The 401(k) Audit CPA Success Show: Episode 5
At the end of December, the SECURE Act was passed and went into law. There are some parts of it that are not in effect yet, but this is definitely something you need to know about if you are an employer that offers a 401k plan (or if you are considering it).
In this episode, Jamie Nau sits down with Kim Moore, the Summit CPA audit director to discuss what you need to know about the SECURE Act as a 401k plan sponsor.
Jamie Nau: Welcome to today's podcast. Today I'm joined once again by, Kim Moore, our audit Director, and we are going to touch on a very important issue for all the plan sponsors out there: The SECURE Act that was passed recently. Kim is going to give us a little bit more information about what that means to you from a plan sponsor, the kinds of action steps you can take, and anything you need to know going forward based on this act. So let's start at the beginning. Kim, explain the SECURE Act and when it happened?
Kim Moore: Sure. Good morning, everyone—or good afternoon wherever you might be. The SECURE Act we wanted to talk about, it's been kind of ongoing in the press. You may have heard some things, or seen some things online about it. It's a bill that started in the U.S. House of Representatives. So it is a congressional act. It started back at the beginning of 2019. It actually passed the House back in May and then went over to the Senate. The Senate had a slightly different version, as is pretty typical for bills that are going through our congressional legislative process. The Senate had another bill, they kind of went back and forth and it got hung up in the Senate. So it sat there for the majority of the year, and we weren't sure if it was going to pass at the end of the year, but there's a lot of pressure. A lot of people wanted it to pass because there are some really good opportunities for plans to take advantage of with the act. And so it actually was pressed in as part of the budget appropriations bill that happened at the end of the year, which of course, main purpose of that is, to fund the government for a another period of time. But they kind of snuck this in along with that budget bill. So it actually got passed at the very end of December, December 19th. And President Trump signed it, made it effective December 20th. So as of right now, it's passed. It's in effect. We're going to talk a little bit more about the different components of it, and what that means to potential plan sponsors. And everybody needs to be aware that even though the bill was passed and it went into law at the end of December, there are various different timing for the different components. So just because it went into law at the end of December, some things are not in effect as of right now. So we will talk a little bit more about that. But just be aware, just because it's in effect, doesn't mean everything came in at the same time period.
Jamie Nau: So we know our government officials are very creative because SECURE is an anagram, right? So can you tell everyone what the stands for?
Both: [Laughing. Inaudible]
Kim Moore: You are absolutely right. SECURE is an acronym spelled SECURE as you would expect. But that stands for: Setting Every Community Up for Retirement Enhancement Act. So it it's quite a mouthful. What it's really all about is, Congress, as well as a whole lot of other folks, have realized that a lot of the citizens out there in the U.S. are not saving enough for retirement. So they're trying to do everything they can to take the burden off of Social Security. And we're not going to get into the whole discussion about Social Security and problems with funding for Social Security. But I think everybody realizes there's some issues there, and they really shouldn't have citizens relying exclusively on Social Security for their retirement income. So they are trying to do everything they can to help make it easier for companies to sponsor retirement plans, and then for employees in those companies to be able to participate. Making it as favorable as possible, that's what this act was all about.
Jamie Nau: You gave me some interesting statistics on this, and I wanted to see if you wanted to go into those a little bit? I am amazed by what the data is.
Kim Moore: Yeah the data is not good. I pulled up just a couple of statistics, and you can go online and look for others, but the U.S. Bureau of Labor Statistics, which does all kinds of statistics about the workforce and people's compensation and all of that, did a study in 2018. So not that long ago, and that said only 55 percent of adults in the U.S. participate in a workplace retirement plan. So they either don't have the ability to participate. Maybe their company doesn't have a plan, or for whatever reason, they've chosen not to participate. So that's almost half of the people in this country are not participating in any kind of retirement plan, which makes you believe they are probably not saving for retirement, which is really scary when you think about. When they got into retirement, what's going to happen? Another study, the Vanguard, a very large investment firm, did a study last year, 2019, and it showed that the average 401(k) balance for those 65 years and up, so those either at retirement age, or very close to retirement age. Their average retirement plan balance was a little over $58000, which, you know, it's great that they have a plan and that they have an account with some money in it. I mean, that's a good thing. But $58000, as we all know, to get you through your years from retirement until your death is not going to be nearly enough to get people through. So there's a just a huge gap there. But also, you like to look at it as a huge opportunity as a company, as a plan sponsor, to help your employees prepare for retirement. You know, a great benefit that you can offer, or enhance the benefit if you are offering some type of retirement plan to your employees.
