Have You Implemented the SECURE Act?

Time is running out.  Half of 2020 is over, and there are important portions of the SECURE Act that affect 401(k) sponsors . . . now!  Much of the SECURE Act took effect January 1, but many employers – overwhelmed as they reinvent business operations in response to COVID-19 – have been unable to focus on the ways the SECURE Act changes 401(k) plan management.  The checklist below presents the most essential SECURE Act provisions that sponsors need to know . . . now.

1. Increased Penalties – Failure to comply with certain ERISA requirements grows more costly with SECURE Act penalties increasing tenfold.

Forms 5500 and 8955-SSA

As the deadline for filing the Form 5500 nears for plans with a December 31 year-end, sponsors face a daily fine of $250 (up from $25 per day) if they fail to submit these annual reports by July 31 or file for an extension.

Likewise, employers face increased fines for late filing of the Form 8955-SSA on which they report separated participants with vested plan balances.  The deadline for filing is the same as the deadline for filing the Form 5500, although it is filed separately.

Most sponsors rely on their plan’s Third Party Administrator to prepare the forms, but their timely filing – and accuracy – is the employer’s responsibility.

402(f) Withholding Notice
– Participants seeking distributions must receive this notice explaining they may roll over their distribution to another tax-qualified retirement account or pay taxes and a possible penalty.  The notice must be provided no less than 30 days before the distribution, although the participant may waive the 30-day period.  Failure to provide the notice now incurs a $100 per participant penalty with an annual maximum of $50,000.

Most sponsors rely on their plan’s Third Party Administrator or Recordkeeper to provide this withholding notice, but employers are ultimately responsible if the notice is not provided.  Sponsors may want to ask their service providers how they help the sponsor comply with this requirement.

2. Compliance Calendar Change for Safe Harbor Non-Elective Plans

Safe Harbor Non-Elective Plans – in which employers make a 3 percent of pay contribution to all eligible participants, regardless of whether a participant defers income to the plan – no longer need to provide participants with a Safe Harbor notice 30 days before the beginning of the plan year.

For plans whose documents do not state they will operate as a Safe Harbor plan, sponsors now may wait until 30 days before the end of the plan year to amend their plan, making the 3 percent non-elective contribution at the conclusion of the plan year to benefit from the Safe Harbor status for the full plan year.  (Sponsors may adopt a safe harbor non-elective status in the final 30 days of the plan year and up until the time of their tax filing if they make a 4 percent contribution to all eligible participants.)

Sponsors should consult with their plan’s Third Party Administrator regarding the new notice requirement and adopting safe harbor status after the beginning of the plan year.

3. Opportunities for Plan Improvement – In the second half of the plan year, it’s a best practice for employers to review how well their plan promotes retirement savings.  This year, they may consider SECURE Act opportunities to improve participation rates.

Tax Credits for Automatic Enrollment
– Small employers (those with 100 or fewer employees) who adopt an automatic enrollment plan feature after January 1, 2020, may receive a $500 per year tax credit for three years after implementation.

Automatic enrollment is proven to increase participation.  Upon eligibility, participants are automatically enrolled in the plan at a defined deferral rate.  They must be provided notice in advance and may change the deferral rate or opt out.  Most do not opt out.

Higher Automatic Escalation – Plans with a Safe Harbor automatic enrollment feature may now automatically escalate participants’ deferral rate up to 15 percent of pay on an anniversary of their automatic enrollment, if they have remained in the default deferral.

Once again, participants must receive advance notice of the escalation and have the opportunity to change their contribution rate or opt out of deferring altogether.

Sponsors should speak with their plan’s Third Party Administrator for further guidance.

4.Preparing for Compliance in 2021 – The SECURE Act expands mandatory eligibility, creating new data-keeping requirements for employers. 

Beginning in 2021, employees who work at least 500 hours per year for three consecutive years must be allowed entry to a company’s 401(k) plan.  Sponsors who previously limited eligibility to those working at least 1,000 hours per year (as previously required) must carefully track hours for all part-time employees.

Sponsors should communicate with their plan’s Recordkeeper now to determine if they should change the way they submit deferral data in 2021.  Some Recordkeepers accept payroll with hours for all employees, whether they are eligible participants, and assist in tracking eligibility.

The earliest the 500-hour employees will become eligible for plan participation will be 2024 and, once eligible, they need not be included in annual discrimination testing.

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.