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The SECURE Act – Impact on Retirement Plans

The Setting Every Community Up for Retirement Enhancements (SECURE) Act encourages workplace retirement plan adoption and increases saving opportunities for Americans. The SECURE Act contains 29 separate provisions, many of which became effective January 1, 2020. Below is a summary of some of the more substantial changes impacting retirement plans:

Tax Credit for New Retirement Plans, SEP IRAs, and SIMPLE IRAs An employer that established a retirement plan, SEP IRA, or SIMPLE IRA could claim a tax credit for startup costs for the plan’s first three years equal to the lesser of:
  • $500 per year, or
  • 50% of qualified startup costs
An employer can now claim a tax credit for up to $5,000 for the new plan’s first three years.

The credit cap is equal to the greater of:

  • $500, or
  • The lesser of:
    • $250 multiplied by the number of rank-and-file employees who are eligible to participate in the plan, or
    • $5,000 
Consider establishing a retirement plan in 2021 to take advantage of this tax credit. 
Small Employer Automatic Enrollment Credit No prior law Small businesses (100 or fewer employees) that implement automatic enrollment are eligible for a $500 annual tax credit for three years. The credit can be used for either:
  • Startup costs for qualified employer plan (e.g., 401(k), SIMPLE IRA), or
  • Costs for converting an existing plan to automatic enrollment
Consider adding automatic enrollment to a new or existing retirement plan to take advantage of the additional tax credit. 
Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs) The unified plan rule (aka the “one bad apple” rule) provided that the failure of one participating employer in a MEP/PEP to meet plan qualification rules would cause the entire MEP to be disqualified.

Additionally, employers participating in MEPs must have shared a common characteristic (e.g., the same industry) to participate.

PEPs/“Open MEPs” could not be established to cover employees of unrelated employers. 
Provides relief from the “one bad apple” rule by treating assets of a failed participating employer as being transferred to another plan maintained by the sponsoring employer.

Allows employers to establish PEPs/“Open MEPs” without requiring them to share a common characteristic.

Effective after December 31, 2020. 
Allows economies of scale through pooled service providers who offer administration ease, fiduciary oversight, and cost efficiencies.

Exposure to plan disqualification is removed if one employer fails to comply with plan rules.
Age to Begin Required Minimum Distributions (RMDs) Participants must begin RMDs by April 1 of the year after reaching age 70 ½ or terminated employment, whichever comes later.

Exception for business owners with 5% or greater ownership. RMDs must begin, even if actively working.
The new deadline is April 1 of the year after reaching age 72 or terminated employment, whichever comes later.

Business owners who are still working and own 5% or more of the business sponsoring the plan cannot delay RMDs past age 72. 
If a participant turned age 70 ½ in 2019 or prior and had terminated employment, they still have an RMD for 2021.

If a participant turned age 70 ½ in 2020 or after, their first RMD will now be the year they turn age 72 or terminate employment, whichever comes later. 
Beneficiary Payout/ “Stretch Provision” In general, the date by which distributions must begin was dependent upon the beneficiary elected and whether RMDs had begun.

If a plan allowed and a participant died before distributions had begun, the entire benefit was typically paid by December 31 of the fifth anniversary of participant’s death.

If the participant died in 2019 or prior, the non-spouse may continue pre-SECURE Act election.
If a plan participant dies in 2020 or after, a new 10-year rule will apply.

The new rule requires the inherited retirement account to be depleted within 10 years for designated beneficiaries and five years for nondesignated beneficiaries (by December 31 of tenth or fifth anniversary of death).

Exceptions include spouses, minor children, disabled or chronically ill individuals, and non-spouse beneficiaries who are no more than 10 years younger than the deceased. Once minor children reach the age of majority, the 10-year rule begins.
Employers should consider whether a plan amendment is required and if stretch distributions are currently permitted under the plan.

Consider whether participants should be notified of the changes and new beneficiary elections solicited.
Plan Adoption Date Extended to Tax Filing Due Date Retirement plans must have been adopted by Dececmber 31 to be treated as a valid plan for that business’ taxable year. Employers now have until their tax filing deadline (plus extensions) to adopt a plan and take a deduction for the previous year. Business owners have more time to determine their financial outlook in a taxable year before establishing a retirement plan.
Penalty-Free Withdrawals for Birth or Adoption of Child Retirement plan distributions were generally taxable as ordinary income and subject to a 10% early withdrawal penalty prior to age 59 ½. Certain penalty exceptions may have applied. Allows a $5,000 penalty-free withdrawal to cover expenses related to the birth or adoption of a child within one year of the event. Determine if this penalty-free withdrawal option should be made available in your plan.
Increase Penalties for Failure to File Plan Returns The IRS imposes penalties for failure to file timely returns and notices. For example:
  • Annual 5500 Report – Penalty of $25 per day, up to a maximum of $15,000
  • Form 8955-SSA – Penalty of $1 per day, up to a maximum of $5,000
The new rule raises the late filing penalties for tax returns and notices. For example:
  • Annual 5500 Report – Penalty of $250 per day, up to $150,000
  • Form 8955-SSA – Penalty of $10 per day, up to a maximum of $50,000
Work closely with your third-party administrator/recordkeeper to make sure that required filings are included as part of the year-end compliance work. 
Long-Term, Part-Time Employees Retirement plans could exclude employees from participating if not age 21 with a year of service (1,000 hours during a 12-month period). Allows long-term, part-time employees who work at least 500 hours annually for three consecutive years and who attain age 21 to become eligible to participate in a retirement plan.

Employers can exclude employees who are solely eligible due to this provision from nondiscrimination, coverage, and top-heavy rules.

Effective beginning after December 31, 2020. 
Keeping accurate records of part-time employees and hours of service will be key to avoiding any plan errors for missed deferral opportunities. 
Increase in Cap for Automatic Enrollment Safe Harbor Plans Auto-escalation of employee elective deferrals were capped at 10% of pay for safe harbor plans. Allows the 10% auto-escalation cap to increase to 15% of pay for safe harbor plans after the participant’s first year in the plan. Adding an auto-escalation feature may help plan participants save more for retirement without having to actively make elections.
Election of Safe Harbor Status Comprehensive written notice must be provided to eligible employees informing them of their rights and obligations under the safe harbor plan 30 days before each plan year whether the plan was using the matching or nonelective contribution option. Limits the safe harbor notice to only those plans using matching contribution formulas.

Nonelective safe harbor plans are not required to provide the notice.
One fewer notice requirement for a retirement plan sponsor to track.

Cost savings for mailing participant notices.

Please note: Qualified plans will require mandatory amendments to address SECURE Act changes; however, for most plans the deadline will be 2022.

If you have questions on the SECURE Act related to your financial situation, please reach out to your Stifel Financial Advisor.

This information is for educational purposes only.

Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.