Jamie Nau: Yeah, for sure. So how does this act encourage me as an employee of the sponsors to get our employees to participate in benefit plans?
Kim Moore: So there's several different provisions that are a part of this act. First off, I would encourage anybody who is really thinking about implementing any of these is to do a little bit more research, because obviously we're limited on time today. So we're not going to be able to go into all of the details. As any congressional act goes, it's very lengthy and has a lot of details to it, which we're not going to go into all of the different details But there's actually three kind of buckets that the law addresses. One is, helping employers, and especially focused on smaller companies, and helping them to be able to offer affordable plans to their employers, because one of the things that they've recognized is that for very small employers, they may want to offer a plan, and they're all about giving their employees the best benefits that they can, but it can be very expensive and they just may feel like it's not a cost benefit to them, or they just can't afford it quite frankly, to be able to offer a plan. So there's some provisions around that. Then there are things to look at like employee participation. Looking at some of the rules around folks that are in a retirement plan, trying to make it easier for them to participate and easier for them to get access to their money. There's also recognition that people are living longer. So they changed the required minimum distribution rules slightly to help with that. Then there's the third bucket, which is just some general stuff which we are going to talk about. So let's start with, I'm an employer, and I'd like to offer a plan, but maybe for whatever reason I found out that it's very expensive. So I have not done it in the past. What does this law do for me? One of the big things that it allows is, if you're a very small employer, and you've done some research and you felt it's too expensive. There are administrative costs to the employer to offer a plan, and maybe you felt like that it was too expensive for you as a small employer. This rule allows you to group together with other similar small employers, and offer one plan to that combined group of employees. So maybe four, or five, or ten, companies would band together and say, we're going to offer one employee benefit plan to all of our employees. Obviously, it has to be the same plans, same benefits, but it allows them to share the cost across all of those companies, which makes it more affordable to the small employee.
Jamie Nau: So are there going to be organization vehicles that help with that? Kind of like a PEO on the insurance side? Or is it going to be just small business associations trying to find similar companies? Or how would you go about, you know, grouping with another company?
Kim Moore: Yeah, in implementing it, the PEO option is applicable, even before this act. So you certainly could do that. That would be one type of way of getting around this. But I would suggest if you're a small employer, and you're thinking, okay, so how can I take advantage of that? There's a couple different things you can do. One, you probably know other folks in your community that are other small business owners. So you could talk to them to just kind of, as a side discussion, ask about if they would you be interested in pulling together to try to offer a plan. What probably would be an even better option is to go to your providers that you already have. So if you're working with a payroll provider, talk to them and see if they have something available that you could work with. Also, just go online and look at the folks that are offering 401(k) plan administration, that would be your big payroll companies, big insurance companies and like a Vanguard, your big investment providers. They all generally offer for 401(k) plan sponsorship. So you could talk to them and see if they're doing anything in this space. Obviously, this bill just got passed, so we're a little ahead of the game. They're still working out the details of that. But I think if you would go to some of the providers like a ADP, Vanguard, Fidelity, some of the big insurance companies, they're going to be putting together plans that will allow small employer groups to get together. Another option is if you have an investment adviser, maybe for some other purpose, you know, you may have an investment advisor for something within your company, or you may use an investment adviser personally, you know, for your own personal investments. You could talk to them and see if they know of other companies that would like to band together, or maybe they're putting together an offering themselves. It’s a great opportunity for the investment advisor community out there to sell some services too. So I think those are all avenues you can pursue to look into. As with anything else, you're going to have to evaluate the different options available. Look at cost. Look at the service that they're going to provide. Look at the investment options that are going to be available to your employees. You want to do the best of all of those, so just sort through them and make a choice. I think there's going to be a lot more options out there, a lot more coming over the next few months now that this has passed.
Jamie Nau: That’s really helpful. So we talked a little bit about that part of the provision. So what's the next provision that you introduce here?
Kim Moore: Yeah, along with that, it's going to allow the employers, if they band together, to file one 5500 (form) for those combined plans. There are some rules around that. We're not going to go into great detail of that. You want to check that out. That helps from an administration standpoint. This bill also puts in a safe harbor provision. So if for example, ten companies banded together to offer one for 401(k) plan, it offers a safe harbor to each of those individual employers. So if one employer group falls down on the job, and doesn't do whatever it is that they're supposed to do administratively with regard to the plan, it doesn't cause liability to the other nine employer groups—it wouldn't disqualify the entire plan. It potentially could disqualify that one employer, but not all of them. So it does provide a safe harbor, so that's nice. Another thing that it does, hoping to increase employers offering a plan, and also participants to participate in the plan, is that they are providing tax credits. They're small. They're around $500 - up to around $5000 credits. And this would be a credit to the employer on their employer tax return, for offering a plan. So if you're not offering a plan currently, and after this act went into play, you do offer a plan, you can take a tax credit. There's kind of a formula you have to work through to figure out what the credit would be. Same thing for participation. If you either are putting in a new plan, or you already have a plan and this is something you can take advantage of, if you already have a 401(k) plan, if you implement what's called: auto enroll into your plan, then there's again another tax credit that the employer can take advantage of. And again, there's a calculation to go through to figure that out.
