The SECURE Act’s impact on 401(k) plans
The government spending bill enacted into law in the closing days of 2019 included several provisions, one known separately as the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Among other things, the new law includes provisions aimed at making it easier for employers to offer retirement plans and for employees to participate in them. This is the first of several articles Plante Moran will release related to the SECURE Act.
Changes to safe harbor plans
Safe harbor plans provide an option for employers to offer employees the opportunity to participate in a 401(k) plan that avoids certain nondiscrimination tests. If the employer meets particular requirements, including making specific employer contributions to the plan, automatically enrolling individuals in the plan, and meeting specific vesting requirements, the plan may qualify under 401(k) safe harbor rules without being subjected to certain nondiscrimination tests.
One provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans in various ways.
One provision of the SECURE Act provides more flexibility for employers who offer safe harbor 401(k) plans in various ways, including:
- Increasing the automatic enrollment escalation cap under a qualified automatic contribution arrangement (QACA) 401(k) plan from 10 to 15%.
- Eliminating the notice requirement for nonelective contributions. Employers should note the notice requirement is still applicable for plans that provide the safe harbor match.
- Allowing employers to switch to a safe harbor 401(k) plan with nonelective contributions anytime up to 31 days before the end of the plan year. Amendments after that time are allowed if (1) a nonelective contribution of at least 4% of compensation is provided for all eligible employees for that plan year, and (2) the plan is amended by the close of the following plan year. Under prior rules, employers had to make a switch like this before the start of the plan year.
These changes apply to plan years beginning after Dec. 31, 2019, so employers who want to consider modifying an existing plan should consult with their benefit providers to learn about how the new rules may affect them.
Automatic enrollment credit
The SECURE Act added a new incentive for small businesses to make automatic enrollment a feature of their plans. Generally, businesses with under 100 employees can qualify for a $500 per year tax credit if they create a new plan that includes automatic enrollment or if they convert an existing plan to an automatic enrollment design. The credit applies to tax years beginning after Dec. 31, 2019, and is available in each of the first three tax years following the year the plan automatically enrolls participants.
Long-term part-time worker participation
Before the SECURE Act, employers could exclude employees who worked less than 1,000 hours in a year from participation in a plan. The new law creates a second eligibility requirement designed to help long-term part-time employees, except in the case of collectively bargained employees. Workers who don’t meet the 1,000-hour rule can still qualify to participate in the plan if they have at least 500 hours of service in three consecutive years. The provision starts counting the three years in the first plan year that begins after Dec. 31, 2020; any service before 2021 isn’t considered. So the first employees to qualify under this rule would need to meet the 500-hour requirement in each of the three years starting in 2021 in order to become eligible in 2024. For those employees who are eligible solely because of the new 500-hour requirement, the employer may exclude such employees from nondiscrimination and coverage testing as well as the application of the top-heavy rules.
Credit card prohibition
The SECURE Act prohibited the practice of permitting access to plan loans via credit cards or similar arrangements. Legislators felt that this would help to preserve retirement savings by making it more difficult to obtain loans from an account for routine or small purchases. This provision was effective as of the date the Act was enacted (Dec. 20, 2019).
Adapting to the new rules
Whenever laws that relate to retirement plans change, employers who sponsor those plans need to consider whether their plan documents need to be amended. Given the complexity of plan documentation and the relatively recent enactment of these changes, the law provided for a remedial amendment period that will generally extend into the 2022 plan year. In the meantime, employers must operationally comply with the new rules (for those that are mandatory) and consider which of the optional provisions they wish to adopt.
Plante Moran will continue to issue additional thought leadership surrounding the SECURE Act in the coming weeks. To learn more about how the SECURE Act affects your company’s existing plan or how it might affect your ability to create a plan, please contact your Plante Moran advisor.