2020 Retirement Regulation Update
2019 was a year of major developments in the US retirement industry. The signing of the SECURE Act at the end of December and state sponsored retirement programs such as CalSavers in California enacted significant changes to qualified retirement plans, as well as how individuals can save for retirement. Below, we will focus on the provisions in those pieces of legislation that most affect you as adopters of The Contractors Plan. Please note, we are awaiting additional guidance on some of the provisions before they can be applied.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law on December 20, 2019 as part of the Further Consolidated Appropriations Act. Most of the provisions in the act are effective in 2020 and require amendments to your plan. The act is over 300 pages in length, so we’ll try to narrow it down to the areas that we feel are the most important and impactful.
- Notices have been eliminated for safe harbor nonelective plans. If you are using a nonelective contribution to satisfy the ADP safe harbor, you are no longer required to send safe harbor notices to your employees. However, if you have a safe harbor match provision, annual notices are still required.
- Mid-Year adoption of safe harbor status. You may now amend your plan to adopt a safe harbor feature using a 3% nonelective contribution anytime up to 30 days before your plan’s year end. Alternatively, if you do not elect to adopt the safe harbor feature for your plan until 30 days before your plan year end, you may still adopt the safe harbor feature with a 4% nonelective contribution.
- Adopting a qualified plan after the end of the year. You may now adopt a qualified retirement plan up until your corporate tax return is due, including extensions. However, if you want to have a deferral option in your plan, it must be adopted prior to year-end.
- Required Minimum Distribution (RMD) age. The age which participants are required to take a required minimum distribution from a qualified retirement plan or IRA has been raised from 70 ½ to 72.This will be effective for distributions required after 2019 for those employees turning 70 ½ after 12/31/2019. If their birthday is after 7/1/1949, they are not required take an RMD until 4/1/2022 – April of the year after you turn 72.
- Small plan tax credit. If you are eligible to set up a SIMPLE plan, generally <100 employees, you could receive a tax credit when establishing a qualified plan such as a Profit Sharing or 401(k) plan. You could receive a credit for the startup and annual fees that total $500 – $5,000 for the first three years of the plan. See your tax accountant to determine if you are eligible for this credit.
- Withdrawals after a birth or adoption. This optional amendment allows for up to $5,000 to be withdrawn without the standard 10% penalty up to 1 year following a birth or finalized adoption. There is also a provision to repay the distribution, though additional guidance from the IRS is required relative to the details of this repayment option.
- Form 5500 late filing penalty increase. The penalty for filing a late Form 5500 has been increased from $25/day with a $15,000 maximum to $250/day, with a $150,000 maximum. Note the DOL penalty for a late Form 5500 filing has remained the same at $1,100/day with no maximum penalty. Message? File your Form 5500 on time!
- In-service distribution age for Money Purchase Pension Plans. If you have a Money Purchase Pension Plan, you have the option to amend your plan to allow for in-service distributions at age 59 ½ instead of age 62.
State Sponsored Mandatory Retirement Plans
Several states have passed legislation which encourages or mandates small businesses to either have an employer sponsored retirement plan or enroll their employees in a state run program. Many of these programs are still being developed. However, the common theme is that an employer can be exempt from the state sponsored programs if they offer a qualified retirement plan. The Contractors Plan meets these criteria.
CalSavers (CA), Illinois Secure Choice (IL), and OregonSaves (OR) have all enacted mandatory employee savings plans that employers must utilize unless they offer a qualified employer sponsored retirement plan.
Programs in Connecticut, Maryland, and New Jersey are still working on the specifics of their mandates and may be ready later in 2020 or 2021. Massachusetts’ program is for non-profit entities only. Vermont’s Green Mountain Secure Retirement Plan will be a MEP (multiple employer plan) and Washington state offers the Retirement Workplace of which participation is voluntary.
If you have questions about whether your state has passed or is thinking of passing similar legislation, please refer to your state’s treasury website.