July 14, 2020

How the SECURE Act is Encouraging Start-up Retirement Plans

The SECURE Act “Setting Every Community Up for Retirement Enhancement” was signed into law December 20, 2019, with most provisions effective for plan years beginning in 2020.  Here are two ways that legislation is encouraging new retirement plans:

Expanded Tax Credits

  • Get a Plan Start-up Tax Credit of up to 50% of plan installation & administrative costs for the 1st year & next two years.  The Maximum Tax Credit has increased from the previous $500 cap to the greater of $500 or $250 times the number of eligible Non-Highly Compensated Employees (NHCEs) with a cap of $5,000 per year.  Further details to note:
    • Employers must have had 100 or fewer employees who earned more than $5K in the preceding year to be eligible for the credit.
    • The credit applies to all retirement plans, including 401(k), 403(b), Defined Benefit & Cash Balance plans, SEPS & SIMPLEs.
    • The credit covers one-time implementation fees, as well as regular annual administrative fees.
    • The $5,000 cap applies each year, so is up to $15,000 over a 3-year period.
    • If it is a DB/DC combo plan, the plans are aggregated and treated as one plan.
    • Solo 401(k) or DB Plans that do not cover any NHCEs are not eligible for the credit.
    • Any existing plan counts toward the 3-year rule, so if you switched from a SIMPLE or SEP, you would only be eligible for a credit for any remaining of the 1st three years from the implementation of the SIMPLE or SEP.
  • Auto Enrollment Tax Credit provides for a new 3-year tax credit of $500 for adding Automatic Enrollment to your 401(k) or SIMPLE Plan.  The Auto Enrollment provisions must meet the EACA requirements in order to allow the employer to be eligible for the credit.  The credit is not tied to actual costs, so the $500 credit applies regardless of the administrative cost to add this feature.
  • The IRS is expected to update Form 8881 to include a worksheet for the calculation of the available credit.

Expanded Time to Adopt a New Plan

  • Prior to 2020, retirement plans had to be adopted by an employer prior to or on December 31st of any year in order for the plan to be effective for that year.  Under the SECURE Act, an employer now has until its tax return due date, including extension, to adopt a new plan.
  • From a practical standpoint, there are still earlier deadlines for 401(k) plans to be in effect for a particular year and practical issues to be considered:
    • October 1st deadline to adopt a 401(k) Plan with Safe Harbor Match provisions. 
    • December 1st deadline to adopt a 401(k) Plan with a 3% Safe Harbor Nonelective contribution (after this deadline a 4% Safe Harbor Nonelective contribution must be used).
    • 401(k) contributions must be deducted from wages during the calendar year, or generally deposited by January following the close of the year for a self-employed person.  If a 401(k) plan is adopted following the close of the year, the plan may be limited to Employer contributions only for the first plan year.
    • Normal filing deadline for a calendar year plan’s Form 5500 is July 31st.  Extensions can only be filed if the plan was in existence by that date.  The IRS may need to waive the late filing fee for a plan adopted after July 31st for the previous year. 
    • Normal funding deadlines still apply to Defined Benefit & Cash Balance Plans.  The deadline to meet IRS Minimum Funding requirements is September 15th for a calendar year plan, even if the deadline to adopt is October 15th.