SECURE Act 401(k) Plan Changes Impact Employer Responsibilities
Employers who sponsor 401(k) plans must ensure they are in compliance.
The SECURE Act changes some employer responsibilities, but unfortunately not all of the necessary guidelines have been released by the Department of Labor or Internal Revenue Service, so employers will have to remain vigilant. Still, there are several things employers must do now.
President Trump signed the SECURE Act into law Dec. 20, 2019, and Congress enacted it on Jan. 1, 2021. The goal of the act is to increase participation in employer-sponsored 401(k) plans.
According to the 2020 U.S. Bureau of Labor Statistics, only 55 percent of the civilian adult population participates in a workplace retirement plan and even many who do have not saved enough. For instance, Vanguard, a wealth management group, reported in 2019 that the median 401(k) balance for those ages 65 and older is just $58,035
In addition, the SECURE Act makes it easier for small employers to band together to use their combined buying power.
The SECURE Act’s eligibility and vesting rules for long-term and part-time employees are now in effect for plan years beginning after Dec. 31, 2020. The deadline for amending a 401(k) plan to reflect those rules is the last day of the first plan year beginning on or after January 1, 2022.
Here is an overview of measures the SECURE Act is requiring employers to implement. As always, check with a 401(k) expert for assistance in implementing the new 401(k) regulations.
New Eligibility Rule for Elective Deferrals
Plan years beginning after Dec. 31, 2020, must allow long-term, part-time employees who meet these conditions to make elective deferrals under a 401(k) plan. They must:
- Be non-union
- Have completed three consecutive 12-month periods of at least 500 hours of service. Note that 12-month periods beginning before Jan. 1, 2021, are not to be considered. Therefore, the earliest date a long-term, part-time employee could become eligible to make elective deferrals under the new eligibility rule is Jan. 1, 2024. The 500-hour provision does not apply to 403(b) plans. An employee also qualifies if they are working part-time for a minimum of 1,000 hours during the year.
- Have reached age 21 by the end of the three consecutive 12-month periods.
Even though long-term, part-time eligible employees must be provided the opportunity to make elective deferrals; they may continue to be excluded from eligibility for other types of employer contributions to their 401(k) plan.
The intention is to encourage more employees to sign up for 401(k)s by reducing the number of hours required to work.
Special Vesting Rules
For vesting purposes, an employee must be credited with a year of service for each 12-month period during which he or she completes at least 500 hours of service.
Internal Revenue Service Notice 2020-68 states that all years of service — even those beginning before Jan. 1, 2021 — count under the special vesting rules subject to certain exceptions (for example, a plan may exclude years of service before an employee turns 18).
The IRS acknowledges the potential administrative burdens related to counting years of service beginning before January 1, 2021, and is accepting comments on the rule until Nov. 2, 2021.
Nondiscrimination testing ensures that plans are fair to lower-level employees. However, plan administrators can bypass this stricter nondiscrimination testing by mandating a three percent nonelective contribution. Non-elective contributions represent three percent of an employee’s salary and are fully paid by the employer. The contribution is not considered a matching contribution. Employers must implement the contribution at least 30 days prior to the close of the plan year.
The default contribution limit for a Qualified Automatic Contribution Arrangement safe harbor 401(k) plan is increased from 10 percent to 15 percent following a participant’s first year of plan participation. However, for the first year of participation, the limit is 10 percent. Employees may opt out of the increase.
Usually, contributions are stepped up annually either at the beginning of the year or when annual raises are given out.