(Updated 12/23/2019) Late Friday evening (aboard Air Force One leaving DC for his holiday retreat), President Trump signed the spending bill that included the SECURE Act. In a bit of last-minute maneuvering in Washington, DC, the House of Representatives added the provisions from the SECURE Act to the spending bill that had to be passed by Friday to avoid a government shutdown. Although the provisions that were problematic before are still part of the mix, the political climate is such that both parties wanted political wins and neither wanted to risk being branded as the one that “allowed” or “forced” another government shutdown.
Given the magnitude of the changes this presents to the retirement plan world, it is surprising that the legislative text for the SECURE Act provisions is only 119 pages, and that is with narrow margins and 12-point type. That means the language provides only broad-brush changes with the details to be filled in by regulation at some point in the future. As a frame of reference, the Pension Protection Act of 2006 directed the Department of Labor to issue regulations on participant benefit statements by 2007…those regulations still have not even been proposed 13 years later.
In our review of the legislation we found some useful provisions, but probably the most significant is the creation of Pooled Employer Plans – basically open MEPs.
Pooled Employer Plans (PEP)
- Multiple Employer Plans can exist two ways – under current regulatory guidance or via a Pooled Employer Plan or PEP (yay, another acronym).
- A PEP is quite simply a plan that covers two or more unrelated employers who do not meet the regulatory commonality requirements and that is sponsored by a Pooled Plan Provider (PPP).
- The PEP document must include a provision that requires non-compliance adopting employers to be spun off into stand-alone plans.
- PEPs are not subject to the One Bad Apple Rule.
- With the exception of the administrative duties assigned to the PPP, all adopting employers in the PEP are treated as plan sponsors of their portion of the PEP.
- Adopting employers are fiduciaries with respect to selection and monitoring of the PEP and PPP.
- The large plan audit requirement for a PEP is increased to 1,000 participants as long as no single adopting employer in the plan has more than 100 participants.
- The Form 5500 must include an attachment that identifies each adopting employer, the amount of contributions (as a percentage of the total) made by each employer during the year, and a listing of the total account balance for each adopting employer as of the last day of the plan year.
Pooled Plan Provider (PPP)
- The PPP must be a named fiduciary, the plan administrator, and the party responsible for all administrative duties such as testing.
- A person or entity must register with the Secretary (looks like both Treasury or Labor) as a PPP before beginning operations as a PPP.
- The PPP is responsible for making sure all applicable parties are bonded.
- Both IRS and DOL can audit PPPs.
- The PPP cannot impose any unreasonable fees or restrictions on distributions or on adopting employers who wish to exit the PEP.
- The PPP is the party legally responsible for satisfying reporting and disclosure requirements, but those can be satisfied electronically.
- There is a good-faith compliance standard in place until further guidance is provided.
These provisions are effective for plan years beginning on or after January 1, 2021.
All of that is covered in only 20 pages of legislative text, so that should give you an idea of how sparse the details are.
Here is a quick rundown of the other key provisions:
New Plan Setup
- An employer has until the due date of the company tax return (with extensions) to establish a new plan for the year.
Safe Harbor 401(k) Plans
- Qualified Automatic Contribution Arrangements: The maximum automatic escalation level for deferrals is increased from 10% to 15%.
- Safe Harbor Notice: Applies only to safe harbor match plans (eliminated for plans that use the nonelective contribution to meet the safe harbor)
- Adding Safe Harbor Provisions: An existing 401(k) plan can be amended to add a safe harbor nonelective feature after the plan year has already started as long as it is effective at least 30 days before the end of the year, and the sponsor makes a 4% contribution (rather than the normal 3%) for that initial year.
- Form 5500: The IRS penalty for late filing is increased to $250 per day up to a maximum of $150,000 per late filing.
- Form 8955-SSA: The IRS penalty is increased to $10 per participant per day up to a maximum of $50,000 for failure to file.
- Startup Plans: Tax credit for the first three years of the plan equal to $250 per eligible non-highly compensated employee, subject to a minimum credit of $500 and a maximum of $5,000.
- Auto Enrollment Credit: $500 per year for the first three years the plan includes an automatic enrollment provision.
Long-Term, Part-Time Employees
- Employees who work at least 500 hours per year for three consecutive years must be eligible to make deferrals.
- They must still meet the plan’s age requirement, which cannot exceed age 21.
- They can be disregarded for testing and top-heavy purposes.
- Required Minimum Distributions: Starting age is increased from 70 ½ to 72
- Beneficiaries: A participant’s account must be fully distributed in no more than 10 years following death, with certain exceptions for spouses, children, and disabled beneficiaries.
- Lifetime Income: Several provisions are related to fiduciary safe harbors for selecting lifetime annuity options as well as required disclosures and portability.
- Birth or Adoption: Participants can take penalty-free distributions (which can optionally be repaid) of up to $5,000 to cover expenses related to the birth or adoption of a child.
- 403(b) Plan Terminations: There are provisions that clarify treatment of individual custodial accounts on termination of a 403(b) plan.
- Participant Loans: Credit card loans are prohibited.
There are some other miscellaneous provisions that relate to certain frozen defined benefit plans, 529 plans, benefits to firefighters, and treatment of educational stipends as compensation for IRA purposes.
With the exception of PEPs and the long-term, part-time employee provisions which are effective in 2021, most of these other changes are effective for plan years beginning on or after December 31, 2019. Yep, you read that correctly…in less than two weeks from now.
Stay tuned for more details. We will continue to stay on top of this and will keep you up to date. And if you are wondering whether DWC plans to be part of the Pooled Employer Plan fun, the answer is a resounding YES!