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With the passage of Setting Every Community Up for Retirement Enhancement (SECURE) Act, small-business owners now have the opportunity to start a retirement plan for their employees and lower the company’s tax liability.

Eligible businesses also can take advantage of the tax credits available and a benefit that can help recruit and retain talent.

Learn more about the many provisions of the SECURE Act that impact employers and employees. Financial advisors also have an opportunity to leverage the rules of the SECURE Act.


Business person learning about the SECURE Act

Retirement Plans Startup Costs Tax Credit

Who is an eligible employer for the retirement plan startup tax credit?

An eligible employer for the retirement plan startup tax credit has 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year. The employer must also have at least one non-highly compensated employee, and in the 3 tax years before the first year of eligibility for the credit, the employer's employees were not:

  •  substantially the same employees who received contributions or accrued benefits in another plan sponsored by the employer,
  • a member of a controlled group that includes the employer, or
  • a predecessor of either.
What is the basic formula for the retirement plan startup tax credit?

The credit is 50% of the employer’s ordinary and necessary eligible retirement plan startup costs up to the credit annual cap. The annual cap is the greater of $500, or $250 for each non-highly compensated employee who is eligible to participate in the plan up to $5,000.

How many subsequent years is the employer eligible to receive the retirement plan startup tax credit?

The credit extends over a three-year period, for a potential total credit maximum of $15,000.

How can a company get the maximum retirement plan startup tax credit?

A company would need to be an eligible employer, have $10,000 or more in plan expenses, and have between 20 and 99 eligible non-highly compensated employees to potentially receive the maximum retirement plan startup credit.

Can the annual account fee be used to calculate the retirement plan startup tax credit?

Yes. Eligible retirement plan startup costs include the ordinary and necessary costs to set up and administer the plan, and educate employees about the plan.

Does the audit expense count towards the plan expenses for the retirement plan startup credit?

Audits completed for filing Form 5500 are generally required for large employers with an employee count over 100. Employers with over 100 employees who received at least $5,000 in compensation in the preceding year would not likely be eligible employers for the startup credit.

Can an employer start a second retirement plan and receive the startup credit?

Not likely. If the employer’s existing retirement plan is offered to substantially the same group of employees as a new retirement plan would be, they would not be an eligible employer for the startup credit.

How does the employer receive the retirement plan startup credit?

IRS Form 8881 (Credit for Small Employer Pension Plan Startup Costs) is filed in conjunction with the employer’s tax return. The IRS will need to amend the form for the new credit provisions.

Can an employer take the tax deduction for the retirement plan expenses and claim the tax credit?

No. Any expenses offset by this tax credit are not eligible for an additional tax deduction. However, the expenses not offset by the tax credit (such as the other 50% of expenses) would be eligible as a tax deduction. This is a nonrefundable tax credit.

If an employer started their retirement plan in 2018 or 2019, would they be eligible to claim the credit if the plan was established less than three years ago?

The new credit applies to tax years beginning after Dec. 31, 2019. The IRS will need to provide guidance as to whether a plan established less than three years ago would be eligible for the increased credit for plan years beginning in 2020.

Is the automatic enrollment tax credit included in the maximum credit of $5,000 per year?

No. The credit for including an automatic enrollment feature is in addition to the startup credit.

How does an employer know if they can receive the retirement plan tax credit?

Employers should consult with their business tax advisor or CPA to review eligibility and application of this tax credit (including carryover rules). Anticipated IRS regulatory guidance may alter or enhance the qualifications for this tax credit.

Small Employer Automatic Enrollment Tax Credit

Who is an eligible employer for the automatic enrollment tax credit?

An eligible employer had 100 or fewer employees who received at least $5,000 in compensation from you in the preceding year.

What is the amount of the automatic enrollment tax credit?

The automatic enrollment tax credit is $500 per year for up to three years, and is separate from any eligible startup tax credit.

If an employer already has a plan, can they receive the credit for adding an automatic enrollment feature?

Yes, the credit is available for new plans adopted that include automatic enrollment, or existing plans that add automatic enrollment.

If an employer started a retirement plan in the past three years that included an automatic enrollment feature, can they claim the tax credit?

The automatic enrollment tax credit applies to tax years beginning after Dec. 31, 2019. The IRS will need to provide guidance as to whether a plan established less than three years ago would be eligible for the credit for plan years beginning in 2020.

Can an auto enrollment feature be added mid-year?

Adding an Eligible Automatic Contribution Arrangement (EACA) is allowable mid-year; however, this is not currently systematically supported, nor does it offer the benefits of non-discrimination testing relief, as it is not a safe harbor design. Employers can add the Qualified Automatic Contribution Arrangement (QACA) effective Jan. 1 of the next plan year, and receive the credit for the first three taxable years in which the auto enrollment arrangement is present in the plan.

How does an employer claim the automatic enrollment tax credit?

