April 3, 2020
Retirement Enhancement Act
Recently, Congress passed the most extensive retirement plan legislation since the Pension Protection Act of 2006 and it is called the SECURE Act. The Setting Each Community Up for Retirement Enhancement Act (SECURE) was passed on December 19, 2019, however some provisions are effective for 2020 and others will be effective in 2021. The article highlights law changes that affect most of Benefit Equity, Inc. (BEI) clients.
When Do You Have to Take Action?
Whenever congress passes laws relating to retirement plans they must be amended in order to keep the plan in compliance. BEI operates employers’ plans according to these rules, when such rules apply, and we advise you when these amendments are required. We have until 2022 to amend your plan. Safe Harbor election changes require current amendments.
Plan Sponsors/Employers do not have to take any action at this time.
Changes for 401(k) Safe Harbor Plans
At the end of every plan year, a disclosure notice about your Safe Harbor Plan must be provided to plan participants. This notice is no longer required if you only have non elective contributions. This means, if you give your eligible employees a 3% contribution the notice goes away.
However, if you use a Safe Harbor match or make a profit sharing contribution then notice is still required. The match is usually 100% of the first 3% deferred and 50% for the next 2% deferred by the employee.
Let’s celebrate you now have one less notice you’re required to provide participants!
Leeway Given for Electing a Safe Harbor Provision
Prior to 2020, the IRS limited employers from implementing a Safe Harbor Pan during the year. Safe Harbor Plans require employers to give eligible participants 3% of their salary to avoid nondiscrimination testing. Failing the nondiscrimination test means some employees will get back some of their deferrals. To avoid this test, you can use the 3% Safe Harbor Rule, if timely adopted, prior to the beginning of the current year. Below is more information about the new rule.
New Rule for Safe Harbor Plans
Safe Harbor non elective provisions may now be adopted anytime up to 30 days before the end of the plan year (December 1st in most cases). This late adoption is not available for plans that have matching contribution at any time during the plan year. Safe harbor nonelective provisions may be adopted after the 30-day deadline, if the non-elective safe harbor contribution increases from the normal 3% of compensation to 4%.
This change is effective for plan years beginning after 12/31/2019.
We do not know for certain what the nondiscrimination testing results are until after the plan year ends. Interim calculations can be made prior to December 1st to take advantage of the extended time frame and implement the 3% safe harbor. Waiting until after December 1st increases the safe harbor to 4% of payroll.
Increased Maximum for Qualified Automatic Contribution Arrangements (QACA)
This new rule applies to an automatic contribution arrangement. This is where an employer automatically enrolls their employees by giving them a notice. The notice informs employees that a certain percentage of their pay (usually an employer picks 3%, 4%, 5% or 6% to start) will be deferred into the 401(k), unless the employee opts out.
Employers may include a requirement in their plan that states, after enrolled at the initial amount each year, they will increase the deferral for everyone enrolled by 1%, not to exceed 15% of their salary. The new rule increased this from a 10% of salary maximum to 15%.
Automatic Enrollment is often now being used by large companies. It reduces the amount of work HR must do to enroll new employees and helps employees take action, who would otherwise procrastinate about participating. Experience shows us very few employees opt out of the plan in the end
However, smaller employers may find this to be more work because they must set up payroll to make the deferral as of the employee’s entry date. Then they would also need to provide the recordkeeper with the employee’s information, such as hire date and email address.
As the employer, you do not collect enrollment forms or have employees go online to enroll, when adopting the automatic enrollment arrangement. Instead, an employer provides the record keeper with new employee information and alerts their payroll service to start deducting whatever percentage an employee decides to elect. If the employee elects the automatic increase each year, an employer would need to increase everyone’s payroll deferral by 1% once a year. The maximum payroll deduction can be set to any amount up to 15%.
BEI can help employers coordinate this function by introducing you to payroll companies that integrate with your recordkeeper, which will help you comply with the automatic enrollment rules.
Receive a Tax Credit
The new law gives employers a $500 tax credit for three years ($1500) to implement this arrangement. This credit will offset the costs considerably for BEI to amend your plan and help you coordinate the process with the recordkeeper. Please check with your BEI Administrator for more information to determine if this is right for you.
Required Minimum Distribution (RMD) Rules
The SECURE Act changes the RMD rules to extend the required beginning date from the April 1st, following the year in which the participant attains 70½, to April 1 following attainment of age 72. This rule is effective for any plan year after December 31st, 2019.
If you turn 70½ in 2020, we recommend you do not take the required minimum distribution, as you now have until you’re 72 years of age. However, if you turned 70 ½ in 2019, you are required to take the RMD in 2020.
What Happens to your Money Upon Death?
The law also eliminates several rules regarding the death of a plan participant and this applies to employer plans and IRAs. Prior to 2020, there was a rule requiring that money needed to be distributed to the beneficiary within five years and this rule has now been extended to 10 years. However, an employee’s ability to stretch the distribution over the life expectancy of a non-spouse (and some others below) is no longer available.
The SECURE Act eliminates the lifetime distribution option for beneficiaries who are not “eligible designated beneficiaries.” Eligible designated beneficiaries include spouses, minor children (although kids who reach majority after death have an additional 10 years to distribute), chronically ill or disabled individuals, and other beneficiaries who are no more than 10 years younger than the participant. The effect of this change is to require most beneficiaries to get the money out of the plan faster, terminating the so-called “stretch IRAs.” These changes are effective for employees who reach age 70½ or who pass away after 12/31/2019.
