Amidst all the strum and drang going on in Washington, little noticed by anyone other than pension geeks (like me), Congress passed the most sweeping retirement plan legislation in 13 years. It was signed into law by the President on December 20th.
The SECURE act is so comprehensive and contains so many modifications that it is impossible for me to summarize all of the changes in my monthly newsletter. So listed below are the more salient changes. Then, over the course of the next few months, I will do a deeper dive and address various significant parts of the bill. Let this newsletter serve as Part I.
All retirement plans will need to be amended. And while no one has said this yet, the amendment will almost certainly require a full restatement of your firm’s retirement plan. Amendments to current plans will not be due until the last day of the plan year beginning on or after January 1, 2022. Treasury (read that to be the IRS) can extend that date further, if required.
Most of the provisions of SECURE (our government was clearly desperate for an acronym, don’t you think?) are not effective until 2021, although some provisions will be effective on January 1, 2020 – that is just a few days away.
Here is a quick summary of the most important provisions:
- Significantly increases penalties for the late filing of Form 5500 and certain notices
- Simplifies the 401(k) safe harbor rules
- Expands portability of lifetime income options
- Allows long-term, part-time workers to participate in 401(k) plans
- Allows plans adopting by the filing due date of their income tax return to be treated as in effect as of the close of the prior year
- Provides a fiduciary safe harbor for selection of a lifetime income provider
- Modifies the treatment of custodial accounts on termination of 403(b) plans
- Extends the current required minimum distribution requirements to age 72
- Requires disclosures regarding lifetime income
- Modifies the nondiscrimination rules to protect longer service employees
INCREASE IN PENALTIES FOR FAILURE TO FILE FORM 5500 AND REQUIRED PARTICIPANT NOTICES
If you pay attention to nothing else in this article, pay attention to this: there is a tenfold (that’s right, tenfold) increase in the penalty for the failure to file Form 5500 from $25 per day (maximum $15,000) to $250 per day (maximum $150,000).
Congress’s stated logic behind the increase, per an earlier House report, is that the penalties for failing to submit these retirement plan returns and participant notices have not increased in many years. Congress felt that the current present day penalties are “too low to discourage noncompliance” and that increasing these penalties “will improve overall tax administration.”
I have my own theory, which I developed when I co-chaired the American Society of Pension Professionals and Actuaries (ASPPA) government affairs committee. In all things tax related, our government strives to make revenue related bills “tax neutral.” In other words, even if their math is a little bit fuzzy (and boy is their math fuzzy!) they try and offset each piece of lost revenue with a like increase in tax revenue from somewhere else.
For example, by extending taking the Required Minimum Distribution (RMD) from 70 ½ to 72 the government, in the short term, will lose a certain amount of tax revenue. By increasing the penalties so dramatically, projections that they make (X number of returns filed late times Y number of days) will offset the lost tax revenue as a result of deferring RMDs by 1½ years.
Certain notice requirements have also increased tenfold. So failure to file certain “notification of change” notices will result in a penalty of $10 per day (not to exceed $1,000). Previously, it was $1 per day. Failure to provide a required withholding notice will now result in a penalty of $100 per day, not to exceed $50,000. The prior penalty was $10 per day with a maximum of $5,000.
These new penalties are set to take effect in less than two weeks and will apply to returns, statements and required notices to be provided after December 31, 2019. It seems logical to assume that the IRS will be more unforgiving in granting “reasonable cause” for late 5500 filings.
As I read and unpack the SECURE Act I will focus future articles on various specific changes and provide you with the pros and the cons as I see them. In the meantime, if you have questions, do not hesitate to email me at firstname.lastname@example.org.
Based in part on a December 23rd article from the National Association of Plan Advisors (NAPA)