Currently, it is not known on what tax form this will be claimed. The IRS is expected to provide guidance on this item.

Additional Time to Establish a Plan

Why would an employer choose additional time to establish a plan?

Employers may wish to make a tax-deductible contribution to their employees, but did not establish a plan prior to the last day of the taxable year. This provision allows an employer to adopt a plan effective for the tax year, up until their tax filing deadline, in order to make the contribution.

How will the employer contribution be allocated under the provision that allows additional time to establish a plan?

The allocation of the employer contribution is required to be based on the employee’s eligible compensation for the plan year.

Can I use additional time to adopt a retirement plan for 2019?

No. This provision applies to plans adopted for plan years beginning in 2020.

Will taking additional time to establish a plan trigger an operational failure for missed employee contribution opportunity?

No, employee deferrals would not be allowed before the plan adoption date, despite the plan effective date of Dec. 31 of the taxable year.

Can an employer start a plan in 2020 if they already have another retirement plan?

Yes, however care should be taken with adopting a second plan as combined nondiscrimination and coverage testing would be required.

Safe Harbor 401(k) Changes Under the SECURE Act

Which safe harbor notices have been eliminated under the SECURE Act?

Employers are no longer required to provide a Safe Harbor notice to employees when the safe harbor contribution is a non-elective contribution (NEC). Notices for safe harbor matching plans are still required.

What is the latest that an employer can adopt a safe harbor plan with a 3% Non-Elective Contribution (NEC)?

A safe harbor plan with a non-elective contribution may be adopted anytime up to 30 days before the end of the plan year. Within this timeframe, the non-elective contribution is 3% of a participant’s eligible compensation.

Can an employer adopt a safe harbor plan beyond that deadline?

An employer may adopt a safe harbor plan with a non-elective contribution (NEC) anytime up to the end of the following plan year if the NEC amount is 4% (rather than 3%) of a participant’s eligible compensation.

Why would an employer choose to late-adopt a safe harbor plan?

An employer who fails non-discrimination testing may wish to adopt a safe harbor design to alleviate the need to return contributions to highly compensated employees or to make a qualified non-elective contribution (QNEC) to correct the failure. A safe harbor design also satisfies top-heavy requirements for plans without additional employer contributions.

If an employer already processed the return of excess to correct discrimination failures, would they still be able to amend their plan to safe harbor and re-contribute the excess amounts?

Since employers may choose to have HCEs return their ROE checks and fund a corrective QNEC by the end of the following plan year, we expect that this same option would be available if an employer decided to choose a Safe Harbor amendment and related contribution.

Automatic Enrollment Cap Increase Under the SECURE Act

What is the purpose of the automatic enrollment cap increase?

Previously, employers wishing to use automatic enrollment escalation features in their plan were prohibited from enacting an automatic enrollment amount above 10% of an employee’s compensation. The new law allows the plan to escalate the amount up to 15%, provided the first year does not exceed 10%.

Can plans that use the Qualified Automatic Contribution Arrangement (QACA) with the escalation feature amend to the new higher limits under the SECURE Act?

Yes, plans will be able to amend for the higher limits, however, the maximum limit of 10% will still apply for the first year.

Long-Term Part-Time Employees Required to be Allowed to Participate in Retirement Plans

Which part-time employees will be allowed to participate in a retirement plan under the SECURE Act?

Part-time employees who work at least 500 hours per year for three consecutive years, and meet the minimum age requirement for the plan, would need to be allowed to participate in the plan.

Are part-time employees eligible for all of the retirement plan benefits?

No, the long-term part-time employees who become eligible must be allowed to make employee deferral contributions, but may be excluded from employer contributions, including match, non-elective, profit sharing, top heavy and gateway contributions.

Do I need to include long-term part-time employees in my non-discrimination testing?

Long-term part-time employees may be excluded from ADP, coverage, and other non-discrimination testing.

When do employers need to start including long-term part-time employees?

Employers need to start counting hours for part-time employees beginning Jan. 1, 2021. The first date at which eligible part-time employees must be allowed to participate is Jan. 1, 2024, three years following the start date for counting hours. Hours worked prior to Jan. 1, 2021 will not count toward eligibility for participation.

What happens if an employee switches from part-time to full-time?

Once an employee satisfies 1,000 hours in one year, they switch to the eligibility rules that apply to a full-time employee under the plan.

How is vesting credit calculated for long-term part-time employees?

For vesting purposes, a long-term part-time employee will receive a year of vesting credit for all previous years in which they worked 500 hours or more.

Increase in Age for Required Minimum Distributions (RMD) Under SECURE Act

What is the new age at which an individual is required to take minimum distributions from a retirement plan?

The minimum distribution age has been raised from age 70½ to age 72. However, this applies to individuals who have not reached age 70½ by Dec. 31, 2019.

