Jan 26, 2020
In this informative webinar on the SECURE Act, we discuss:
Click here to download the slides
- Opportunities and challenges of the new Multiple Employer Plans (MEP) regulations
- Maximizing your clients access to the increased small employer pension plan startup tax credit
- Effective dates of key provisions
- And other aspects of the legislation
from this presentation.
Click here to read our analysis on the SECURE Act.
Click here to read our advisor Q&A
Transcript of webinar:
Michael Haun: I'd like to introduce today's presenters. First up, we have Mike DiCenso who is Newport Group's Executive Vice President of Sales. Mike leads our sales organization and the development of our company's business strategies and goals. He has nearly 30 years of experience in our industry and a proven history of success in sales, marketing and product development. Our second presenter today is Margaret Miley. Margaret is a Vice President in Newport Group's legal team. She provides in house counsel for Newport on issues involving the tax, labor and securities law aspects of both qualified and non-qualified retirement plans. Margaret has over 20 years of experience as an ERISA attorney and her expertise includes qualified retirement plans, 403B and 457 plans as well as non-qualified deferred compensation arrangements. Now without further ado, I'd like to turn it over to Mike. Mike, take it away.
Mike DiCenso: Hello everyone. What we're going to do today is we're going to do an agenda with you on The SECURE Act. As you look at The SECURE Act, and the reason it's been put in place is that there are 55 million Americans who are employed in the workforce, but do not have a retirement plan offered to them at their place of employment. So between the Trump executive order and Congress, they have created solutions to bring to the market for employers of every size, small mid and large employers to be able to implement a retirement plan that will be effective for their employees to join.
Mike DiCenso: We're going to go through the agenda with the SECURE Act, we'll go over retirement plan accessibility, other significant provisions, Safe Harbor plans, the small business tax credit, which is extremely important and confusing, 403b plan provisions, the qualified birth and adoption distributions, required minimum distributions, the long service and part-time employee eligibility to the plans, other accessibility provisions, the MEPs and PEPs, and then we'll have questions at the end. As always, we like to start with a quiz.
Mike DiCenso: Next slide please. So question one address for the team here and everybody is on the line is which of these plan types does The SECURE Act cover? Is it MEPs, is it PEPs, group plans or not sure? And we'll be addressing all of this as you're answering these questions. We'll be addressing all of this during our webinar. As you look at the MEP PEP marketplace, one thing I'll say is all PEPs are MEPs but not all MEPs are PEPs. And so this brings to light how complex, confusing, even conflicted at times these regulations are. What we have is the MEPs that have come under the Trump executive order between the IRS and the Department of Labor to where there has been a change in what was commonality to bonafide groups to expanding closed MEPs to include employers that are not in the same industry but are together for other reasons than benefits.
Mike DiCenso: Then we have The SECURE Act that was put in place, which has launched the PEPs. And so in this we're going to go through these different aspects for you, which there are differences between both. Both will still be out there in the marketplace going forward and we'll address all of these with you during this webcast. Can we share the results please?
Mike DiCenso: All right, so we saw the MEPs got 41%, PEPs got 18%, group plans got 21%, and not sure got 21%. So this session should be very valuable for everybody on the call. The MEPs were addressed under the Trump executive order by the Department of Labor. So that was not covered by The SECURE Act. There are some aspects of it that are covered by The SECURE Act, but as of September 30th of 2019, that is when the MEP regulations became final by the Department of Labor. The PEPs and the group plans, those are covered by The SECURE Act.
Mike DiCenso: So with that, what I'd like to do is introduce Margaret Miley. Margaret's going to go through the agenda items that we just discussed. I will be jumping in from time to time to add some color, but this is your session. We want you guys to get out of it what you need. And we look forward to your questions at the end. Margaret.
Margaret Miley: Thanks Mike and welcome to everybody on the call. We are going to talk about The SECURE Act for the next hour. There's a lot in it, so we're going to try and get through as much as we can.
