Some Payroll Solutions Could Cost Employers Thousands Because of the SECURE Act
Beginning on January 1st, 2021, employers who do not track how many hours their employees work every year risk incurring hundreds, if not thousands of dollars in unexpected costs. These changes are tied to a spending bill President Trump. Signed on December 20, 2019. This bill included the SECURE Act1, which made more changes to retirement plan law than any other since 2006.
SECURE Act Changes to Retirement Plans in 2020
One of these changes requires 401(k) plans to provide all employees the opportunity to defer pay into the plan if they work between 500 and 1,000 hours for three consecutive 12-month periods2. While the Act does not force employers to make ordinary contributions (e.g. profit-sharing contributions) to the plan, the IRS often requires employers to make a corrective contribution to employees’ accounts when errors occur (e.g. improperly preventing an employee from making deferrals)3.
SECURE Act Non-Vested Employer Contributions
Additionally, if an employer makes a non-vested contribution to long-term, part-time employees’ accounts, then a unique vesting standard applies. Under this unique standard, employers must credit long-term, part-time employees with a year of service if they work at least 500 hours during a 12-month period4. While regulations on the issue have not been provided, current IRS and DOL regulations suggest these employees could continue to use this 500-hour calculation even if they became full-time employees.5
READ MORE: 401(k) Plan Eligibility Best Practices
Who can participate in retirement plans?
Retirement plans only allow certain employees to participate. Plans exclude some employees because of their classification (e.g. leased employees) or because of how many hours they work in a year. Many financial advisors and consultants incorrectly tell employers that their plan excludes employees who work part-time, but this is not true.
Can you exclude part-time employees from retirement plans?
The IRS does not allow plans to exclude part-time employees because of their status as part-time employees.6 Instead, plans normally exclude these employees through service requirements. Until recently, this was a distinction without merit.
When do SECURE Act changes take effect?
These changes are effective on January 1st, 2021. This means that part-time employees will not benefit from these changes until at least 2024.7 Despite this, employers should ensure their payroll solution is capable of tracking hours of service for all employees start tracking hours by the end of 2020. If they do not, then they could be responsible for paying part-time employees hundreds or thousands of dollars in 2024.
How will the SECURE Act impact our employee retirement plans?
Interested in finding out whether or not you apply for tax credits? Contact our team to learn more about the best retirement plans for your employees and how to ensure your company is receiving the benefits offered by changes to the SECURE Act.
1 Further Consolidated Appropriations Act, 2020 Division O., Title I (2019).
2 Id., at § 112, available at https://www.congress.gov/bill/116th-congress/house-bill/1865/text#toc-H2CED6EAE7CFE4E6A9245B6056AEE6DE7.
3 E.g., I.R.S. Rev. Proc 2019-19 Appendix A §.05(9)(b).
4 Further Consolidated Appropriations Act, 2020 Division O., Title I, § 102(a)(2).
5 See e.g., I.R.S. Treas Reg. §§ 1.411(d)-3(a)(3), 1.411(a)-8(c).
6 See Generally, I.R.S., Employee Plans Determinations Quality Assurance Bull. FY-2006-3, Part-Time Employees Revisited, available at https://web.archive.org/web/20170210010016/https://www.irs.gov/ pub/irs-tege/qab_021406.pdf. See Also, Treas. Reg. § 1.410(a)-3(e) Example 3.
7 Further Consolidated Appropriations Act, 2020 Division O., Title I, § 102.