While the major changes resulting from the SECURE Act’s annuities, RMD and open MEPs provisions—plus the elimination of the “Stretch” IRA—have grabbed most of the headlines since the Act became the “law of the land” as of Jan. 1, 2020, there are a number of other 401k-impacting provisions that need to be on the radar of 401k-focused advisors.
According to a recent Employee Benefits & Executive Compensation blog post from Proskauer Rose LLP, almost all tax-qualified employer-sponsored retirement plans will need to be reviewed for possible amendments to reflect the changes brought about by the SECURE Act.
The Act provides for a remedial amendment period for making these changes until the last day of the first plan year beginning on or after Jan. 1, 2022 (with a delayed deadline for certain collectively bargained plans).
“An advisor’s most important goal is addressing the needs of their clients, so I’m sure they will be working to understand the new provisions and opportunities under the SECURE Act, including the resources available to learn more,” says Eric Stevenson, President, Nationwide Retirement Plans. “This initial step will ensure they know how to engage with their clients to properly address changes and seize opportunities that can benefit the plan sponsor and employees.”
Stevenson added that advisors may want to initially focus on provisions such as the small employer start-up tax credit and auto feature tax credit (both covered below) that make it easier for employers to establish workplace retirement plan to their employees.
While you can check out the links at the end of this article for more SECURE Act coverage from 401k Specialist, here’s a look at six relatively “under the radar” provisions that impact 401k plans now and in the coming years.
Part-time employees eligible for 401ks
As a result of the SECURE Act, effective in 2021employers will be required to offer 401k eligibility to part-time employees, provided they are at least 21 years old and have completed either one full year of service with more than 1,000 hours worked or three consecutive years of service with at least 500 hours worked per year.
Under previous rules, part-time workers could be excluded from participating in their employer’s 401k plan.
However, these participants may be excluded for testing purposes, they are not required to receive a matching contribution, and, if the plan is top-heavy, the special vesting and contribution requirements would not apply to them, according to a Stinson Benefits Notes Blog posted on Jan 6, 2020.
For purposes of calculating 500 hours of service during a 12-month period, 12-month periods beginning before Jan. 1, 2021, will not be taken into account.
These changes do not apply to collectively bargained employees.
Penalty-free birth/adoption withdrawals
As a result of the SECURE Act, beginning in 2020, 401k or IRA participants who withdraw up to $5,000 from a plan will not be subject to the 10% penalty tax on early withdrawals (before reaching age 59½) if the withdrawal is taken to cover “qualified” birth or adoption expenses.
To be exempt, the participant must include the name, age and TIN of the child on the participant’s tax return for the year.
This is true as long as the participant withdraws the money within one year of a child being born or an adoption becoming final. Though not mandated, the participant may also be permitted to repay this amount to the plan within a yet-to-be-determined time frame. More guidance is needed on the tax treatment and timing of repayment.
Plans will need to be prepared to address this new exception when reporting distributions for 2020. The provision can be applied to distributions made after Dec. 31, 2019.
Tax credit for auto enrollment
The tax credit for small employers that start new retirement plans including 401ks increases from $500 per year to as much as $5,000 per year for three years under the SECURE Act.
There is also a new $500 per year tax credit for up to three years for small employers that adopt new plans that include automatic enrollment.
Small employers for this provision’s purposes are defined as having had no more than 100 employees who earned at least $5,000 in the preceding year.
Increase of cap for automatic enrollment safe harbor
Under the SECURE Act, “safe harbor” 401k plans are allowed to automatically escalate workers’ contributions up to a maximum 15% savings rate, instead of the current 10%. The argument goes that by raising the ceiling for automatic in-plan retirement saving, workers will be able to save even more.
“Advisors should consider working with plan sponsors who utilize the automatic enrollment safe harbor to increase the escalation cap to 15% of compensation,” says Frederick Brackin, an Associate in Gunster Law Firm’s Tax Law and Private Wealth Services practices.
Prior to the SECURE Act, the safe harbor rules on qualified automatic contribution arrangements (QACAs) limited the maximum automatic contribution rate to 10% of a participant’s compensation. Now, the 10% cap remains until the last day of the first plan year that begins after the employee’s date of participation, but in subsequent plan years the maximum permissible automatic contribution rate has been raised to 15%.
This change is effective for 401k plan years beginning on and after Jan. 1, 2020.
Combined annual reports for certain DC plans
Form 5500 (Annual Return/Report of Employee Benefit Plan) will be modified by Department of Treasury and the Department of Labor to permit all members of a group of defined contribution plans to file one consolidated form if the plans: 1) share the same trustee, named fiduciaries and administrator, 2) have the same plan year, and 3) provide the same investments or investment options to participants and beneficiaries.
This change applies to plan years beginning after Dec. 31, 2021.
The SECURE Act also increases penalties from the IRS tenfold for failing to file Forms 5500 and to provide certain notices to participants, effective for filings and notices due after 2019.
Relaxed requirements for non-elective Safe Harbor 401k plans
The safe harbor notice requirement is eliminated for nonelective 401k safe harbor plans (but not for 401k plans that have safe harbor matching contributions).
A plan may be amended to become a nonelective 401k safe harbor plan for a plan year at any time prior to the 30th day before the end of the plan year (i.e., before Dec. 1 for calendar plan years). A plan can be amended to become a nonelective 401k safe harbor plan after the 30th day before the end of the plan year, if the plan provides for a nonelective contribution of at least 4% and the amendment is made by the last day for distributing excess contributions (i.e., April 15 of the year following the year of the deferral). This provision applies to plan years beginning after Dec. 31, 2019.
MORE SECURE ACT PROVISIONS COVERAGE:
- A SECURE Act Safe Harbor for Guaranteed Income in 401ks: Fred Reish
- ‘Stretched’ Out: Adjusting to SECURE Act’s New 10-Year Rule
- RMD Age Jumps to 72 in 2020 After SECURE Act
- What SECURE Act’s Annuity, Open MEP Provisions Mean for Advisors
- SECURE Act Awaits Trump’s Signature
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