Margaret Miley: By way of background, The SECURE Act was one of many different bills that were included in the recent Appropriations Act that was passed back in 2019 and actually signed into law on December 20th of 2019. It is the most sweeping pension legislation that we've seen in nearly 15 years going back to the Pension Protection Act of 2006. The focus of most of the provisions of The SECURE Act are on making retirement plans more accessible to that segment of the population in the United States that does not have access currently to an employer sponsored retirement plan with some additional provisions that are generally focused on helping employees and participants preserve their retirement assets. Most of the provisions take effect this year, although some were effective on the date of enactment. Some were retroactively effective back many years and a couple of provisions don't take effect until 2021. We're going to talk about all of that.
Margaret Miley: In terms of amending your plan documents, you'll see as we go through the presentation today that most of the provisions of SECURE are optional. Not all, but many of them are optional. Things that you can take advantage of if you want to, if you want to add them to your plan. So most plan amendments, the plan amendments to adopt those SECURE Act provisions are not required until the end of the 2022 plan year. But you do have to start administering your plan in compliance with any of the provisions that are not optional. Now, as I said, SECURE is a part of a larger act, The Appropriations Act. And if you're interested in reading it, you can Google HR 1865 which was the name of the bill and you will find the text of The SECURE Act in division O. But be aware that there are also some retirement related provisions in other parts of that act. You will find in division Q of The Appropriations Act language regarding disaster relief that impacts retirement plans. And you will also find some retirement related provisions in division M. So those are not technically part of The SECURE Act because only the text appearing in division O is part of SECURE. But we will talk a little bit about these other provisions that are in other parts of the act. Next slide please.
Margaret Miley: So today we're going to be focusing on those provisions of SECURE that really were intended to open up retirement plans to employers, make them less burdensome in terms of administration and cost, et cetera. And those are the things that are on this screen. Next slide.
Margaret Miley: But there are other provisions that we aren't going to have time to spend a lot of time talking about, but I do want to point out three of maybe the more significant provisions that we won't be spending a lot of time on. One is lifetime income disclosures. Now this is an idea that has been floating around for a period of time, but what this is, is that at some point in the future after the Department of Labor and IRS issue guidance, pension benefits statements are going to have to include a lifetime income disclosure on them at least once every 12 months. And what that is, is you're going to have to have a statement on the pension benefits that basically tell participants in defined contribution plans how much monthly income they could receive if their vested account balance was used to purchase an annuity. So that is coming, but it will not be a requirement until 12 months after we get guidance on this from the IRS. But something to be aware of.
Margaret Miley: Also as I pointed out there is in division Q disaster relief provisions and for those of you in the industry, you're probably familiar with these types of acts that have been passed historically. So what this does is it gives participants in retirement plans some tax deferred benefits and relief if they've been impacted by a federally declared disaster. And like prior disaster relief, under division Q, participants have the ability to take up to a hundred thousand dollars in distributions to address if they've been impacted or if their principal residence is in one of these federal disaster areas, they can take distributions up to a hundred thousand dollars in loans. And so that's something to be aware of and, let's see, and they can also recontribute amounts that they had received as a hardship distribution. If they took a hardship distribution to purchase a principal residence and that residence was affected by a disaster, then participants can actually recontribute that money back to the plan so they don't have to pay taxes on it. So disaster relief is included in The Appropriations Act even though it isn't actually part of SECURE.
Margaret Miley: And then also the other thing I want to bring to your attention is this provision in division M of The Appropriations Act. There is a provision there that lowers the age requirement for taking an in-service distribution from pension plans. Currently that age is 62. It is now going to be 59 and a half. And that's going to affect potentially money purchase plans and defined benefit plans. And there's also a lowering from 70 and a half to 59 and a half for in-service distributions from governmental 457B plans. So again, just something to be aware of. Next slide.
Margaret Miley: So let's dig into the provisions of SECURE that impacted accessibility and access and preserving and retirement assets, et cetera. The first thing that I wanted to talk about is provisions that impact Safe Harbor plans. So Safe Harbor plans are those types of plan designs that allow a 401(k) plan to automatically satisfy discrimination rules. You don't have to run your ADP test, you don't have to make corrective distributions to highly compensated employees if you adopt a Safe Harbor plan contribution feature for your plan, and there are three significant changes to Safe Harbor plan rules starting this year. The first involves qualified automatic contribution arrangements. That's a type of Safe Harbor where participants are automatically enrolled to defer a certain percentage of their contribution into the plan and then
the employer has to make either a matching contribution or a non-elective contribution that is fully vested after two years of service otherwise known as a QACA.
