At the beginning of 2020, the SECURE Act (Setting Every Community Up for Retirement Enhancement) went into effect outlining new rules that affect employee-sponsored retirement plans.
The SECURE Act includes key provisions that affect two sets of employers:
The SECURE Act was signed into law to incentivize employers to either expand their current retirement plan offerings or create retirement plans to assist more employees with retirement planning, respectively.
One of the driving factors behind the SECURE Act was incentivizing small-to-medium-sized businesses to offer retirement plans to their employees.
According to the latest research, 53 percent of SMBs currently do not offer retirement plans. A primary reason cited by many SMB owners is the cost.
The SECURE Act includes provisions to address the cost roadblock that has prevented many businesses from offering retirement plans to their employees:
- The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500, or (2) the lesser of: (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or (b) $5,000. The credit applies for up to three years.
- The new rules increase the credit for small employer pension plan start-up costs. Starting in 2020, a new tax credit of up to $500 per year will be available to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.
- Plans adopted by filing due date for the year may be treated as in effect as of the close of the year. Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year.
The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.
The SECURE Act changed, updated, or amended retirement plan provisions that affect employers that currently offer retirement plans.
- The SECURE Act expands retirement savings by increasing the auto enrollment safe harbor cap. An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements.
One of the options is an automatic enrollment safe harbor plan. Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant's first deemed election year. For the participant's first deemed election year, the cap on the default rate is 10%.
- The SECURE Act allows long-term part-time employees to participate in retirement plans. Starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (1,000 hours), or three consecutive years of service where the employee completes at least 500 hours of service per year.
- The SECURE Act loosens notice requirements and amendment timing rules to facilitate the adoption of non-elective contribution 401(k) safe harbor plans. Starting in 2020, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption.
The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year.
- The SECURE Act modifies nondiscrimination rules to protect older participants in closed plans. Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.
- The SECURE Act requires new annual disclosures for estimated lifetime income streams. The new rules will require that plan participants' benefit statements include a lifetime income disclosure at least once during any 12-month period to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams. This includes a qualified joint and survivor annuity for the participant and the participant’s surviving spouse and a single life annuity.
Whether you currently offer retirement plans and want to take advantage of the new provisions in the SECURE Act, or you are looking for a fresh look into your benefits, we’re here to help.
Reach out to our CPA firm to discuss your specific situation. We would appreciate the opportunity to walk through the SECURE Act as it applies to your business.