Article by Gary Mauger, New Pinnacle Consulting Group, and Evan Giller, Boutwell Fay, LLP
The SECURE (Setting Every Community Up for Retirement Enhancement) Act and its enhancements to retirement plans are regarded as the most comprehensive since the Pension Protection Act of 2006. The Act, which became law December 20, 2019, includes 30 provisions designed to expand and preserve retirement savings and provide administrative improvements. Some provisions in the law were effective in 2020, others have future implementation dates, and some were effective retrospectively.
Among the many provisions that make it easier for small employers to offer a retirement plan, the Act:
- Creates a new type of Multiple Employer Plan (MEP) called a Pooled Employer Plan (PEP) that allows unrelated employers to participate in a MEP. It also eliminates the “one-bad-apple” rule so that non-compliance by one employer does not disqualify the entire MEP. Under the SECURE Act, PEPs are not available to 403(b) plans, but pending legislation may expand PEPs to include 403(b) plans.
- Provides small businesses (100 employees or less) with a financial incentive to start up a retirement plan (401(k), Simple IRA) with tax credits up to $5,000 for the first three years. This incentive does not apply to 403(b) plans.
- Offers an additional $500 tax credit for three years to employers adding auto-enrollment, generally for employers with under 100 employees.
Considering whether to offer a retirement plan to employees is an important decision. Smaller organizations banding together in a MEP to share the cost could be an opportunity for all schools. Employers, however, need to look carefully at the costs and benefits of a MEP before agreeing to join.
For schools currently offering a 403(b) or 401(k) retirement plan, there are mandatory and optional changes to your plan.
- The age for required minimum distributions increased to 72 (from 70.5) for individuals who reached 70.5 in 2020 or later.
- An optional, taxable, but penalty-free withdrawal up to $5,000 from a retirement plan or IRA within a year of a child’s birth or adoption can be repaid to the plan or to another employer plan or IRA.
- Participant statements are required to include a lifetime income disclosure projecting the monthly income they would receive if the balance was paid out as a single-life or joint-life annuity.
- The law provides a safe harbor for fiduciaries for the selection of a lifetime income provider to encourage the introduction of lifetime income options from defined contribution plans.
- In a 401(k) plan, long-term part-time employees with 500 or more hours for three consecutive years are eligible for deferrals to the plan.
- For plans relying on non-discrimination safe harbor features, the following changes are in effect:
- Nonelective contribution plans are no longer required to provide an annual notice.
- The automatic enrollment deferral cap increased to 15% under the qualified automatic contribution arrangement safe harbor.
- A safe harbor non-elective contribution may be added to the plan after the beginning of a plan year (criteria applies) and the contribution has been increased from 3% to 4%.
- Administrative changes:
- Penalties for failure to file Form 5500 increased from $25 per day to $250 per day up to a maximum of $150,000.
- Penalties for failure to file Form 8955-SSA is $10 per participant per day up to a maximum of $50,000.
In addition to the SECURE ACT, several laws have been enacted since 2018 that also impact 403(b) and 401(k) retirement plans. These include the Bipartisan Budget Act 2018, the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 and Consolidated Appropriations Act (CAA) of 2021.
These legislative acts contain required and optional changes affecting plans. As the plan sponsor, you are responsible for the plan’s compliance. As the IRS finalizes the rules and provides amendment deadlines, plan sponsors need to ensure the amendments are adopted in a timely manner. For schools using a plan document provider’s Volume Submitter Document, the document amendments will be drafted and released to plan sponsors when available.