Margaret Miley: In a QACA, prior to this year, the maximum automatic contribution percentage you could apply to participants was 10%, but under SECURE that 10% is increasing to 15% once you get outside of the initial contribution period. So for the initial period, which starts from the date that the contribution is first applied, the automatic contribution is first applied to the participant and ends on the last day of the following plan year, the maximum contribution rate is still 10%, but once you get out of that initial period, you can now impose an automatic contribution percentage of up to 15% on participants.
Margaret Miley: Now, as I indicated, that particular provision is effective currently. It's effective for plan years beginning after 12/31/2019, but we don't know how you could actually or whether you could actually implement a 15% contribution percentage mid year. Typically, you have to provide notices regarding the qualified automatic contribution arrangement in advance of the plan year and so it's not clear that you're actually going to be able to take advantage of this increased contribution rate during mid 2020. So we're waiting for more guidance on that, but at least starting in 2021, you'll be able to bump that up to 15% if you so desire.
Margaret Miley: Another change affecting Safe Harbor plans is that the requirement to provide an annual notice is being eliminated. If you have a non-elective Safe Harbor plan, that's the Safe Harbor plan that contributes at least 3% of compensation to all participants. And in the past, in order to be a non-elective Safe Harbor plan, you had to provide a notice to participants at least 30 days in advance of the start of the plan year. But that's being eliminated. You no longer have to provide an advance notice. So if your plan is failing ADP testing and you want to become a Safe Harbor plan, you can so without having provided that Safe Harbor notice before the beginning of the year. Now the notice is still required for 401(k) plans that use a matching contribution Safe Harbor formula. It's only the being eliminated for non-elective Safe Harbor plan. And again, this is effective this year. So if you've got clients out there that intended to be Safe Harbor but they didn't get the notice out in time, the notice has now been eliminated and it is no longer going to be an impediment to them in terms of putting a non-elective Safe Harbor plan in place.
Margaret Miley: And the third and final provision that affects Safe Harbor plans has to do with the time period for adopting a non-elective Safe Harbor plan. Again, it used to be that you had to adopt or elect to be a non-elective Safe Harbor contribution plan in advance of the plan year. That has now changed so you can elect Safe Harbor status as late as 30 days prior to the end of the plan year. Again, if you're getting towards the end of the plan year and your client's plans are in danger of failing the ADP test, they can adopt Safe Harbor status as late as November 30th of the year and still avoid having to make those corrective distributions to your highly compensated employees. You can also actually wait until December 31st of the following plan year to elect Safe Harbor status for the prior year if you're willing to kick in 4% of compensation instead of 3%. that change is also effective this year. Next slide.
Margaret Miley: I know a lot of you are interested in this next provision and there's actually two provisions in SECURE that impact or that have to do with tax credit for small businesses. Currently, there already is a qualified startup cost tax credit. And the qualified startup cost tax credit was 50% of your qualified startup costs, but not more than $500. And you could take that credit or you could claim that credit for the first three years of a plan's existence, but it was no more than $500. What's changed is that that $500 cap is increasing, so that under SECURE, the credit is potentially as great as $5,000 a year for each of the first three years. Now, because the credit is still only 50% of the qualified startup costs, you have to have qualified startup cost of at least $10,000 in order to take advantage of the maximum startup costs tax credit that's now available.
Margaret Miley: A few things to know about this. It's only available to employers that have no more than a hundred employees. It's not available to tax exempt or governmental entities. It's for new plans. So the employer cannot have maintained a plan in the prior three years for substantially the same group of employees. You have to have at least one NHCE non-highly compensated employee who is participating in the plan. So this wouldn't be for sole proprietors. It can be for startup costs associated with a qualified plan, a SEP or a SIMPLE. Either plan type is fine. And what do we mean by qualified startup costs? We mean expenses incurred to start or administer a plan. And administer would include expenses such as record keeping services, trust services whatever types of expenses you incur to implement and establish a plan, would generally be covered. It also includes expenses incurred to provide retirement education to employees. It does not include plan contributions, just the administrative and retirement education expenses that you incur, not the plan contributions themselves. And this is effective for taxable years beginning in 2020.
