How to help your small business clients navigate the SECURE Act
Planning for a secure retirement is a top-of-mind priority for almost every American worker. Yet, according to a recent study by the Federal Reserve, one-quarter of those who are not retired say they have no retirement savings or pension whatsoever. At the end of 2019, a significant step was taken in addressing the retirement crisis with the passage of the Setting Every Community Up for Retirement (SECURE) Act. The purpose of the SECURE Act is to incentivize employers to offer retirement plans as well as to improve individual retirement savings outcomes for the millions of Americans without adequate retirement savings.
In considering your role as trusted advisor, your clients — both individuals and small business owners — will be looking to you for your expertise in understanding both the potential tax implications of the SECURE Act, as well as its other benefits.
Here are just a few of the Act’s many important provisions to share with your clients:
Prior to the SECURE Act, small employers could claim up to 50 percent of their ordinary and necessary eligible retirement plan startup costs, up to $500. Under the new law, the tax credit will now offer eligible employers a maximum of $5,000 for introducing a retirement plan for employees. The credit extends over a three-year period, for a potential total credit maximum of $15,000.
In addition, a new annual tax credit of $500 will be offered to qualifying small employers who add automatic enrollment features to their newly established or existing 401(k) plan or SIMPLE IRA. This credit is available for three years, starting with the first taxable year in which automatic enrollment is included.
Open multiple employer plans or pooled employer plans
While Multiple Employer Plans (MEPs) have existed for some time, the SECURE Act introduced Pooled Employer Plans (PEPs), a type of “open MEP,” allowing for two or more unrelated employers to join through a pooled plan. While single employer 401(k) plans are still heavily utilized, there can be many perks of MEP/PEPs for businesses looking to reduce administrative burden and fiduciary liability.
For small employers interested in offering 401(k) plans but who may have been reluctant to do so, PEPs may be a viable solution at a reasonable cost. These plans are administered by a pooled plan provider that acts as the named fiduciary and plan administrator, responsible for providing required notices, filing the Form 5500, audits, and other day-to-day administrative functions — work typically done by the employer when sponsoring an individual plan. PEPs also designate trustees to collect and hold the assets of the plan and can delegate investment management to alternate fiduciaries. Each participating employer has the responsibility of selecting and monitoring the pooled plan provider and any other named fiduciaries.
Traditional IRA contributions
The SECURE Act also eliminates the maximum age for traditional IRA contributions. Now, individuals can continue to make contributions past age 70 ½.
Increase in age for required minimum distributions
Prior to passage of the SECURE Act, minimum distributions were required from retirement accounts beginning at age 70 ½. This has now increased to age 72 for those who reached 70½ prior to the end of 2019. Those who have started RMDs but haven’t reached age 72 also need to abide by the old rules too.
Fiduciary safe harbor
The SECURE Act also has introduced a fiduciary safe harbor for 401(k) plan sponsors that include lifetime income products in their retirement plan investment offerings.
This safe harbor protects the plan sponsor from liability for any losses to beneficiaries or participants if the insurance provider fails to meet its financial obligations. The safe harbor applies only where a provider is chosen after fulfilling the criteria of a thorough examination of the financial capability of the insurer and determining that the cost of the guaranteed retirement income contract is reasonable, and the same standards are periodically reviewed.
Increased penalties for failure to file or provide disclosures
Retirement plan providers should also be aware of increased penalties coming out of the SECURE Act. Providers need to be concerned with timely filing of the Form 5500, providing plan change information on Form 5500, filing Form 8955-SSA, and providing proper disclosures related to taxability of plan distributions. All of the previous penalty amounts related to these infractions have increased by a factor of 10 — failure to file Form 5500 results in a penalty of $250 per day, not to exceed $150,000, and failure to file a required notification of change to information reported on Form 5500 results in a penalty of $10 per day, not to exceed $10,000.
As the provisions of the new SECURE Act are rolled out, with some in effect as early as Jan. 1, 2020, it’s important your clients are armed with the tools they need to make sure they are reaping the benefits while complying with the rules. In a world where regulatory matters are evolving at a rapid pace, understanding how changing laws and tax incentives impact your clients will strengthen your reputation as a trusted business advisor.