The SECURE Act – which stands for “Setting Every Community Up for Retirement Enhancement” – was recently signed into law. The new legislation is intended to help more workers save for retirement and help improve employer-sponsored retirement plans.
The purpose of this article is to provide an overview of the major changes affecting retirement plans as a result of the SECURE Act.
Changes to 401(k) eligibility for certain long-service, part-time workers
Currently, retirement plans may exclude part-time employees if they do not complete at least 1,000 hours of service in a year. The new legislation requires 401(k) plans to broaden participation to any part-time worker who has worked at least 500 hours in each of the immediately preceding three (3) consecutive year. These changes are effective for plan years beginning Jan. 31, 2020, but hours of service during 12-month periods beginning before 2021 are not considered.
- Plans that currently exclude part-time workers will need to amended to include these new eligibility requirements.
- Calendar year plans will need to accommodate the new eligibility requirements beginning January 1, 2021. But because the 12-month period for purposes of counting the 500-hour requirement are not counted before 2021, the counting of service (for purposes of the 500-hour requirement) will begin but actual eligibility will be delayed.
Changes to plan distribution rules
Required minimum distribution (RMD) age increased to age 72
The new law increases the RMD age to 72. This new change is effective for plan participants who reach 72 after January 1, 2020. Previously, a participant was generally required to receive minimum distributions by April 1 of the calendar year following the year in which the participant attains age 70-1/2.
Child birth or adoption distributions up to $5,000
The new legislation permits retirement plans to allow penalty-free (no 10% penalty) distributions of up to $5,000 for expenses related to the birth or adoption of a child. This change is effective for distributions on/after January 1, 2020. Plan sponsors should consider whether or not to offer this special distribution in their plan. And if offered, plan will need to be amended and notices will need to be provided to plan participants.
Changes to Safe Harbor Plans
Safe Harbor plan adoption and administration
Currently, safe harbor 401(k) plans that do not perform non-discrimination testing because the plans provide a minimum of 3% non-elective contribution to plan participants must provide safe harbor notices to all eligible participants. The new legislation eliminates this notice requirement. Additionally, it allows retirement plans to add safe harbor 3% non-elective at any time up to 30 days before the close of the plan year. Finally, it also allows a plan to adopt non-elective safe harbor even after the 30th day before the close of the plan if certain requirements are met: (1) amendment to adopt the non-elective safe harbor is made by the end of the following year, and (2) the nonelective contribution is at least 4%. This change is effective for plan years that start January 1, 2020.
Increased QACA safe harbor rate cap
Currently, plans with automatic enrollment that have qualified automatic contribution arrangement (QACA) safe harbor to automatically satisfy non-discrimination testing must limit default automatic contribution rates to 10 percent. The SECURE Act allows this rate to be increased to 15 percent. This change is effective for plan years beginning January 1, 2020.
Changes to IRS Form 5500 annual return/report
The new law increased the late filing penalty ten-fold for Form 5500. The late filing fee is now $250 per day up to a maximum of $150,000 (previously $25 per day up to $15,000). The increased penalties are for plan years beginning January 1, 2020.
Changes to small business (up to 100) startup credit
The new law increases the current $500 tax credit cap (for the plan’s first three years) to the greater of (1) $500 or (2) the lesser of (a) $5,000 or (b) $250 multiplied by the number of non-highly compensated employees eligible to participate in the plan. This is effective for plan years beginning January 1, 2020.
New small business (up to 100 employees) automatic enrollment credit
Small organizations that implement automatic enrollment features are eligible for an additional $500 credit for three (3) years regardless of when the automatic enrollment features are implemented. The new credit is effective for plan years beginning January 1, 2020.
A 14-year veteran in all aspects of workplace retirement plan benefits program, Mizan J. Rahman specializes in the compliance, administration, design, and legal documentation of 401(k), 403(b), and 457(b) plans. Mizan provides high-level, personalized consulting to small and medium-sized businesses and not-for-profit organizations. One of the select few to have been awarded Enrolled Retirement Plan Agent (“ERPA”) by the Internal Revenue Service, Mizan regularly represents clients in front of DOL and IRS during audits.
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