The SECURE Act in 3 parts:  Plan Creation

The SECURE Act in 3 parts: Plan Creation

The SECURE (setting every community up for retirement enhancement act of 2019) Act was approved by the Senate on December 19th and signed into law on December 20th. The bill aims to expand access to plans while providing some incentives for how employees get involved and utilize retirement plans. On the whole, it is a bunch of small ideas that have been packaged into one bill with none of the individual items being that big of a deal on their own (in our humble opinion).

For this piece, we will focus on the parts of the bill that attempt to incentivize employers to adopt plans. One of the issues states have been trying to address is the lack of employees covered by a plan. Employees are 12 times more likely to save for retirement at work if they are offered a plan versus doing it on their own. The SECURE act provides some financial incentives to help get employers to offer this valuable benefit. They are:

1)     An increase in the tax credit from $500 to $5,000 for cost associated with setting up a plan,

2)     An additional $500 credit for employers who adopt auto-enrollment for three years,

3)     Extend the time employers have to set-up a plan from the end of the year to the time that they file their tax return,

4)     Increase the cap on auto-escalation for safe harbor plans from 10% to 15%,

5)     Allow for open MEPs.

While all of these are small measures on their own, hopefully they will provide the additional push some employers need to get a plan established. Frequently an employer’s biggest costs associated with a plan are going to be any company contributions that might be made for employees. While the above provisions help with some of the operational expenses, they won’t really put a dent in the employer’s overall cost to run a plan.

Additionally, the open MEP concept is one that has been floated for some time. The act helps to eliminate some provisions that were prohibiting employers from adopting them. The most common one is the one bad apple provision that in the past could have created liability for an adopting employer if another employer in the MEP acted badly. The SECURE Act eliminates this. Unfortunately, that doesn’t really make the MEP all that more attractive.

Most small plan sponsors will find that with institutionally priced funds, streamlined administration, and savvy plan design they can offer a plan on their own that is on par with or even more competitive than a MEP. The one practical application we see is a plan sponsor that is looking to offer a plan and has enough employees that they will be a large plan filer.

In this scenario, using a MEP will help pool the audit costs so the employer isn’t facing a large tab for offering the plan. The employer then has to determine if the limited investment line-up and plan design configuration of the MEP fit their needs. We doubt this will be the game changer that the industry so desperately wants it to be. We believe vendors will push these standardized offerings as a means to secure investment offerings and to offer pre-packaged solutions that are simpler to sell.

The most interesting provision of the SECURE Act is the portion that will allow part time employees to participate in their plans if they work over 500 hours for three consecutive years and are 21 or over. The provision allows these employees to be excluded from safe harbor contributions, nondiscrimination testing and top-heavy requirements. Will these long-term part-time employees take advantage of the plans and if so, what additional burden and costs will that shift back to the employer? Most employers would like to make plans available to these types of employees but testing issues and costs have prohibited them in the past from opening up their plan’s eligibility requirements further.

Stay tuned for our next installment on the SECURE Act where will discuss changes to required minimum distributions, stretch IRA’s, and in-plan annuities.

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