A lot of new legislation has been passed in the last few years. Here is a summary of those changes.
The SECURE (Setting Every Community Up for Retirement Enhancement) Act was passed in December 2019. It includes many new provisions that affect plan sponsors.
- Tax credit for start-up plans – Eligible employers may be able to claim a tax credit of up to $5,000, for three years, for the ordinary and necessary costs of starting a SEP, SIMPLE IRA or qualified plan (like a 401(k) plan.) A tax credit reduces the amount of taxes owed on a dollar-for-dollar basis. The amount of the credit starts at $500 and is dependent on the number of plan participants.
- Tax credit for adding automatic enrollment to an existing plan – Adding an automatic enrollment provision to the plan could be worth a tax credit of $500 per year for the first three years. The provision that is added must be an Eligible Automatic Contribution Arrangement or EACA.
- Changed the automatic contribution amount – Previously, the highest percentage you could use in automatically enrolling participants in the plan was 10%. This has been raised to 15%.
- Long-Term Part-Time Employees – Starting in 2021, plans will need to allow certain part-time employees to enter the plan. If an employee works 500 hours per year for three consecutive years, they will now be able to make elective 401(k) deferrals to the plan. Employer contributions are not required for these participants. Because of the three years required, the earliest these employees would need to enter the plan would be January 1, 2024.
- Pooled Employer Plans (PEPs) – This allows a single Pooled Plan Provider (PPP) to pool participants from different employers into one plan.
The Coronavirus Aid, Relief and Economic Security (CARES) Act was passed in March 2020. It allowed plans to offer distributions up to $100,000 without incurring the 10% early withdrawal penalty. It also allowed for loans of up to $100,000, doubling the $50,000 limit. In addition, the CARES Act also delayed loan payments until January 1, 2021. Individuals must have been affected by the COVID virus in some way to have qualified for the special tax treatment. These distributions and loans are no longer available.
The COVID-Related Tax Relief Act (COVIDTRA) passed in 2021 as part of the Consolidated Appropriations Act. It created the Qualified Disaster Distribution Exemption (QDD). This allows participants to take up to $100,000 from the plan without the 10% early withdrawal penalty. It also allows loans of up to $100,000. To qualify, the participant must be someone who lives in a qualified disaster area and had an economic loss as a result of the disaster. The COVID virus is not considered a qualified disaster for this legislation.
COVIDTRA also gave relief for partial plan terminations. Generally, a plan must vest a participant 100% if more than 20% of their workforce is laid off. Since many employers were forced to lay off employees due to the pandemic, many plans were in danger of having a partial plan termination. The Act allows a plan to avoid that partial plan termination. If the number of active participants in the plan on March 31, 2021 is at least 80% of the participants that were in the plan on March 13, 2020, then no partial plan termination has occurred and there is no need to fully vest the terminated participants.
If you have any questions on the new guidance, please contact your Noble-Davis plan consultant.