Margaret Miley: Next slide. I put up or included an example of how the small business tax credit works. In this example, we've got employer with 43 employees, so they're eligible because they have under a hundred employees. 39 of their employees are non-highly compensated. They decide to put in a qualified plan in 2020 and that plan is going to be first effective 1/1/2021. And under the plan, employees who have one year of service are eligible to participate. 27 of the non-highly compensated employees of that employer have a year of service and the service provider charges $7,500 to administer the plan.
Margaret Miley: So what is the available tax credit for this employer for 2021? It is $3,750, and this is the way we figured that out. Remember the tax credit can never be greater than 50% of the qualified startup costs. And we said that the qualified startup costs are $7,500, so the tax credit is at most going to be $3750. But it's capped at the greater of $500 or the lesser of $5,000 or 250 times the number of eligible non-highly compensated employees. The math is there. 250 times the 27 eligible, non-highly compensated that have a year of service is $6750. So the lesser of $6750 or $5,000 is $5,000. The greater of $500 or $5,000 is $5,000. So they're potentially eligible for $5,000 in tax credits because they've got 27 eligible non-highly compensated employees, but their tax credit is only going to be $3750 because you don't get more than 50% of the credit.
Margaret Miley: Next slide. Now, in addition to increasing the qualified startup costs tax credit, there's an entirely new credit that's available to the same types of employers, i.e., employers with less than a hundred employees. This is a credit of $500 that an employer can take for the first three years that they implement an eligible automatic contribution arrangement in their plan. And again, qualified plans, SEPs and simples all qualify. So if you have a small employer and they're willing to put an eligible automatic contribution arrangement feature in their plan, then they can take a tax credit of $500 for the first three years that that ACA is in effect.
Margaret Miley: Now, an eligible automatic contribution arrangement is an arrangement defined under code section 414W3. That is your most basic form of automatic contribution arrangement where the only real requirement is that you subject participants to a uniform percentage of compensation being contributed as a plan. There's no specific percentage that you have to apply to participants. It just has to be a uniform percentage. There's no employer contributions required. So all the employer has to be willing to do is set up this automatic contribution arrangement where participants, unless they elect out, some percentage of their compensation is going to be contributed to the plan. And this also was effective in 2020. Next slide.
Mike DiCenso: So with this, just a statement on the tax credits, being that there is more in tax credit, there is greater potential for almost every plan sponsor that starts up a plan from where they were before. And so this is an advantage, it is just there is a complicated formula here. It's a $5,000 tax credit. You've got to go through the formula, by plan, by employer to figure out how much tax credit they are actually going to receive.
Margaret Miley: Thanks Mike. On this next slide, for those of you that may work in the tax exempt or K through 12, if you have clients in the K through 12 industry, you're probably working a lot with 403(b) plans and you may have run into some frustrations terminating those plans like a lot of practitioners have. Like qualified plans, if you want to terminate a 403(b) plan, you have to distribute all of its assets within a reasonable period after the plan has been formally terminated, usually within 12 months of the termination of the plan.
Margaret Miley: What's been a challenge in the 403(b) industry is that many of those 403(b) plans are set up using individual custodial account agreements for the participants. And so it hasn't always been possible for the plan sponsors to actually force participants to take distributions from these terminating plans because the participants themselves are really the contracting party with the 403(b) custodian and the employers don't necessarily have the authority to force those participants to take distributions from their individual custodial account agreements. And so when they wanted to terminate a 403(b) plan, they couldn't, because they couldn't distribute all the assets out.
Margaret Miley: That all changes under SECURE and this was really very, very welcome news for people that practice in this industry. What SECURE says is that 403(b)(7) custodial accounts can now be treated as having been distributed in kind to the 403(b) custodian to effectuate a plan termination. Even though you're distributing it in kind, there's not going to be any tax consequences to the participants themselves. The tax status of the account is preserved as long as the 403(b) custodian continues to administer that account in accordance with the rules that were in effect when the plan terminated. And this was effective for taxable years beginning after December 31st, 2008. This was one of those provisions that has retroactive effect. So to the extent there were plans in the past that took the position that the plan was terminated, even though they didn't actually force out these distributions, that is basically getting retroactive blessing by the IRS with this SECURE Act provision. But we are expecting to get some guidance from the IRS on this, no later than June of this year, to see whether there are any formal steps that have to be taken on that front.
