan to a safe harbor 401(k) by making a 4 percent contribution to all eligible employees – instead of choosing between the return of contributions and earnings to highly compensated employees or making a qualified non-elective contribution to all employees.
3. Safe harbor non-electives and notices (effective for plan years after 2019)
Prior law: For new safe harbor plans, a notice explaining the plan's design was required to be sent to employees at least 30 days prior to the effective date of the plan or the amendment adopting the safe harbor provision.
This notice also was required to be provided annually while the plan was in place.
What changed: The Act eliminates this annual notice requirement for safe harbor plans that have a non-elective employer contribution rate of 3 percent or more to all participants.
It also removes the 30-day notification requirement when a plan is amended or adopted that includes the 3 percent, non-elective employer contribution.
What it means: The change paves the way for retroactive implementation of a safe harbor plan and amendments (in the case of a 4 percent or greater contribution) and eases the adoption of a safe harbor plan during the year (through a 3 percent or greater contribution by the employer).
Potential stumbling blocks: Not eliminated is the initial notice of the plan design that is required to be sent to participants who become eligible for the plan.
As current employees meet plan eligibility requirements, a notice must still be provided to them within 30 days of eligibility. With all the hype about elimination of the notice requirements, this eligibility requirement easily could be missed.
These three sections scratch the surface of the SECURE Act, which will help more companies provide retirement plans for their employees. While plan sponsors now have more flexibility in plan design and adoption, they need to be aware of the fine print in the legislation to avoid costly mistakes and compliance issues with the IRS.
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