The SECURE Act and spending bill provisions recently signed into law by President Trump contain a cornucopia of significant changes, but some of the most important affect 401(k) plans. While plan amendments will not be required until 2022 at the earliest, plan sponsors may take advantage of some of the changes in 2020. Here is a summary of new rules that current and potential 401(k) plan sponsors need to know.
If You Have a 401(k) Plan
Does Your Plan Provide Loans?
One prohibition is effective on enactment. Effective immediately, 401(k) plans are not permitted to make plan loans available by credit card. Existing programs must be discontinued.
If You Have a Safe Harbor Plan, You May Have New Flexibility
The SECURE Act gives plan sponsors more time to decide whether to adopt a safe harbor 401(k) plan with nonelective contributions. Under prior law, a sponsor who wanted to decide whether to adopt a safe harbor plan with nonelective contributions had to send a “maybe notice” to employees reserving the right to decide to have a safe harbor plan for the succeeding plan year and had to make the decision at least three months before the end of the year. The SECURE Act eliminates the notice requirement and permits a plan sponsor to elect to have a nonelective safe harbor plan mid-year and even after the end of the plan year, provided that if the plan sponsor makes the decision to have a nonelective safe harbor plan later than 30 days before the end of the plan year, the plan sponsor must make a nonelective contribution of at least 4% of pay. The notice requirements for safe harbor plans that provide matching contributions were not changed.
If your plan is a qualified automatic contribution arrangement (QACA), a type of safe harbor plan with automatic enrollment, the maximum auto-enrollment contribution under auto escalation will increase from 10% to 15%.
These provisions are effective in plan years beginning on and after January 1, 2020.
More Part-Time Employees Must Be Covered in All 401(k) Plans
Currently, plans may exclude employees who don’t complete at least 1000 hours of service in a 12-month eligibility computation period. These are called “statutory exclusions” because, so long as they don’t get benefits, these employees don’t count as uncovered employees when an employer is testing for non-discriminatory coverage. A part-time employee who never works 1000 or more hours in an eligibility period is not required to ever be included in a plan.
All of this will change in 2021 when long-term part-time employees will have to be permitted to contribute to 401(k) plans. These employees are individuals who complete more than 500 hours of service in three consecutive eligibility years, which don’t need to include prior service. Including these part-time employees won’t be optional, but they will not be required to get employer contributions and will be excluded from non-discrimination testing. This new rule expands access to 401(k) coverage at the expense of complicating plan administration.
If You Don’t Have a 401(k) Plan but Are Considering Adopting One
You Have More Time
Under current law, qualified plans must be adopted by the last day of the year in order for employers to make deductible contributions for that year. This strict rule often catches employers unaware because IRAs can be adopted after the end of the tax year and up to the tax return due date. It is easy to confuse the requirements. Beginning with the 2020 tax year, the rules for qualified plans and IRAs will be the same – both can be adopted up to the plan sponsor’s tax return due date. This will provide much-needed flexibility for employers considering plans, but it won’t permit employees to make retroactive 401(k) contributions. The new provision also does not retroactively benefit plan sponsors who in prior years inadvertently adopted their plans too late.
Higher Tax Credits May Be Available
The tax credit for small employers that start new retirement plans increases from $500 per year to as much as $5,000 per year for three years. There is also a new $500 per year tax credit for up to three years for small employers that adopt new plans that include automatic enrollment. Small employers had no more than 100 employees who earned at least $5000 in the preceding year.
New Multiple Employer (MEP) Plan Options Are Available
The SECURE Act will make open multiple employer plans, called Pooled Employer Plans (PEPs), available as an option beginning in 2021. These will be professionally managed plans that permit unrelated employers to participate. Adopting employers will be relieved of much (but not all) of their fiduciary responsibilities. PEPs are a major step toward increasing small employer plan coverage, and they will be the subject of a later blog post.
In future Insights posts, I will discuss changes important for defined benefit plans, IRAs, plan administrators, and investment advisers.