On December 20, 2019, the Setting Every Community Up for Retirement Enhancement Act (the SECURE Act for short) was signed into law by President Trump. The SECURE Act made many significant changes to the treatment of retirement and other savings plans and corrected a few unfavorable changes that had been put in place from the TCJA. We will present the highlights of the SECURE Act in this three-part series; Part 1 and Part 2 covers changes for individuals and Part 3 covers changes for small businesses.

Pooled Retirement Plans are Improved

Before the SECURE Act was signed into law, multiple employers could pool their resources to create and fund a retirement plan for all employees, but there was a hidden danger – the “one bad apple” rule in which the entire plan could be disqualified if a single participating employer did not comply with the provisions of the plan. The SECURE Act has removed this rule, allowing the plan to continue operating even if one of the participating employers was noncompliant. While certain conditions still apply to a plan that will be exempt from the “one bad apple” rule, this still allows much more availability for small businesses to provide for employer retirement. This change takes effect in tax years after 2020.

Small Employer Pension Startup Credit Increased

The tax credit for a small employer pension plan’s startup costs has been increased for tax years after December 31, 2019. Under the old rules, employers could take a credit of 50% of plan startup costs for the first three years of the plan’s existence, up to a limit of $500. Under the SECURE Act, the credit is based on the number of eligible employees who are non-highly-compensated, and is increased to $5,000.

Qualified Retirement Plans Must Include Certain Part-Timers

Under the old law, employers who have a defined contribution plan qualified under Internal Revenue Code Section 401(k) could exclude from the plan part-time employees, defined here as employees who work less than 1,000 hours per year for the organization. Under the SECURE Act, employers who implement a qualified plan in effect on or after January 1, 2021 must make the defined-contribution element of a plan available to so-called “long-term part-timers,” who are employees who work at least 500 hours for three consecutive years. 

This does not obligate such employers to make other provisions of the plan, such as employer nonelective and matching contributions, available to such employees, but they may do so if they wish, as long as they consider the three years of service to count towards the years-of-service requirements for employee vesting.

We hope this series has been useful to you in understanding some of the intricacies of the new law. Proper tax planning can make all the difference for taxpayers who are trying to navigate the change in the new law, and we at MRPR stand ready to assist you. Please check out Parts 1 and 2 of this series for more information.