Margaret Miley: The other change affecting 403(b) plan provisions has to do with a clarification of what types of individuals could be covered in a 403(b)(9) retirement income account. That's a type of 403(b) plan that is sponsored by church organizations and churches. There was some question as to what types of employees could actually participate in this plan. So that's been clarified in SECURE, and again, this is a provision that also has retroactive effect. So it's really intended more as a clarification rather than a change.
Margaret Miley: Next slide. One of the things I think that a lot of people are interested in is this provision of SECURE involving qualified birth or adoption distributions. And just to put this in context, in the proper context, most employer sponsored retirement plans are subject to distribution restrictions. So you can't just make payments to participants whenever they ask or whenever they want it. They have to satisfy, they either have to be 59 and a half or have had a hardship, required minimum distribution, there's other provisions available but they have to have met one of the permissible payment events permitted for that plan type before they can get a distribution. When it comes qualified birth or adoption distribution. So this is something that actually is also effective this year. And it applies to IRAs, qualified plans, 403(b) plans and governmental 457(b) plans.
Margaret Miley: Under this provision in SECURE, a payment from the plan can be made to a participant who recently has either had a child via a birth or has adopted a child. If that participant wants to take a distribution within a year of the date that they had the birth or the qualifying adoption, they're permitted to, in other words, the plan can permit it. I don't believe the plan has to permit it, but it is an optional provision that a plan could permit that participant to take a distribution even though they didn't satisfy and if the current permissible payment events applicable to the particular plan type. So they can take a distribution of up to $5,000 per birth or qualified adoption and that qualified birth or adoption distribution is going to be exempt from the 10% early payment penalty tax. As I noted, it has to be made or requested within one year of the birth or adoption or doesn't get all of these favorable tax treatment.
Margaret Miley: The distribution can be repaid as though it were received in an eligible rollover distribution, which means if you've got somebody that has a short-term need for funds, they can take up to $5,000 out of the plan, use it if they need it or use it for that limited purposes and put it back in the plan and never have to pay income taxes on it. So it is a way to sort of get a tax free short term loan or funds from the plan.
Margaret Miley: These types of distributions are not eligible for rollover so you don't have to give a special tax notice to the participant and it's not subject to the 20% mandatory income tax withholding. It is subject to 10% optional income tax withholding. And it's effective for distributions made after December 31st of last year. So technically, it's available now and we have gotten some questions about it. I don't think anybody knows exactly how this is all going to work out. We were hoping that this was one of the provisions that the IRS provides guidance sooner rather than later on. Does a plan have to make this available? If it doesn't make it available, does the participant just take advantage of the various favorable tax treatment on their own individual tax return? What is the process for repayment? How long does a participant get to repay a distribution like this? Because there's nothing in the statute about that. What sort of documentation does a participant have to provide in order to qualify for this type of distribution? And does a plan administrator have to request that documentation? There's a lot of questions yet to be answered here, so we, like everybody else in the industry I think is just waiting for the IRS to issue some guidance so we know how to proceed. Next slide.
Mike DiCenso: And so many aspects of this are waiting for clarification as to how things will actually operate with some of these other items around the SECURE Act.
Margaret Miley: Very true. This next provision also is something I think that's gotten a fair amount of attention in the press. There are changes to the required minimum distribution rules. One of the changes is that participants are no longer required to take these minimum distributions until they reach age 72, as long as they attained age 70 and a half after December 31st of 2019. So anybody who attained 70 and a half in 2019, they still have to take a required minimum distribution by April 1st of 2020 and they have to continue to take those required minimum distributions, even though they're under 72. So there's a fairly bright line here. But if anybody who turned 70 and a half after 2019, they don't have to take a minimum distribution until April 1 of the year, following attainment of 72 or termination, whichever occurs last.
