As an early holiday present for some, Congress passed (and the President signed into law) two spending bills, one of which contained the provisions for the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). The purpose of the SECURE Act, which has been sitting in Congress for months, is to enhance opportunities for people to increase their retirement savings and ease administration of qualified retirement savings plans for employer sponsors. This post will provide an overview of the SECURE Act’s most notable changes to retirement plans and how employers, as well as employees, will be impacted.
For plan years beginning after December 31, 2020, the SECURE Act requires 401(k) plans to allow an employee to make elective deferrals if the employees has worked at least 500 hours per year with the employer for at least three consecutive years and has met the minimum age requirement (age 21) by the end of that three year period. Currently, employers may exclude part-time employees who work less than 1,000 hours per year from participation in a 401(k) plan. Lawmakers saw this as a disadvantage to the increasing part-time and sporadic workforce population, creating a gap in retirement-saving opportunities. With the change, a “long-term part-time employee” who has completed the service cannot be excluded from the plan because they haven’t met the previously requisite minimum number of service hours in a year. The long-term part-time employee must be allowed to commence making elective salary deferral contributions to the 401(k) plan no later than the earlier of (1) the first day of the plan year beginning after the employee met the service and age requirements, or (2) the date six months after the date on which the individual satisfied the requirements.
Keep in mind that this mandatory change in eligibility requirements only affects 401(k) plans. It also only affects elective salary deferral contributions. Plans may continue to enforce more stringent eligibility requirements (e.g., a higher hours of service requirement) for non-elective employer contributions or matching contributions. If a plan incorporates a safe harbor plan design, the employer may choose whether or not to allow long-term part-time employees to receive safe harbor contributions. When it comes to nondiscrimination testing of non-safe harbor plans, a plan may exclude long-term part-time employees from top-heavy vesting and top-heavy benefit requirements, as well as receive other nondiscrimination testing relief as it stands under present-day law.
Many employers have taken advantage of a safe harbor rule that allows plans to bypass contribution nondiscrimination testing if they provide minimum, guaranteed non-elective or matching contributions to all non-highly-compensated employees. There are a number of rules associated with a safe harbor plan design, including a written notice requirement. For plan years beginning after December 31, 2019, the SECURE Act eliminates the safe harbor notice (although, plans will still have to provide an employee the opportunity to change their salary deferral elections in the year in which the safe harbor contribution is being provided). The SECURE Act additionally relaxes some of the timing requirements, providing a greater opportunity for employers to adopt safe harbor provisions closer to the beginning of a new plan year. Finally, for those employers who have incorporated an automatic enrollment safe harbor provision, the cap on the default contribution rate will increase to 15% (from 10%) after the first year an employee’s deemed election applies.
If a single retirement savings plan is maintained by more than one unrelated employer (that is, without commonality of ownership or service), then a multiple employer plan (MEP) has been established. Professional Employer Organizations (PEOs) sponsoring a retirement plan is the most typical type of MEP. As you might imagine, there are many specialty rules governing this type of benefit arrangement. For instance, if one employer member of a MEP fails to maintain the IRS’ tax favorable qualification requirements, then the entire plan is considered to be tainted and may result in the disqualification of the MEP, thereby harming the participants of all member employers. This is known as the “one bad apple” rule. Beginning with plan years after December 31, 2020, a new type of multiple employer plan (called a “pooled employer plan”) will be allowed to be established by unrelated employers. The SECURE Act amends the Internal Revenue Code to provide a procedure for separating the qualification status of each member employer and one company’s failure will no longer infect the entire plan. In essence, this new legislation provides relief from the one bad apple consequence.
ERISA employers are required to file an annual report with respect to information about a retirement plan’s financial condition, tax qualification and other aspects showing effective operational status. This information is packaged in the IRS Form 5500, which the Department of Labor (DOL) utilizes to ensure portions of ERISA compliance. Typically, a unique Form 5500 was required for each retirement plan. For years, welfare benefit plans, facing similar reporting requirements, could consolidate their Form 5500s if their health and welfare plans were “wrapped together.” Until the SECURE Act, no such option existed for retirement plans.
Form 5500s filed on behalf of retirement plans with plan years beginning after December 21, 2021 may be consolidated where plan sponsors have more than one similar qualified retirement plan. The consolidation rule only applies to defined contribution plans with the same plan year, same administrator, same trustee and same named fiduciary or fiduciaries. Additionally, all investment choices available to participants must be the same amongst all consolidated plans. The ability to consolidate 5500 filings will hopefully make it easier and more cost effective to complete and comply with reporting requirements for those employers sponsoring multiple retirement plans.
For more information about the SECURE Act and other fiduciary responsibilities, register for our upcoming webinar, Retirement plans, risk and the future of fiduciary responsibility. We’ll address some of the SECURE Act changes along with strategies for effectively managing fiduciary responsibilities while mitigating risk.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including taxation and healthcare reform.
Bret works with HR professionals to ensure they have a clear understanding of the rules governing all aspects of human resources. He works with employers to maintain compliance of health and wellness benefit packages under state and federal guidelines, including rules of taxation and healthcare reform. Bret holds a bachelor of science in economics from the University of Kentucky and a law degree from the University of Pittsburgh, School of Law.
Retirement planning is very different from planning for other benefits because the end goal is many years – even decades – away. It’s impossible to develop a foolproof plan that will guide a 25 year-old to her retirement 40 years later. But the practice of planning, the financial education obtained and the savings habits created along the journey can steer employees closer to reaching their retirement goals.
If you sponsor a retirement plan, it’s probably a 401(k) or 403(b) plan. You’ve likely created a defined contribution plan that enables people to set aside a portion of their paycheck in a pre-tax fashion in hopes the earnings gained against their principal investment will grow to provide a substantial portion of their income in retirement years. But is it working?
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