Expertise Beyond the Numbers

SECURE ACT ANALYSIS: Impact of Recent Law Changes on Employers

On December 20, 2019 the Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law as part of a Consolidated Appropriations Act. This largely bi-partisan legislation makes a few modest, but potentially important changes to the US retirement plan system. In this article, the first in a series, we will review a number of provisions which may be impactful to businesses and business owners.

Expanded Timeline for Establishing Employer Sponsored Retirement Plans

One of the more significant changes included in the SECURE Act from an Employer perspective is the expanded timeline for the adoption of qualified retirement plans. For many years certain retirement plans (ex. 401(k), 403(b), defined benefit, profit sharing) were required to be established before the end of the tax year in order deduct contributions in a given tax year. The new provisions allow these plans to be adopted as late as the extended due date for the Employer’s tax return. In practice, this means that rather than being required to establish a plan by December 31, 2019, an Employer could establish the plan as late as September 15, 2020.

Employers should consult with their benefits consultants and tax advisors before deciding to implement complex retirement funding strategies.

Credits for Employer Sponsored Retirement Plans

The SECURE Act expands credits available to employers who start retirement plans for the benefit of employees. The credit is calculated as $250 per non-highly-compensated employee up to a maximum of $5,000.

In addition, a credit of $500 per year for a three year period is available to employers who implement automatic enrollment practices within their retirement plans. Similar to the automatic escalation provisions mentioned below, research indicates that automatic enrollment significantly increases lifetime retirement savings rates for many employees.

Each of the above credits are available to “small businesses” with fewer than 100 employees.

These relatively modest credits are unlikely to influence many employers’ decision to offer an employer sponsored retirement plan. However, employers should consult their tax advisor to take best advantage of these credits if they are available.

Increased Auto-Enrollment Safe-Harbor Limits

Many workplace defined contribution retirement plans, such as 401(k) and 403(b) plans, include automatic escalation provisions. These are designed to increase employees’ retirement contributions by small amounts each year (often 1% – 3%) in order to help employees reach long-term retirement goals. According to research from the Society of Human Resource Management (SHRM), automatic escalations provisions are both statistically meaningful and are favored by employees.

The SECURE Act increases the upper limit for automatic escalation of employee contributions to 15% of earnings as opposed to the previous 10% limit.

Employers may want to discuss including higher automatic escalation provisions to employer sponsored retirement plans with their benefits consultants and / or employees. Controlling documents may need to be reviewed and / or updated.

Inclusion of Long-Term Part-Time workers in Employer Sponsored Retirement Plans

For many years employer sponsored defined benefit retirement plans (ex: 401(k) plans) were only required to be offered to employees who worked more than 1,000 hours per year. The SECURE Act expands that participation threshold for employees who work more than 500 hours per year for three (3) consecutive years. The House Ways and Means committee references research which indicates that women are more likely than men to have part-time employment and, thus, may be at a long-term disadvantage with respect to retirement savings.

These expanded eligibility requirements may require amendments or re-drafting of some retirement plan documents. Employers should consult with their benefits consultants to determine if documents should be reviewed and / or updated.

Administrative Provisions for Employers

Several new administrative provisions are included in the SECURE Act. Among them:

  • Combined / consolidated annual filings will be available for eligible defined contribution retirement plans. Plans must be very similar and include
    • The same Trustee
    • The same Named Fiduciary
    • The same Administrator
    • Have the same plan year
    • Have the same investments and investment options
  • Expanded nondiscrimination rules which allow long-term workers to continue to participate in closed plans
    • This provision likely applies to Employers with older retirement plans with richer benefits which have been closed to new employees
    • More likely to apply to large companies or government entities
  • Increased penalties for failure to file appropriate retirement plan tax returns
    • IRC Section 6651 and 6652 penalties are increased for tax returns with due dates later than December 31, 2019
    • Many penalties were increased by a factor of 10, thus what was once a $5,000 non-filing penalty may be as high as $50,000
    • Some penalties can be as high as $150,000 per tax year

The above administrative changes could have different impacts for different Employers. Employers should consult their benefits consultants to determine exposure and planning options.

CONCLUSION: Like many tax laws the SECURE Act incorporates some planning opportunities for business owners along with possible administrative burdens. The most important takeaway for Employers is to work with benefits and tax advisors and implement plans to take advantage of opportunities and mitigate areas of exposure. Contact us with questions or to establish the best plan of action for these requirements.