Posted by Tyler Starr, CPA
In Are Retirement Savings More Secure under the SECURE Act?, we reviewed some notable changes included in Title I of the SECURE Act, which focused on expanding and preserving retirement savings. This follow-up blog will discuss other notable changes in the SECURE Act that mostly deal with changes to administrative provisions of plans.
SECURE Act, Title II: Administrative Improvements, includes just that: administrative improvements for employers running qualified plans. Here are the key provisions:
- Extended adoption deadline for new plan – This provision permits businesses to treat qualified retirement plans adopted before the tax return due date of the employer, including extensions, as having been adopted as of the last day of the taxable year. However, this applies only to employer contributions, as deferral provisions would have to be in place before the plan accepts any elective deferrals from the employees. The additional time added by this provision provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive employer contributions for that earlier year. This applies to plans adopted for tax years beginning after December 31, 2019.
- Combined annual report for group of plans – Plans eligible for consolidated filing must be defined contribution plans, with the same trustee, the same named fiduciaries, and the same administrator, using the same plan year, and providing the same investments or investment options to participants and beneficiaries. The provision will apply to returns and reports for plan years after December 31, 2022. This change will reduce administrative costs, making it easier for small employers to sponsor a retirement plan. However, a consolidated filing could trigger a financial statement audit if the grouped plans cover more than 100 participants.
- Disclosure regarding lifetime income – Benefit statements provided to defined contribution plan participants are now required to include a lifetime income disclosure at least once during any 12-month period. This disclosure would illustrate the monthly payments a participant would receive if the total account balance was used to provide lifetime income in an annuity. These disclosures will provide useful information to plan participants regarding their retirement readiness. Plan sponsors and plan fiduciaries will have no liability under ERISA to participants solely by reason of providing the information, even if they provide more than is required. The Secretary of Labor has been directed to develop a model disclosure. This provision will apply to pension benefit statements furnished more than 12 months after the Department of Labor issues interim final rules, the model disclosure, and outlines the required assumptions to be used.
SECURE ACT, Title III: Other Benefits, is highlighted by an expansion to IRC Section 529 qualified tuition program accounts to cover costs associated with registered apprenticeships and qualified education loan repayments, which applies to distributions made after December 31, 2018.
SECURE ACT, Title IV: Revenue Provisions, focuses on modifications that will likely enhance revenue for the IRS, but will make it even more imperative for plan sponsors to be diligent in following administrative procedures and meeting the deadlines for required notices and filings. Here are the major changes:
- Modification of required distribution rules for designated beneficiaries – The SECURE Act extended the timeframe within which payouts from defined contributions plans and IRA accounts must be made following a participant’s death from 5 to 10 years. It also eliminates the lifetime distribution option for most beneficiaries other than surviving spouses. Other eligible designated beneficiaries who qualify for lifetime distributions include minor children, chronically ill or disabled individuals, and other beneficiaries who are no more than 10 years younger than the participant. Other than those exceptions, non-spousal beneficiaries will generally be limited to a 10-year payout period. For larger plans that have to be distributed within 10 years, this will result in an acceleration of the taxes due on these distributions and probably at a higher tax rate than had they been distributed over the beneficiary’s lifetime. This applies to the payouts of plan participants who die after December 31, 2019.
- Increased penalties for failure to file retirement plan returns – The Form 5500 penalty has been modified to $250 per day, not to exceed $150,000. This is ten times the previous penalty, which was $25 per day, not to exceed $15,000. The Form 8955-SSA and 8822-B penalties are also increasing ten-fold. Failure to file a registration statement would incur a penalty of $10 (instead of $1) per participant per day, not to exceed $50,000 (instead of $5,000). Failure to file a required notification of change would result in penalties of $10 per day (also up from $1) to a maximum of $10,000 (up from $1,000) for any failure. Also, failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year. Increasing the penalties is expected to encourage the filing of timely and accurate information, which, in turn, would improve overall tax administration. All of these increases in penalties apply to returns, statements, and notifications required to be filed, and notices required to be provided after December 31, 2019.
SECURE ACT, Title V: Tax Relief for Certain Children, deals with modifications of the rules relating to the taxation of unearned income of certain children. SECURE Act, Title VI: Administration Provisions, provides for a remedial plan amendment period until the 2022 plan year, so plan sponsors will have until December 31, 2022 to adopt a retroactive amendment to reflect the operational changes of any provisions.
Most of the provisions of the SECURE Act mentioned above will allow employers to safely provide more information for employees to assess their retirement income situation and in turn, provide employees more opportunities to choose saving for retirement. In some cases, administrative procedures have been modified to be more flexible for employers and employees, but in other cases the SECURE Act has called employers to be more diligent in their processes and reporting. In any case, plan sponsors should determine how the new laws apply to them and make any necessary changes to the plan or plan procedures. Plan sponsors should consult a retirement plan professional if they have any questions about the new rules discussed above.