Jamie Nau: Outside of the tax credit, is that something you recommend? Do you like the auto enroll option?
Kim Moore: There are pluses and negatives to the way auto enroll works in case you're not familiar. You set up, as part of your plan document, that you're going to implement auto enroll, and you still set whatever your eligibility requirements are. Usually that's an age and a service requirement. So you may say, an employee can enroll in the plan once there are over the age of 21, and they've worked for the company, let's say three months. And those can vary, obviously, but with auto enroll, once an employee hits both of those requirements, they're over the age of 21, and they've worked for you for three months, then decide to enroll would kick, in and they would automatically be enrolled in the 401(k) plan, unless the employee elects not to. So that's something they have to do on their own. So if they do nothing, they're going to be auto enrolled and it's at whatever you stated in the plan document. Usually it's something around 3 percent. They get automatically enrolled either immediately, or within a period of time, and if they don't elect investments, it will select a default investment election for them. Good thing with that is it can increase your plan participation, which is, you know, what this is all about, getting people to save for retirement. I don't understand this and I can't explain it. But when you do auto enroll, they generally won't opt out. They just won't take the action even though it's filling out a form. They won't fill the form out. If you have the exact same requirements, but you ask them to fill the form out to opt in, then you get a much smaller participation rate. So, you know, it's the same end result. I can't really explain why that is, but that is what we've seen with a lot of our clients. And we're all busy. I think, you know, it's just one more thing you have to do in your busy life. So it does increase plan participation. Now, on the negative side, from a plan sponsors standpoint, it can increase some administrative work, because if you have high turnover, just depending on the type of organization that you are, if you have a lot of people coming and going. You have a lot of part time people, or a lot of hourly people where their compensation is going to change from pay period to pay period, those people tend to turnover a lot. And so you may have a lot of folks in your plan with very small account balances. So you may have hundreds of people with account balances under $50, and then you've got to pay for those people, so it can increase your administrated costs. You've got to eventually get the money out of the plan for those people. So you've have to go find them. You've have to get them to fill out a form sometimes to get the money out of the plan. So you kind of want to weight that. Is it worth it? Do you have staff to handle that? Because you don't want to get into auto enroll, and then you can't keep up with all the people in the plan. It's kind of a balancing act, but there is good and bad. We've seen a lot more of our clients going to this. Another feature that goes along with auto enroll, it's not automatic with it, but you can implement it at the same time or later on. It's something called: auto escalation. And this plan did change the maximum escalation from a 10 percent cap to a 15 percent cap. The way auto escalation works, if you had auto enroll, you can auto enroll your folks at whatever you set. Usually 3 percent is something that we see quite often. Then once a year on a date that you would set, as part of the plan document, that percentage goes up a percentage each year for the employee until it hits that maximum cap, which again is going from a 10 percent, to 15 percent. So for a new employee, they would get auto enrolled in this case, at 3 percent. The following year it would bump up to 4 percent, the following year it would bump up to 5 percent, etc. until it reaches that 15 percent cap again, unless the employee opts out. So the employee at any point in time could say, no, stop at 5 percent. I don't want to go to the 15, or maybe I'm up to 10, and now I don't want to be at 10 percent or more. I want to go down to 5 percent. So they can always change that. But it's going to auto up until it hits the 15 percent. Again, helping people save more for retirement, and assuming that their compensation is going to increase is going to allow them to save more. So that's kind of how that component works.
Jamie Nau: So before you get to the other two provisions, there's two left that you're going to talk about, I'm just going to throw our email address out there. So we're always looking for new topics, and guests, or anybody else that has an information for the show. So if you have any questions or topics to suggest, please e-mail us at: email@example.com. Again, firstname.lastname@example.org. We're always looking forward to get the listeners involved. So please reach out to us. So with that said, Kim, what are the final two provisions, and give us a little bit of info on them.
