The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act which was signed into law in December of 2019 has enacted sweeping changes to the retirement plan industry.  As a result, this is the first in a series of articles that are intended to summarize the most impactful aspects of the SECURE Act as they apply to tax-qualified retirement plan sponsors.

It is important to understand that even though this legislation was only recently enacted, many of its provisions are already effective.  However, many others require additional regulatory guidance before they can be implemented.  Therefore, it is critical for retirement plan sponsors to take the time to educate themselves on the impact of these changes in order to help ensure the proper administration and operation of their retirement plans.

Delayed RMD Beginning Date

In general, “required minimum distributions” (“RMD(s)”) are mandatory annual retirement plan distributions that are required to be received by certain individuals once they attain a certain age.  In this manner, RMDs are intended to ensure that employees spend their retirement savings during their lifetime rather than attempt to use their retirement savings as an estate planning tool.

Prior to the SECURE Act, the first RMD was required to be taken by April 1^st of the calendar year after the later of: 1) the year in which an employee attains age 70-1/2; or 2) the year that employment with the plan sponsor is terminated.  However, a 5% owner was required to take his or her first RMD by April 1^st of the calendar year after the year in which age 70-1/2 was attained regardless of whether he terminated employment or not.

Effective for 2020, the SECURE Act increased the age that triggers when the first RMD must be taken from age 70-1/2 to age 72 thereby delaying when the first RMD must be taken.  Employees who turned 70-1/2 in 2019 or earlier cannot take advantage of this rule change and must continue to receive their annual RMDs even if they have not yet attained age 72 in 2020.

401(k) Safe Harbor Notice Requirements

Effective for plan years beginning after December 31, 2019, plan sponsors are no longer required to issue annual 401(k) safe harbor participant notices in relation to a 401(k) safe harbor profit sharing (also referred to as “non-elective”) feature.

Plans that include a 401(k) safe harbor profit sharing feature generally require an employer contribution of at least 3% of compensation to all eligible employees in order to avoid the application of certain onerous nondiscrimination testing that would otherwise apply.  One of the requirements associated with satisfying the “401(k) safe harbor” requirements is the provision of a formal notice to employees that discusses such contribution as well as certain other plan features and information.  The notice generally must be provided at least 30 but no more than 90 days prior to the beginning of each plan year that the 401(k) safe harbor contribution is to be made.  However, effective for plan years beginning after December 31, 2019, such notices are no longer required in connection with a 401(k) safe harbor profit sharing feature.  Notwithstanding the foregoing, the 401(k) safe harbor notice requirement continues to apply to plans that have a 401(k) safe harbor matching feature.

This change will help to reduce the administrative burden experienced by plan sponsors of plans with a 401(k) safe harbor profit sharing feature.

401(k) Safe Harbor Adoption Deadline

Effective for plan years beginning after December 31, 2019, a 401(k) safe harbor profit sharing contribution feature equal to at least 3% of compensation can be adopted as late as 30 days prior to the end of the plan year to which it would relate or, if at least 4% of compensation is allocated as the 401(k) safe harbor profit sharing contribution amount, as late as the last day for distributing excess contributions for the plan year.  Generally, this means that a plan that employs a calendar year plan year will have until December 31^st of the year after the year to which the safe harbor contribution relates to adopt a 401(k) safe harbor profit sharing feature if the amount to be allocated under such feature is at least 4% of compensation.

In the past, a plan with a 401(k) safe harbor feature generally had to be amended to implement such feature before the first day of the plan year to which such feature related.  Thus, this change will now provide significant design flexibility to plan sponsors because it will allow a plan sponsor to wait until 30 days before the end of the plan year before committing to a mandatory employer contribution of at least 3% of compensation for eligible employees.  This is important because it can allow a plan sponsor to wait until the year is almost over before determining whether the safe harbor contribution may be necessary to avoid refunds that might otherwise occur as a result of failed nondiscrimination testing.  In addition, if the plan sponsor is willing to give a slightly larger safe harbor contribution, it can now wait until after the end of the plan year to which it would relate before deciding to make a safe harbor election.

Increased Small Employer Plan Start-up Tax Credit

Effective for tax years beginning after December 31, 2019, the small employer start-up plan tax credit is increased to 50% of start-up costs for each of the first 3 years that a plan exists up to the greater of: 1) $500; or 2) the lesser of: a) $250 for each non-highly compensated employee eligible to participate in the plan; or b) $5,000.

In 2002, a tax credit was created by Congress to benefit small employers (100 or fewer eligible employees) who decided to establish a tax-qualified retirement plan.  However, the amount of such credit was capped at 50% of start-up costs for each of the first 3 plan years with a maximum per year credit of $500.  This change under the SECURE Act significantly increases the maximum amount of the per year tax credit up to, potentially, $5,000.  Presumably, many small employers will not be able to qualify for the full $5,000 tax credit due to the qualifications associated with reaching such amount.  However, this is a significant gesture on the part of Congress to increase the maximum credit amount in a somewhat transparent attempt to encourage small employers to provide retirement plan access to its employees.

Small Employer Automatic Enrollment Tax Credit

Effective for tax years beginning after December 31, 2019, a tax credit of $500 is established for each of the first 3 years that a small employer (100 or fewer eligible employees) sponsors a plan with an “eligible automatic contribution arrangement” (“EACA”).  In general, an EACA is a broadly available type of automatic contribution arrangement that can be designed in order to allow participants to withdraw their automatic contributions within 90 days of initial participation if they are enrolled by mistake.

An existing plan can add the EACA feature to qualify for the tax credit.  In addition, a small employer could qualify for both this automatic enrollment tax credit and the start-up plan tax-credit discussed above in the same tax year.

According to much of the available retirement plan industry guidance on the topic, the majority of automatically enrolled employees do not immediately suspend their 401(k) deferrals upon discovering that they are enrolled and, instead, continue to participate in the plan.  Thus, this tax credit may not only encourage more small employers to implement an EACA but could also have a very positive impact on employees’ savings for their retirement.

We hope that this article helped you to better understand this topic.  However, please be advised that it is not intended to serve as financial, tax or legal advice so it should not be construed as such.  If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional.  For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.