If an individual is older than 70½, but less than 72, can they defer taking additional RMDs until they reach age 72?

No. If an individual began RMDs under the old rules, they must continue taking them, even if they have not reached age 72.

Penalty-Free Withdrawals for Individuals in Case of Childbirth of Adoption

What does the penalty-fee withdrawal rule allow?

This rule allows participants to take distributions up to $5,000 from their retirement plan for expenses relating to childbirth or adoption, and allows the amount to be re-contributed to the plan. These distributions would not be subject to the 10% early withdrawal penalty.

What is the time frame in which these distributions are allowed?

The distributions are allowed over a period of 12 months after the legal birth or adoption date.

Is this provision mandatory?

At this time, the IRS has not directed whether or not this provision is required to be offered by all plans.

Can employers allow participants to take advantage of penalty-free withdrawals of this now?

There are a significant number of outstanding questions that need to be addressed before a plan could utilize this feature, therefore, the provision cannot be implemented prior to receipt of further guidance from the IRS.

Updates to Multiple Employer Plans/Pooled Employer Plans/Pooled Plan Providers

What has changed regarding multiple employer plans (MEPs) under the SECURE Act?

The existing MEP rules, which apply to employers that have a common interest beyond adopting a plan, have only changed slightly. The “one bad apple” rule, which disqualified a MEP if one employer failed to maintain the qualification of their plan, has been virtually eliminated, as long as the non-compliant employer corrects all failures, and is spun off to a separate plan.

What is the Pooled Employer Plan (PEP) created by the SECURE Act?

The Pooled Employer Plan (PEP) is a type of “open MEP”, which allows employers to participate in a single plan, regardless of whether they have a common interest or not.

What is a Pooled Plan Provider (PPP)?

A Pooled Plan Provider is required to satisfy all the following requirements:

  • Act as the named fiduciary and plan administrator
  • Responsible for all administrative duties for the plan to be ERISA compliant (3(16) provider
  • Registered with the DOL prior to starting operations
  • Ensure that all named fiduciaries handling assets are properly bonded
  • Is the primary target for IRS/DOL audits, examinations and investigations?
Who is responsible for designating a trustee for a PEP?

The PEP is required to designate one or more trustees responsible for collecting contributions and holding plan assets.

What fiduciary responsibility is retained by a participating employer in a PEP?

Individual plan sponsors (participating employers) would have fiduciary liability relating to selecting and monitoring the pooled plan provider, and investing and management of plan assets for their employees. If a 3(21) or 3(38) service provider is utilized, the sponsor is responsible for monitoring them. Also, each participating employer must take necessary actions to stay compliant with ERISA law.

Is Paychex going to act as a Pooled Plan Provider and/or offer a Pooled Employer Plan?

There are several unknowns. There are outstanding directives to the IRS and DOL which, when addressed with further agency guidance, will help Paychex determine what products and services can be provided to best suit our clients’ needs.

Increased Penalties for Failure to File or Provide Disclosures

Which late filling penalties are the biggest concerns for a retirement plan provider?

The penalties providers need to be mainly concerned with relate to filing Form 5500 in a timely manner, providing plan change information on Form 5500, filing Form 8955-SSA, and providing proper disclosures related to taxability of plan distributions.

What are the increased penalties?

All previous penalty amounts have increased by a factor of 10:

  • Failure to file Form 5500 results in a penalty of $250 per day, not to exceed $150,000
  • Failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000. (Reported on Form 5500)

    (1)  any change in the name of the plan,

    (2)  any change in the name or address of the plan administrator,

    (3)  the termination of the plan, or

    (4)  the merger or consolidation of the plan

  • Failure to file Form 8955-SSA incurs a penalty of $10 per participant per day, not to exceed $50,000
  • Failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. (402(f) notice)
What should plan sponsors do to prevent penalties?

Plan sponsors should be diligent communicating plan and participant changes to Paychex and verify that correct information is reported on Form 5500 and Form 8955-SSA prior to filing these forms by the required deadlines. Additionally, any tax withholding notice that is required to be provided by the plan sponsor needs to be distributed timely.

Fiduciary Safe Harbor for Selection of Lifetime Income Provider

What exactly is this fiduciary safe harbor?

Previously, a plan fiduciary was subject to fiduciary liability if they chose a lifetime income provider’s product for their retirement plan, and losses to participants and beneficiaries occurred due to the provider’s inability to follow through on obligations. The new safe harbor removes that liability if the plan fiduciary completes scripted due diligence on the provider and the product.

What due diligence is required to afford this protection to plan fiduciaries?

To be protected under this safe harbor, the fiduciary is required to have a prudent process for identifying insurers, including consideration of the financial capability of the insurer to fulfill its obligations, the cost of the contract, and the benefits and product features. The fiduciary is required to obtain written representations annually from the insurer relating to their authority to offer certain products and their proven past and future financial stability.

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