New legislation impacting small business retirement plans could soon become law and affect you. The House of Representatives version, the Setting Every Community up for Retirement Enhancement Act of 2019 (SECURE), and the Senate version, the Retirement Enhancement and Savings Act of 2019 (RESA), are being reviewed and blended for possible voting in coming months.
Below are some of the key provisions that may be relevant to you and your business:
- Increasing the Auto Enrollment Safe Harbor Cap: The legislation increases the cap from 10% to 15% of employee pay that required automatic escalation of employee deferrals go no higher than under an automatic enrollment safe harbor plan.
- Simplification of Safe Harbor 401k Rules: The legislation changes the non-elective contribution 401k safe harbor to provide greater flexibility, improve employee protection and facilitate plan adoption. The legislation eliminates the safe harbor notice requirement but maintains the requirement to allow employees to make or change an election at least once per year.
- Increase Credit Limitation for Small Employer Pension Plan Start-Up Costs: To make it more affordable for small businesses to set up retirement plans, the legislation increases the credit by changing the calculation of the flat dollar amount limit on the credit to the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit applies for up to three years.
- Small Employer Automatic Enrollment Credit: The legislation creates a new tax credit of up to $500 per year to employers to defray startup costs for new 401k plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to the plan start-up credit allowed under present law and would be available for three years. The credit would also be available to employers that convert an existing plan to an automatic enrollment design.
- Repeal of Maximum Age for Traditional IRA Contributions: The legislation repeals the prohibition on contributions to a traditional IRA by an individual who has attained age 70 1⁄2.
- Portability of Lifetime Income Options: Permits qualified defined contribution plans, section 403b plans, or governmental section 457b plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan or IRA of lifetime income investments or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. The change will permit participants to preserve their lifetime income investments and avoid surrender charges and fees.
- Allowing Long-term Part-time Workers to Participate in 401k Plans: Under current law, employers generally may exclude part-time employees (employees who work less than 1,000 hours per year) when providing a defined contribution plan to their employees. Except in the case of collectively bargained plans, the bill will require employers maintaining a 401k plan to have a dual eligibility requirement under which an employee must complete either a one year of service requirement (with the 1,000-hour rule) or three consecutive years of service where the employee completes at least 500 hours of service.
- Increase in Age for Required Beginning Date for Mandatory Distributions: The bill increases the required minimum distribution age from 70 1⁄2 to 72.
- Plans Adopted by Filing Due Date for Year May Be Treated as in Effect as of Close of Year: Permits businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the taxable year to treat the plan as having been adopted as of the last day of the taxable year. The additional time to establish a plan provides flexibility for employers considering adopting a plan.
- Combined Annual Reports for Groups of Plans: The legislation directs the IRS and DOL to effectuate the filing of a consolidated Form 5500 for similar plans. Plans eligible for consolidated filing must be DC plans, with the same trustee, the same named fiduciary (or named fiduciaries) under ERISA, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. The change will reduce aggregate administrative costs, making it easier for small employers to sponsor a retirement plan.
- Disclosure Regarding Lifetime Income: The legislation requires benefit statements provided to DC plan participants to include a lifetime income disclosure at least once during any 12-month period. Disclosure in terms of monthly payments will provide useful information to plan participants in correlating the funds in their DC plan to lifetime income. Plan fiduciaries, plan sponsors, or other persons will have no liability under ERISA solely by reason of the provision of lifetime income stream equivalents that are derived in accordance with the assumptions and guidance under the provision and that include the explanations contained in the model disclosure, which the Secretary of Labor is directed to develop.
- Fiduciary Safe Harbor for Selection of Lifetime Income Provider: Provides certainty for plan sponsors in the selection of lifetime income providers, a fiduciary act under ERISA. Under the bill, fiduciaries are afforded an optional safe harbor to satisfy the prudence requirement with respect to the selection of insurers for a guaranteed retirement income contract and are protected from liability for any losses that may result to the participant or beneficiary due to an insurer’s inability in the future to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a DC plan.
We’ll keep you apprised of any changes as this legislation takes further shape.
Matthew Burke, CPA, CFE
Matt specializes in providing Cerini and Associates’ diverse array of midsized business clientele and nonprofit organizations with valuable consulting and assurance services. He prides himself on value-added, responsive, and innovative service to his clients; with a focus on forward-thinking and creative solutions. Matt joined the firm in 2002 and has years of experience with many types of complex accounting, auditing, compliance, and general business matters that impact entrepreneurial, established, and nonprofit businesses.