Form 5500 Late Filing Penalties
BEI is very involved and thorough when assisting our clients, with the required annual report/return Form 5500, to avoid any late filing penalties. We find some employers who were never told they should hire us to oversee the plan compliance requirements. Or, they are just getting around to it after someone asks if they are up-to-date on all their government filings. Obviously, they were not a client of BEI!
Failure to file the return has a penalty of $25 per day for up to $15,000 per year. The IRS has a late filing program called DFVCP that provides for a filing fee of $750 for you can bring your late returns up-to-date. We have used this government program to help our new clients, who did not have a TPA, and similar to how BEI helps with the filing of Form 5500. However, if a late notice was sent from the IRS before you file under their DFVCP program, late fees will apply.
The IRS recently increased the penalty to $250 a day up to $150,000 and this is a massive increase for missing one government form! Financial advisors and CPAs must keep this strongly in mind when taking on new clients and we recommend you always request to view their F5500 forms.
Form 8955-SSA Penalty Increase
The Form 8955-SSA penalties are also increasing ten-fold and this form lists plan participants who have not received money owed under and employer’s plan. The penalty has increased from $1 per day per unreported participant to $10 per day--and from a $5,000 maximum to $50,000. This is one of the reasons BEI asks for a census (payroll information) every year, because we need to know who terminated and who was not paid to complete this form for you.
This change is effective for returns due after 12/31/2019.
If you wait until your extended business tax return due date, which is Sept 15th for calendar taxpayers, you are cutting it too close to get the return prepared and submitted to the government. To avoid any possibility of filing late, you will need to have your contributions deposited timely, and not delay in getting us the information we request.
$5000 Available for Adoption or Childbirth
Participants who have or adopt a child after 2019 may take a distribution of up to $5,000 from a plan or an IRA, without having to pay the 10% premature distribution tax. However, you will need to pay federal and state taxes, if made within one year of the birth or adoption. For adoptions the adoptee may be a minor or an individual who is incapable of self-support.
As of this time, we have limited guidance from the government regarding the type of paperwork the IRS will require from an employer who is sponsoring a plan, in order to give a participant their money. We highly recommend you check your BEI Administrator, should a participant request a distribution of their money under this new rule.
Tax Credit Increased for Start-Up Plans
The SECURE Act increases the tax credit for small employers (with fewer than 100 employees in the preceding tax year) from $500 up to $5,000. This tax credit applies to the first three years following the adoption of a new plan. The tax credit will equal 50% of the plan’s start-up costs up to the greater of (a) $500 or (b) the lesser of (i) $250 for each eligible non-highly compensated employee, or (ii) $5,000 per year.
The law also provides a credit of $500 per year for three years, where a small employer’s plan includes an eligibility automatic contribution arrangement (EACA). This credit is not limited to administrative costs.
Extended Adoption Deadline for New Plans
Up until 12/31/2019, a plan participant was required to adopt a new plan, no later than 12/31/2019, to take a tax deduction for the year just ended. Starting in 2020, a participant can adopt a new plan up to the tax return due date of the employer and including extensions.
This new deadline only applies to employer contributions and401(k) deferral provisions must be in place before the plan accepts elective deferrals. Therefore, if you start a 401(k)/Profit Sharing Plan for 2020 in 2021 (prior to your company tax return deadline), you can only begin taking employee 401(k) deferrals as of the date you signed the documents. 401(k) deferrals will be applied to 2021. You can contribute toward the profit sharing part of the plan for 2020, but not the 401(k).
403(b) Plan Guidance
The SECURE Act clarifies terminated custodial account plans are treated in the same manner as terminated annuity products. For example, the plan may distribute individual custodial accounts to the participants that continue to be tax-deferred.
Prior to this new law, if you terminated a 403(b) plan that had individual annuity policies or if everyone who had a policy, didn’t agree to transfer or cash it out, you could not terminate the plan. You will need to address transfer of 403(b) accounts with the custodian/recordkeeper.
Multiple Employer Plans (MEP) or Pooled Employer Plans (PEP)
We have had rules relating to Multiple Employer Plans (MEPs) for a long while and there are “closed MEPS” and “open MEPS.” The SECURE Act deals predominately with the “open MEP” rules. Closed MEPS have a common nexus such as an association, leasing company (PEO), or chamber of commerce. There are no changes with these closed MEPs.
The rule that have kept these “open MEPs” on the back burner was the “bad apple” rule. For example, let’s say a group of employers signed up for the MEP because it
offered limited liability and lower fees. However, if one employer for some reason decides not to follow the rules, that one “bad apple” disqualified the entire MEP. This rule has limited the number of employers willing to join such a plan.
The SECURE Act eliminated with the “bad apple” rule. Beginning in 2021 an organization that will be known as a “pooled plan provider,” can set up a MEP that will be known as a Pooled Employer Plan (PEP), if they take responsibility for all operational requirements. They will be the named fiduciary, plan administrator, trustee, and will be the entity who ensures that all government requirements are met for the plan. BEI’s future articles will keep you up to date on these types of plans.
What is not known right now is how employers will view these PEPs. Will they want their own plan or want to join a PEP? More information will follow on our involvement as a pooled plan provider (PEP), as the IRS and DOL develop new rules.
To learn more or receive additional information about these significant changes, please contact us at email@example.com or call us at 800-899-9141.
Author: Robert Gorelick, APA, Founder Benefit Equity Inc.