SECURE Act: New Tax Incentives for Employers to Offer Retirement Benefits
Mark A. Thomson
The Setting Every Community Up for Retirement Enhancement (SECURE) Act authorizes a new, cost-effective type of retirement plan: The pooled employer plan (PEP) beginning in 2021. This is a new type of multiple employer plan (MEP).
MEPs have been available for many years, but they suffer from some serious drawbacks and inherent complexities that make them impractical for many businesses, especially smaller ones. By creating the PEP, the SECURE Act largely eliminates these obstacles, extending the benefits of MEPs to more businesses.
Related Read: The SECURE Act Changes the Rules for Employers on Retirement Plans
What are the upsides?
MEPs are 401(k) or other retirement plans maintained by two or more employers. Participating employers may sponsor the plans themselves, or a trade association, professional employer organization (PEO) or other third parties can sponsor them. (Note: Do not confuse MEPs with the “multiemployer plans” maintained by some unionized companies.)
The benefits of MEPs include:
- Reduced Costs
They allow employers to take advantage of group purchasing power and other economies of scale to achieve significant savings. Participants may also enjoy access to the MEP’s expertise and advanced technology.
- Time Savings
MEPs can assume time-consuming administrative burdens, freeing up participants to focus on operating their businesses. This is often a concern that we hear. Properly administering a plan with complex rules, while trying to run a business, causes many businesses to question the value of a plan versus the cost, time and risk for non-compliance.
- Lower Liability
Participants can shift some (but not all) of their fiduciary obligations to the MEP.
So-called “closed” MEPs offer the greatest benefits because they are treated as a single employer plan for purposes of annual reporting, annual audits and other administrative functions.
Related Read: SECURE Act Expands Access to Multiple Employer Retirement Plans
What are the potential pitfalls?
Under current law, there are obstacles that make it difficult for many businesses to enjoy these benefits to their fullest extent. First, to be treated as a single employer plan, an MEP must be closed. A closed MEP is one in which participating employers have a commonality of interest. This means they are in the same industry or geographical area, or join an MEP sponsored by an eligible organization, such as a trade association or PEO.
“Open” MEPs are another option. Each participating employer in an open MEP is treated as maintaining a separate plan, with its own filing, audit and other administrative obligations.
Another deterrent to joining an MEP is the one-bad-apple rule. Under that rule, the tax-advantaged status of an open or closed MEP may be lost if even one participating employer fails to meet the qualification requirements. The U.S. Departments of Treasury and Labor issued proposed regulations last year that would alleviate the impact of the one-bad-apple rule on some, but not all, MEPs.
What makes a pooled employer plan special?
Under the SECURE Act, a properly structured PEP is treated as a single plan for filing, audit and other compliance purposes, regardless of whether it satisfies the commonality of interest requirement. This allows unrelated businesses of any size to take advantage of the benefits of an MEP. PEPs also avoid the one-bad-apple rule if their plan documents include certain provisions for addressing a participating employer’s compliance failure.
The SECURE Act also expands access to MEPs by allowing financial services companies, insurance companies, third-party administrators and other organizations to sponsor PEPs, provided they meet certain requirements. To qualify as a pooled plan provider (PPP), a sponsoring entity must register with the IRS and the Department of Labor, acknowledge in writing that it is the PEP’s named fiduciary and plan administrator and ensure proper bonding of individuals who handle plan assets.
Beyond pooled employer plans
The SECURE Act includes other provisions to encourage employers to offer retirement benefits to their workers. For example, it increases the maximum tax credit for retirement plan start-up expenses incurred by small businesses from $500 to $5,000. In addition, it provides a $500 tax credit for employers that add an automatic-enrollment feature to eligible plans and extends the due date for establishing a new 401(k) plan. Contact your CPA to discuss expanding the tax-favored retirement benefits your company offers its employees.
Sidebar: CARES Act expands financial options for impacted employees
Congress has made it easier for some 401(k) plan participants to tap into their retirement savings to ease financial strains caused by the novel coronavirus (COVID-19) pandemic. Specifically, the Coronavirus Aid, Relief, and Economic Security (CARES) Act generally allows participants who are adversely affected by the pandemic to take out up to $100,000 from their 401(k) and certain other retirement plans in 2020 without any immediate federal income tax consequences.
Eligible employees can recontribute the amounts any time up to three years later with no federal income tax consequences. They will be taxed on any distributions that are not recontributed within the three-year window. But they will not owe the 10% early withdrawal penalty if they are under age 59½.
To allow these withdrawals, you will have to amend your plan, and additional rules and limits apply to this relief. If your 401(k) plan allows plan loans, the CARES Act also temporarily liberalizes the rules for those. Contact your tax and benefits advisors for details and make sure to ask annually whether your plan needs to be updated. That simple question can save time and expense later if ever audited by the IRS or DOL.
For more information, contact Mark Thomson at firstname.lastname@example.org or 312.670.7444. Visit ORBA.com to learn more about our Manufacturing & Distribution Group.