How the SECURE Act Affects Employers and Employees
The Setting Every Community Up for Retirement Enhancement (Secure) Act was signed into law on December 20, 2019, with little fanfare. However, the Secure Act is a significant piece of retirement legislation that includes provisions designed to help businesses offer retirement plans for their employees and for individuals to save for their own retirement. It also severely restricted, for many potential beneficiaries, the valuable tax benefit of stretching distributions from inherited retirement accounts over many years.
Secure Act Provisions Affecting Employers
The numerous provisions of the act fall into two main categories: those affecting employers, and those affecting individuals. The authors outline the former below; the latter are discussed in the following section.
Lower Barriers for Offering Multiple Employer Plans
Many small- and medium-sized businesses are unable to offer their employees a retirement plan due to the high administrative costs and substantial compliance burdens associated with such plans. Under previous rules, employers that desired to join together to offer a single retirement plan—thereby lowering administrative costs and sharing a single plan administrator—had to share a “communality” or relationship that bound the employers together (i.e., operating in the same industry). These are known as multiple employer plans (MEP).
Section 101 of the Secure Act amends IRC section 413 by easing many of the restrictions related to MEPs. This facilitates the ability of unrelated employers to participate in pooled employer plans and share the costs of operating retirement plans for their employees. Significantly, the act also eliminates the “one bad apple” rule, which previously stipulated that all employers participating in an MEP could face adverse tax consequences if even one employer in the group failed to satisfy the tax qualification rules for the MEP. This rule will no longer apply once Secure Act section 101 takes effect in plan years beginning after December 31, 2020.
Another notable advantage to small employers is that, because section 101 requires only one IRS Form 5500 for the retirement plan as well as only one plan audit, the administrative costs and burdens associated with offering retirement plans are reduced. Under the pooled plan provider guidelines, only the plan provider is required to file a Form 5500 tax return. The act defines a pooled plan provider as the person who is designated by the terms of the pooled employer plan as a named fiduciary, as the plan administrator, and as the person responsible for the performance of all administrative duties under the plan (frequently an insurance company or other pension provider). Small businesses are defined in section 101 as plan sponsors.
Given that section 101 of the Secure Act does not take effect until plan years beginning after December 31, 2020, small businesses that do not currently offer retirement plans should explore the possibility of joining a pooled employer plan. Note that section 101 does not apply to defined-benefit, multi-employer plans that are frequently included as a benefit under union labor agreements.