By: Valerie F. Gainer
The SECURE Act, signed into law on December 20, 2019, may help alleviate some of the burdens small employers face when providing retirement plans. Here are a few key things you need to know when evaluating what, if any, changes you should make to take advantage of this new legislation.
OPEN MULTIPLE EMPLOYER PLANS
While Multiple Employer Plans (or MEPs) are not new to the retirement industry, they previously have been inaccessible to many employers that were unable to satisfy the commonality/control requirement (a requirement that businesses must be related in certain ways to participate in a MEP). The SECURE Act has eliminated the commonality requirement, allowing unrelated employers to pursue the advantages offered by pooled plans.
The SECURE Act’s provisions regarding Pooled Employer Plans (or PEPs) will be effective in 2021. A PEP is a single plan sponsored by a Pooled Plan Provider (“PPP”) with no commonality requirement for participating employers. Although employers retain obligations relating to the choice and oversight of the PPP, the PPP takes on fiduciary responsibilities for the plan and helps with plan administration thereby alleviating the burden on employers. PEPs could be especially beneficial to small employers that may be able to use them to provide better investment outcomes at a lower price. Once the Internal Revenue Service and Department of Labor issue guidance on PEPs, we will understand more about how they should be structured.
Notably, the SECURE Act also offers relief from “bad apples” in pooled plans. Previously, if one participating employer failed to satisfy MEP rules, all employers in the plan were disqualified. Now, if the plan contains a mechanism to rid itself of the bad apple, other participating employers will not be negatively affected.
AVAILABLE CREDITS
If you do not currently have a retirement plan in place, the SECURE Act offers you credits for setting one up. Businesses establishing a plan can receive an increased credit, ranging from $500 to $5,000, for three years following institution of the plan. Additionally, tax credits are available to small employers who set up a new 401(k) plan or SIMPLE IRA plan containing automatic enrollment provisions or who revamp a current plan to incorporate automatic enrollment provisions.
401(k) RULES
Under the SECURE Act, a 401(k), other than a matching contribution safe harbor plan, may be amended into a non-elective contribution safe harbor plan at any point prior to 30 days of the end of the plan year (amendments will be permitted inside the 30-day period under certain conditions). Non-elective contribution plans no longer need to provide safe harbor notices, although employees must still make or alter their elections every year. Additionally, the cap on automatic enrollment safe harbor plan contributions has increased from 10% to 15%.
RETIREMENT FOR LONG-TERM PART-TIME EMPLOYEES
The SECURE Act expands access to 401(k) plans, enabling certain part-time employees to participate. In 2021, part-time employees who have worked 1,000 hours in one year or 500 hours per year for three years in a row may be eligible under certain circumstances to participate in their employer’s 401(k) plan.
FIDUCIARY SAFE HARBOR
Plan sponsors have fiduciary obligations when choosing an insurance company to supply annuities. The SECURE Act gives fiduciaries an optional safe harbor to guard against liability if the insurance company fails to meet its contractual obligations.
TRANSFERRING LIFETIME INCOME INVESTMENTS
Certain retirement plans will now be permitted to utilize trustee-to-trustee transfers to relocate lifetime income investments, eliminating fees to participants.
CLOSED PENSION PLANS
An alteration to the nondiscrimination rules will enable participants in closed pension plans to keep accumulating benefits.
ILLUSTRATIONS ON BENEFIT STATEMENTS
At least annually, a defined contribution plan benefit statement must include an illustration of what the participant would receive monthly if the participant’s current balance would be used to supply lifetime income.
Jackson Kelly PLLC is prepared to assist you as you examine what the SECURE Act could do for your employer-provided plan. Please contact us to discuss the best way to meet your goals.