How the SECURE Act Impacts Employers and Plan Sponsors

For almost 20 years, the percentage of American private sector workers who do not have access to workplace retirement plans has remained steady at about 30%. As the gig economy has grown and gained popularity with younger workers, concerns about lack of access to workplace retirement plans has increased.

The SECURE Act introduces some changes that may help make workplace plans available to more workers. For instance, the new rules:

Allow diverse employers to join together. The SECURE Act eliminated the commonality of interest requirement that was a previous feature of multiple employer plans (MEPs). Open MEPs, typically, are available through defined contribution plan service providers.

Consolidate Form 5500 reporting for group plans. To reduce plan costs, the SECURE Act allows defined contribution plan sponsors who share a plan administrator to file a single aggregated annual report.

Incentivize smaller employers to offer plans. Small businesses that introduce retirement plans are eligible to receive a start-up-cost tax credit of up to $5,000 for three years. Additional credits (up to $500 a year for three years) are available when a new plan includes an automatic enrollment, or an existing plan adds automatic enrollment.

Note: If the expense of a defined contribution plan – even with tax offsets – remains too high, there are other options that may better suit smaller employers. IRA-based plans, like SIMPLE and SEP IRAs, were created specifically for small businesses. Payroll deducted IRAs also are an inexpensive option.

Open access to part-time employees. If your company sponsors a 401(k) plan, plan documents may need to be modified to include part-time workers. The new rules open plan participation to employees who have worked 500 hours a year for at least three years and have reached age 21 by the end of the three-year period.

Provide guaranteed income safe harbor. Many American retirees depend on Social Security to provide a stable stream of guaranteed income during retirement. The 2019 report from the Social Security Board of Trustees estimated that, without action by Congress, the joint trust fund will be depleted by 2035.

The SECURE Act establishes a fiduciary safe harbor for ERISA fiduciaries that select lifetime income investment options in defined contribution plans.

To date, many plan sponsors have avoided adding lifetime income options (i.e. annuities) to plans to avoid potential plan and fiduciary liability. The safe harbor requires plan fiduciaries to “engage in an objective, thorough, and analytic search” that considers the financial capabilities of insurers and the cost of contracts.

The SECURE Act also introduces changes that may simplify plan administration and provide non-discrimination testing relief. Some provisions in the SECURE Act became effective January 1, 2020, so it’s important to review the specifics as soon as possible.

Talk with your plan providers and ERISA attorney, and decide how your plan(s) will take advantage of the opportunities and manage the challenges created by the SECURE Act.

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The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.