Margaret Miley: Now, the last time that there was a change to the required minimum distribution age, there were a lot of questions about, well, if the plan has a required minimum distribution provisions in it that currently let someone take a distribution at 70 and a half and the required beginning date has now changed to 72, do we have to let the people still have the money at 70 and a half? In the past, the answer to that has been yes. You can’t take the right to an in-service distribution away from a participant, but again, it's possible that in guidance that the IRS issues that we can just move it to 72 and be done with it, but it's likely that distributions at 70 and a half will continue to have to be made available.
Margaret Miley: The other change affecting required minimum distributions has to do with how quickly someone who dies, how quickly the account balance of a participant has to be paid out after their death. And this is changing. If you've seen in the press, they've been talking about the elimination of stretch IRAs. Well, a stretch IRA is an IRA that where if a participant dies, their designated beneficiary, no matter how old that beneficiary is, they have the option of taking minimum distributions out for the designated beneficiaries life expectancy. So if it's a very young beneficiary, that those payments can be stretched over the beneficiaries life expectancy.
Margaret Miley: That is being curtailed significantly. Similar rules apply in the qualified plan arena. In fact, virtually identical rules, but we don't call it stretch IRA because it's a qualified plan. So the new rules are as follows. When a participant dies, the account balance has to be completely distributed within five years if the beneficiary is not a designated beneficiary, that would be things such as estates or charities and some trusts. If a participant names their estate as a designated beneficiary, then the entire account balance has to be paid to the estate within five years of death or technically by December 31st of the fifth year following the year of the participant's death. If the beneficiary is a designated beneficiary but not an eligible designated beneficiary, then the account balance has to be paid out within 10 years of death.
Margaret Miley: An example of that type of individual is a non-spouse beneficiary who's more than 10 years younger than the participant. Those types of beneficiaries have to take the entire account balance out within 10 years of death. If the beneficiary is an eligible designated beneficiary, then the account balance can still be stretched over the lifetime or life expectancy of the eligible designated beneficiary. But the types of people who qualify as eligible designated beneficiaries is fairly limited. So it has to be the spouse, a minor child, until the child reaches the age of majority or a non-spouse beneficiary who's not more than 10 years younger than the deceased participant. There are a few others, but those are the main categories, so that's what's changing here. The types of beneficiaries that can stretch payment out over their life expectancy is being significantly curtailed and everybody else has to receive payment within five or 10 years of the date of the participant's death.
Margaret Miley: Now if an eligible designated beneficiary dies, then the ability to stretch that account goes away with them and the remaining balance has to be paid out within 10 years of the eligible designated beneficiary's regardless of who that beneficiary is.
Margaret Miley: So this applies with respect to deaths occurring after 2019. If an individual died in 2019, they're under the old rules and the stretch IRA is still available to them, the stretch in the qualified plan is still available to them. But then if they die and there is still an account balance left, their beneficiary is going to be subject to these new rules and the remaining balance would have to be paid out within 10 years of that beneficiary's death.
Margaret Miley: Next slide. Another major change in SECURE is this concept of a long-service part-time employee. Currently under current law, plan sponsors are permitted if they so choose, to impose a year of service requirement on employees as a precondition to participating in a 401(k) plan. So if an employer wants to, they can only offer a 401(k) plan to employees who have at least completed a year of service. And a year of service means basically completing a thousand hours within a 12 month period. So that's the current rule. Obviously under the current rule, people who are long service, part-time employees, but never hit a thousand hours are never going to be permitted to participate in the 401(k) plan. So SECURE is changing that. Again, the focus of SECURE is in part to expand access to retirement plans for taxpayers and employees, and this was one of the provisions that is doing that.
Margaret Miley: Under SECURE, if an employee completes at least 500 hours of service in each of three consecutive 12 month periods, then they have to be allowed to participate in the 401(k) plan, even though they've never reached that 1000 hour threshold, provided they're at least 21 at the end of that time. Now, the twist on this is that, even though it's effective in 2021, hours completed prior to 2021 don't have to be counted. So if you have an employee who's been working for you for several years, and as of 2021 they already have three years, in which they completed 500 or more hours of service. They don't have to be let in on January 1, 2021, because you don't have to count the service that they performed prior to 2021. Instead, the clock starts at zero on January 1, 2021. And they would have to have 500 hours in each of 2021, 2022, and 2023 in order to obtain eligibility to participate in the plan under this provision.
