Four Things Businesses Need to Know About the SECURE Act
According to a Pew Charitable Trusts survey, one in three Americans does not have access to a retirement plan through their employer and fewer than half of all workers participate in an employer-sponsored plan. While not the only way to build wealth for retirement, employer plans are an important tool for many Americans to do so.
In an attempt to make a dent in the retirement gap, the SECURE (Setting Every Community Up for Retirement Enhancement) Act was signed into law on Dec. 20, 2019 with aims of expanding retirement vehicle access for individuals and incentivizing employers to offer retirement plans. Several of the provisions included in the plan went into effect January 1, 2020, but others won’t take effect until future plan years.
“Companies are taking a hard look at what they’re offering to employees in terms of retirement savings plans,” said Debbie Crump, senior vice president and trust officer with the Institutional Wealth Division of BOK Financial. “This act is intended to enhance the likelihood that smaller employers would offer retirement plans for their employees. It’s also helping these businesses by making retirement plan offerings more affordable through tax and other incentives.”
Here’s a snapshot of four elements of the SECURE Act that businesses need to be aware of and topics that will help you ask the right questions of your CPA or retirement plan advisor.
1. Tax credits to offer retirement plans
Under the previous provisions, small businesses were eligible for a minimal tax credit, but that has been increased for starting a new employer plan. Combined with an additional $500 incentive for establishing automatic enrollment for employees, the incentive could result in a $5,500 tax credit for eligible start-up costs for each of the first three years. These provisions are effective for taxable years beginning after 2019.
“The intention is to help cover the costs of setting up a new plan, which is a great incentive to encourage companies to start a plan,” Crump said. “Also, if you automatically enroll participants on day one, they won’t miss those dollars that could compound significantly in the future.”
2. Extended time table to adopt a plan
Employers considering a new plan now have more time to adopt a retirement plan and still receive the tax benefits. The SECURE Act provisions allow for more flexibility to adapt the design of certain types of employer-funded plans after year-end, as long as it’s complete by the due date of your corporate tax return, including extensions.
In addition, existing plans now have a more time to apply testing safe harbor provisions to the plan at a time other than the beginning of the plan year. These new provisions only apply if the employer agrees to satisfy the safe harbor requirements by using a nonelective contribution option.
“Plans could be amended during the plan year if certain requirements are met, but this additional time may allow for more options for companies that have had issues related to testing required on their plan,” Crump said.
3. Inclusion of part-time employees in 401(k) plans
Another future-looking provision applicable to defined contribution plans is the requirement to allow long-term, part-time employees to participate in employer-sponsored retirement plans. These employees would be required to work at least 500 hours for three consecutive years – that’s just an average of 10 hours per week. This provision only requires that employers allow these part-time workers to make their own deferral contributions. An employer contribution or match is not required until the employee has satisfied the eligibility requirements for employer contributions. This provision will not take effect until plan years beginning after 2020 when the three-year counting period begins. Therefore, participation would not be required to begin until 2024.
“The part-time worker provision will require some additional legwork for employers with the necessity to track hours worked over a three-year period of time to determine eligibility,” Crump said. “Employers need to consider that this may increase the cost of their plan, but the additional participants may also increase the asset size of their plan, in turn increasing the buying power for investments in the company plan.”
4. Increase in penalties for failure to file certain benefit plan filings on time
Consequences for missing applicable regulatory filing deadlines have steepened. For example, the penalty for failing to timely file a Form 5500 has increased from $25 per day to $250 per day for each day the filing is past the applicable deadline. The maximum cap for this per day penalty has also been increased from $15, 000 to $150,000. Employers should be aware of what filings are required for their company benefit plans (both retirement and welfare plans) and have an understanding on the required filing deadlines. Don’t be late!
The SECURE Act includes many more provisions that will impact individuals approaching retirement and company plans. Consult your plan’s relationship manager for additional details on how these changes will impact your company’s retirement offerings now and in the future. Stay tuned to BOK Financial websites for updates and details on other elements of the SECURE Act throughout 2020.