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Tax & AccountingMarch 13, 2020

SECURE Act Changes for Employers and Retirement Plans

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in December 2019. Many of its changes are already affecting employers and plan sponsors. Some of these changes are discussed here.

Small business tax credits for retirement plans increased

The SECURE Act increases credits for small businesses with retirement plans. A small business is a business with up to 100 employees.

Increased credit for new retirement plans 

Before the SECURE Act, a small business that established a retirement plan could claim a tax credit equal to 50% of the plan startup costs. The maximum credit was $500.

The SECURE Act increases the maximum credit to $5,000. It also allows the business to claim the credit for three consecutive years.  

New credit for automatic enrollment (H3)

A small business that adds an automatic enrollment feature to a retirement plan can claim an extra $500 tax credit for three years. 

Filing penalties also increased

The SECURE Act also increases several penalties for retirement plans that fail to file timely and accurate forms. For filings, notices and statements filed after December 31, 2019:

  • The penalty for failure to file Form 5500 is increased to $250 per day, with the maximum penalty capped at $150,000.
  • The penalty for failing to file a registration statement is increased to $10 per participant per day, with the maximum penalty capped at $50,000.
  • The penalty for failing to file a required notification of change is increased to $10 per day, with the maximum penalty capped at $10,000 for any particular failure.
  • The penalty for failing to file a required withholding notice is increased to $100 for each failure, with the maximum penalty capped at $50,000 for all failures during the calendar year. {6652}

These changes are summarized in the following table:

Forms/Registration Statement/Notices Failure to File Late Penalties Before 12/31/19 Failure to File Late Penalties After 12/31/19
Form 5500 $25 per day the failure continues, not to exceed $15,000 $250 per day the failure continues, not to exceed $150,000
Registration Statement $1 per participant, per day the failure continues, not to exceed $5,000 $10 per participant, per day the failure continues, not to exceed $50,000
Notification of Change $1 per day the failure continues, not to exceed $1,000 $10 per day the failure continues, not to exceed $10,000
Withholding Notices $10 for each failure, not to exceed $5,000 $100 for each failure, not to exceed $50,000

Automatic Enrollment Cap Increased

One of the problems with voluntary employee retirement savings program, such as 401(k) plans, is that rank-and-file employees tend to undersave. Employees may not contribute enough to their plans. Even worse, an employee who has to take several steps to enroll in a plan may not bother to participate at all.

One solution is an automatic enrollment feature, under which a default percentage of the employee’s deferred compensation is contributed to a retirement plan. The employee must make an affirmative election to opt out of the plan or change their contribution rates.

The SECURE Act raises the cap on automatic payroll contributions from 10% to 15% of the employee’s compensation. {401(k)(13)}

Annuity and Lifetime Stream-of-Income Encouraged

Congress was worried that individuals who retire solely with account-based plans will not have a clear idea of how far their money will go. As a result, the new law aims to promote lifetime annuities that provide regular payments as long as the annuitant lives.

The SECURE Act provides for portable annuity contracts that can be moved from plan to plan {401(38)}, along with a new fiduciary safe harbor for selecting annuity providers {404(e)}. These rules apply to 401(k) plans, 403(b) tax sheltered annuities, custodial accounts, and 457(b) plans.

Age Limits Changed

Participants in retirement plans can now push back the date they have to start taking required minimum distributions (RMD) from the year they turn 70 ½ to the year they turn 72.

The age limit for contributions to a traditional IRA for contributions is eliminated.

Stretch IRAs Eliminated

For IRA owners or employees who die after 2019, the SECURE Act eliminates “stretch IRAs.” Before, withdrawals from an inherited IRA could be stretched over the life of the beneficiary, which could significantly reduce taxes. Now, all non-spouse beneficiaries will be required to spend down their inherited IRAs in ten years.

Retirement Plan Distributions for Childbirth and Adoptions

Finally, employers must permit a parent to receive up to $5,000 in qualified birth or adoption distributions. These are distributions from an eligible retirement plan made within one year after a participant’s child is born or an adoption is finalized.

These distributions are also exempt from the 10% penalty on early withdrawals.

By Nitasha Kadam, J.D.

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