Retirement Plan

Adapting Your Retirement Plan to the SECURE Act

There are many new rules for qualified retirement plans and IRAs that impact your business in the coming years.

These new rules are contained in the SECURE Act, which is part of the massive spending measure (P.L. 116-94) signed into law on December 20, 2019.

(A roundup of other business-related tax changes in the spending package was discussed in a previous blog post.) Some rules take effect on January 1, 2020, while others don’t start until after 2020.

Multiple employer plans (MEPs)

Two or more unrelated employers can join together in a pooled employer plan. This new option will allow small employers to gain the benefit of economies of scale, meaning they’ll save on administrative costs and be able to offer more investment options to their employees who participate.

MEPs must have a designated pooled plan provider who acts as the plan fiduciary, which eases fiduciary responsibilities for small employers who go into the plans.

Expect to see considerable guidance on MEPs from the IRS and DOL in the coming months.

Effective date: Plan years beginning after December 31, 2020.

401(k) safe harbor plans

Employers with 401(k) plans can avoid complicated nondiscrimination and coverage testing by using an automatic enrollment safe harbor. Under this safe harbor, employee contributions are automatically increased each year by a set percentage. The new law increases the form cap of 10% of compensation (up to the annual elective deferral limit) to 15%.

Employees can make or change their salary reduction contribution election once each year. There is no longer any notice requirement. And employers can change to a safe harbor plan at any time before the 30th day before the close of the plan year, even though elective deferrals are being made to the plan. Amendments after this time would be permitted under certain conditions.

Effective date: Plan years beginning after December 31, 2019.

Tax credits for small employers

Small employers (those with no more than 100 employees) that do not have a plan but start one that covers at least one employee who is not the owner or owner’s spouse may take a tax credit for administrative costs up to $500 per year for up to three years. The new law increases the credit to the greater of $500 or the lesser of (1) $250 per employee who is not highly compensated and who is eligible to participate, or (2) $5,000.

And the new law adds a new credit for automatic enrollment of participants. The credit is $500 per year for startup costs for a new 401(k) plan or SIMPLE IRA with automatic enrollment, as well as for employers with existing plans that convert to automatic enrollment. This credit is in addition to the credit above and also runs for up to three years.

Effective date: Plan years beginning after December 31, 2019.

Part-timers

Currently 401(k) plans can exclude part-time employees from participation. These are employees who work less than 1,000 hours per year. Under the new law, those working more than 500 hours but less than 1,000 hours in three consecutive years must be permitted to participate. Even if they do, however, employers that don’t use an automatic enrollment plan can exclude these part-timers for testing under nondiscrimination and coverage rules.

Effective date: Plan years beginning after December 31, 2020.

Required Minimum Distributions (RMDs)

Employees who are in your retirement plan and attain a set age must commence required minimum distributions (RMDs). Employers must begin making distributions to these participants. The new law raises this age to 72, up from the current age 70½. However, the change only applies to those who attain age 70½ after 2019.

Effective date: Plan years beginning after December 31, 2019.

Administrative changes

Currently, a qualified retirement plan (other than a SEP) must be adopted by the end of the year, even though funding for the plan is permitted up to the extended due date of the return for the business. The new law eliminates the end-of-year adoption requirement, giving businesses more time to decide whether to implement a plan for the year. So, a profit-sharing, stock bonus, or pension plan can be adopted as late as the extended due date of the business’ return. But this retroactive plan adoption rule doesn’t apply for 401(k)s.

Effective date: Plans adopted for tax years beginning after December 31, 2019.

Conclusion

This is not a complete list of all the changes made by the SECURE Act. In the coming months there will surely be guidance from the IRS and DOL on new tax rules. Stay tuned!

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