Avoiding Noncompliance “Traps” Under the SECURE Act

The recently passed SECURE Act offers provisions that benefit employers sponsoring 401(k) plans and their employees, all with the goal of helping more Americans enjoy financial security in retirement.  However, sponsors must be ever vigilant to avoid the “trap” of noncompliance, as the SECURE Act creates significantly stiffer penalties for failure to meet certain filing and notification requirements.

Beginning January 1, 2020, the SECURE Act significantly raises the penalties for the late filing of certain reports and registrations, as well as penalties for not providing certain notifications.

Form 5500

This annual form filed with the IRS reports financial conditions, such as plan contributions and assets; investments; and plan operations. It is due on the last day of the seventh month after a plan year ends.  Late-filers may file for an extension on or before the due date using Form 5558 and then file the Form 5500 two-and-a-half-months later.  For a calendar-plan year (a plan whose year end is 12/31), the Form 5500 due-date is July 31; with extension, it is October 15.

With passage of the SECURE Act, late filers who do not file on extension, or plans on extension that miss their late-filing deadline, will face a daily penalty of $250 versus the $25-per-day penalty in effect before January 1, 2020.  Likewise, the maximum penalty has increased ten-fold, from $15,000 to $150,000!

Registration Statements and Notifications of Changes

The IRS requires employers to report other plan changes related to participants and operations.

Annually, at the time the Form 5500 is filed, plans subject to vesting schedules must register information about separated participants with deferred vested benefits using Form 8955-SSA.  The registrations are due at the time the Form 5500 is filed.  

Employers must notify the IRS of other changes related to responsible parties for the plan or the address of the plan sponsor, to name just two.  Employers may use Form 8822-B, to report such changes within 60 days of their occurrence.

Like the penalties for late filing of the Form 5500, penalties for late filing of participant registrations and plan changes have increased ten-fold.  Daily late fees per participant for late registration statements now increase to $10 from $1, with the maximum fine for any plan year at $50,000 (up from $5,000).  Lateness in reporting plan changes results in a daily penalty of $10 up to a maximum of $10,000 (from a $1 daily penalty and a $1,000 maximum penalty).

Withholding Notices

Plan sponsors must provide withholding notices to participants seeking distributions.  These notices, commonly known as 402(f) notices, explain the benefit of rolling over their distribution and the tax consequences, as well as potential early withdrawal penalties when not rolling over the distribution.  The notice must be provided no less than 30 days and no more than 180 days before the distribution is to be made, although the participant may waive the 30-day period. 

Failure to provide a required withholding notice now results in a $100 penalty for each failure with a maximum annual penalty of $50,000 for all failures within a plan year (again, reflecting a ten-fold increase from $10 per failure and an annual maximum penalty of $5,000).

While the SECURE Act increases these IRS penalties for late filings and registrations and failure to provide notice, it is important to remember that falling into the noncompliance “trap” can also result in penalties from the Department of Labor, which can be higher than those of the IRS.  The DOL has the authority to assess penalties for a late filing of the Form 5500, for example, with a maximum daily rate that is annually adjusted for inflation (effective January 15, 2020, it is $2,233).

As is the case with all rules related to governmental filings and notifications, plan sponsors benefit by hiring knowledgeable service providers.  Employers interviewing new providers – or assessing existing service – will want to consider the guidance received in filing the necessary reports and forms, distributing necessary notices, and understanding all requirements and deadlines.

This blog is written to help make the lives of plan sponsors easier in the process of meeting legal requirements under ERISA for their defined contribution plans.  Please understand that reading this blog should not alone take the place of a one-on-one consultation regarding the needs of your specific plan and hence cannot be a guarantee against fiduciary breaches.