Kim Moore: Sure, and I would echo your reach out to the listeners, if you also have any questions just off of the podcast, I know we're going through a lot of detailed information in a short period of time. So feel free to just email questions as you hear them off of the podcast, or if you'd like more information. I would be happy to help you out. Now the other couple of things, from a participant standpoint, there's a couple of things that changed. I won't go into all the details, but it does allow an in-service withdrawal if you have a birth of a child, or you're adopting a child, and that's up to a $5000 distribution. Most 401(k) plans won't let you take money out of the plan until you retire, or terminate service with the employer, except for certain very specific situations. This allows an additional situation for a birth of a child, or adoption of a child.
Jamie Nau: So that's with no penalty? You can just take that money straight out?
Kim Moore: Yeah, no penalty. Now you will have to pay tax on it. You know the IRS is going to get their check. But no penalty. You know recognizing that, they want to help younger families out. Also, it raises the required minimum distribution age slightly. It didn't increase it significantly, but it's going up to from 70 in a half, up to 72. And I'd look for more, you know, more in this space going forward. There's been a lot of talk that they may raise it up potentially to 75. Just recognizing that people live longer and want to make the money in retirement accounts last for their entire lifetime. So, you know, they're looking at raising those ages. Now doesn't mean you can't take it out sooner. But it's just saying you're not forced to take the money out, at, you know, an earlier age. One other thing they're going to require disclosures around the income from your retirement plan. It's a new disclosure. We don't know exactly what it's going to look like, but it's called the: lifetime income disclosure. So it will require plans to disclose to you, based on the amount of funds in your account, what type of monthly benefit you could see once you hit your retirement age. Obviously, it's a forecast because they don't know when you're going to retire, they don't know how long you're going to contribute, they don't know what the stock market's going to do. But similar to the forecast that they do for Social Security, they're going to put in a disclosure requiring that.
Jamie Nau: Will that be a general disclosure in the financial statements? Or would that be something that goes out to each individual participant with the amount they have in there?
Kim Moore: No, it'll be specific to each participant, specific disclosure based on your funds in your account. So I think that's a great thing. You know, more to come on that, too, because that's not going to come in for another year. And I would advise everybody to keep in mind that there are different due dates on each one of these things we've talked about. So look into that a little bit more carefully before you change your plan, or adopt something just to make sure you're not trying to take advantage of something too quickly. The last thing I wanted to mention, it did increase penalties for late filings on the Form 5500. If you're not aware, if you don't file the Form 5500 by specific due dates, depending on what the plan reporting timeframe is, usually it's calendar year which gives you until the end of July original filing date, and an extension to October 15th, if you do file for the extension. If you miss those due dates, there are pretty hefty penalties in place already. There was $25 per day, up to a maximum of $1500 penalty for filing late on the Form 5500. This act is going to increase that significantly. up to $250 per day from the $25, and up to a maximum of $150,000 fine. So pretty hefty fines. You're going to want to make sure going forward you get to the Form 5500 in on time.
Jamie Nau: Now we know why it was part of the budget bill, right?
Kim Moore: Exactly right, and Jamie, I'd just say there are some other things that we're not going to have time to get into today, but there are other provisions we can talk about those on a on a later podcast. By all means, email me at that email address that Jamie gave out. I'd be happy to either go into more detail on the things we talked about, or go into any of the other provisions. Check online also. There's a lot of information out, and there will be a lot more coming out over the next few months about The SECURE Act as it gets kind of rolled out, and providers are looking at it, and figuring out how they're going to implement it on their end. So I'm sure there will be a lot more details coming.
Jamie Nau: I appreciate it. I think you give a lot of really good information. I know I learned a lot, and I know it's takes a lot of work to go in and read the entire bill, and I'm sure you were spending some time doing that.
Kim Moore: Yeah, it's not a lot of fun reading all of that congressional legislation, as I'm sure all of our listeners can readers can sympathize with.
Jamie Nau: Great. Well, before we end the podcast, any final thoughts that you have on The SECURE Act that listeners should be walking away with?
Kim Moore: No, I think it's something to definitely take a look at, whether you're an employer, or thinking about implementing a plan, or maybe you already have a plan. There's some good things to take advantage of in there. You know, we all want to help our employees have the best benefit package, that benefits them. You know, different employers have different employee bases, and some are younger, some are older. Some have a lot of turnover, some don't. Some have more hourly workers, some have more part time workers. There's part time provisions included in this act as well. So definitely I think it's worth everybody’s time to just scan it. See if there's anything you can take advantage of and help out with. You know, we all need help preparing for retirement. So I think there's something in there for everybody.
Jamie Nau: Well, once again, I appreciate your time. We will be back again next month with another great topic.
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