How does the SECURE Act affect safe harbor retirement plans?
Among the many recent changes to retirement plans, three provisions of the SECURE Act impact safe harbor plans. The provisions center around notice requirements and safe harbor 401(k) plan design to decrease the administrative burden, provide additional employee protection, and encourage the adoption of new plans. These new provisions apply to plan years beginning after December 31, 2019.
Safe Harbor Plans Before the SECURE Act
Let’s take a look at the safe harbor plan design prior to the SECURE Act updates. For an existing 401(k) plan seeking safe harbor protection starting January 1 of the next year, the plan sponsor would need to make the decision to add the safe harbor provision at least 30 days in advance to comply with the notice requirements. In addition, once a plan included a safe harbor provision, the plan was more or less locked in as safe harbor since mid-year changes to the plan design could cause significant compliance risks.
READ MORE: SECURE Act Changes for Part-Time Employees
What do SECURE Act Safe Harbor changes mean for me?
First and foremost, the SECURE Act changes are designed to have a positive impact on newly adopted safe harbor plans. The impact of the new provisions should include:
- Reduced distribution costs by eliminating the notice requirement
- Reduced administrative burden by saving time from tracking delivery method and timing of delivery
- Increased flexibility for the adoption of safe harbor provisions and reduced risk of compliance failure since plan sponsors can retroactively amend their plans to become nonelective contribution safe harbor plans.
1. The SECURE Act helps administrative burdens and reduces distribution costs.
Employers traditionally provide notice of the plan’s safe harbor status to all eligible employees 30 to 90 days in advance of the plan year. Existing plans with a plan year beginning on January 1 would need to provide notice to the employees sometime between October 1 and December 1 in the current year. For plans with a large number of participants unable to receive electronic delivery, mailing notices to each participant annually could become financially and administratively burdensome.
READ MORE: Revenue Provisions of the SECURE Act
The SECURE Act simplifies one of the notice requirements.
Employers using the nonelective contribution safe harbor feature (both traditional and QACA plans) no longer have to provide notice annually to eligible employees. Eliminating the notice requirement lightens the administrative burden on plan sponsors and may reduce distribution costs. Notably, employers offering either the Basic Safe Harbor match or the Enhanced Safe Harbor match are still required to provide notice annually.
2. The SECURE Act permits mid-year plan changes to safe harbor plans.
In addition to addressing the notice requirement, the SECURE Act allows for mid-year plan design changes. Realizing that the rigidity of the law was unduly burdensome to plan sponsors and could potentially negatively impact participants, the SECURE Act simplifies the notice requirements and permits plan design changes during the plan year and even into the following plan year.
When can employees make retirement plan changes to safe harbor plans?
Traditionally, safe harbor plans have been locked into their plan design for the entirety of the plan year. The legislative changes provide two opportunities to plan sponsors to adopt the nonelective safe harbor provision mid-year.
Opportunity #1: Before the 30th day Before the Close of the Plan Year
The first opportunity to add safe harbor nonelective contributions is before the 30th day before the close of the plan year, as long as no safe harbor matching contributions are made. So for plans running on a calendar year with the Plan Year beginning on January 1, the deadline to become a safe harbor nonelective contribution plan would be December 1. This provision substantially extends the deadline to become a safe harbor plan.
Opportunity #2: Before the Last Day for Distributing Excess Contributions
The second opportunity further extends the deadline, but at a price. A plan can become a safe harbor nonelective contribution plan any time before the last day for distributing excess contributions for the plan year. So this ends up being the last day of the next plan year. And, the employer must offer a 4% nonelective contribution instead of the standard 3%.
Advantages of Mid-Year Plan Changes
This flexible plan design allows employers to see if they pass the ADP / ACP or top-heavy tests before committing to a safe harbor nonelective contribution plan design. Since the nonelective contribution isn’t dependent on employee elective deferrals, a plan amendment late in the year will not adversely impact employees. Employers at risk of compliance testing failure can use this option to retroactively adopt the safe harbor provision and avoid costly compliance failures.
3. The SECURE Act increases the maximum automatic deferral percentage for QACAs.
The SECURE Act increases the maximum allowable automatic contribution percentage for Qualified Automatic Contribution Arrangements from 10 percent to 15 percent. Previously, plans under a QACA were required to set the automatic elective contribution percentage between 3 percent and 10 percent. This increase encourages employee contributions and may boost retirement savings for participants.
Get in touch for help choosing a retirement plan.
Looking to make changes to your retirement plan? We can help. Contact us to see which plan is right for you. Our team of experts can help you navigate the various plans available to you to help you choose a custom retirement plan for your employees. We can also walk you through SECURE Act changes that can benefit retirement plans to help you understand the pros and cons of each plan type so you can rest assured your team has the best option available. Contact us to get started.