Margaret Miley: Now, to make this more palatable to employers, there's some other provisions of SECURE that say, anybody who becomes eligible to participate in a plan solely because of this new rule, doesn't have to receive employer contributions, and can be disregarded for purposes of coverage, discrimination, and top heavy testing. So we've gotten a lot of questions about this. And there seems to be some confusion. If a participant gains eligibility to contribute to the 401(k) plan, solely because of this rule, in other words, they have not completed 1000 hours at any time. They're eligible to participate only because they've got the three years of 500 or more hours of service but never 1000, then they can start contributing.
Margaret Miley: If they start contributing, they don't count in your ADP test, they don't count in your coverage tests. You don't have to give them a contribution if your plan is top heavy. So, as long as they never hit that 1000 hour threshold, you can disregard them for all of those purposes. And that I think is a very useful feature of this rule, because otherwise, certainly your discrimination tests would be adversely impacted if you had to allow a lot of probably a fairly low compensated employees to participate in your plan.
Mike DiCenso: With that said, being that the 1000 hours threshold, these are still part-timers who would be in the plan. And so this can have an effect on testing, which could limit what the highly compensated can put it to the plan. From there, this may open the door for advisors to fill the role for more of a financial planning wealth management standpoint for those key employees, to help them save more for retirement outside of the plan. As well as this should help to bring more non-qualified planned opportunities on top of the 401(k) retirement plan.
Margaret Miley: Thanks Mike. And let me just expand on that a little bit. So there are a lot of plans out there. It's not uncommon these days for 401(k) plans not to impose any service requirements to participate. You'll see plans out that allow all employees to participate 30 days after their first day of employment, or something along those lines, or 90 days after their first day of work, and without regard to how many hours of service that they've completed.
Margaret Miley: And in those types of plan designs, part-time employees are currently going to be eligible to enroll. Those part-time employees that are in your plan, because of the way the plan has been designed, you don't get to disregard them for coverage, discrimination, or top heavy. And you have to give them employer contributions to satisfy discrimination rules, et cetera.
Margaret Miley: So, we're obviously going to be waiting for guidance, but my guess is that there's some opportunity there for you to work with your clients to redesign their plans, particularly if you've got plans that are having trouble satisfying the discrimination testing, because of the part-time employee participation, or the need to include those part-time employees in the plan.
Margaret Miley: And the other thing we got a question about was, will these employees be counted for audit purposes? Do they count as participants on the participant count number, such that your plan might be subject to an audit, when it otherwise wouldn't. I guess I'll have to say the jury is still out on that. According to the statute there's no exemption. So without guidance from the Department of Labor and IRS to the contrary, I would say yes, at this point it does look like those employees would count for purposes of whether the plan is subject to an audit or not. Next slide.
Margaret Miley: The three other provisions of SECURE that I wanted to mention are number one, qualified plans can now be adopted until the due date for filing the employer's tax return for the year that the plan is intended to be effective. So if you, I mean we're in 2020 now, if an employer wanted to put in a plan for 2019, because they want to be able to take a deduction for a plan contribution for example, they can now do that. It used to be they would have to have that plan in place by the end of the year, formally adopt that plan in 2019, in order for it to be treated as established. But under SECURE, they have until the due date including extensions for filing their tax return, to put that plan into place.
Margaret Miley: Now that obviously is not going to allow someone to start to, to put employee elective deferrals into the plan retroactively, because the plan actually has to be formally signed before employees can start deferring. But it would allow an employer to put a profit sharing contribution into the plan for the prior year.
Margaret Miley: Another change, and this has more to go with preserving retirement assets, is there is now a provision that any participant loans from a qualified plan that are made available via a credit card or similar arrangements, are no longer going to be tax free loans. They are going to be treated as taxable distributions. And that's effective for loans made after December 20th of last year. So if your clients have plan loan provisions like that, that's something that they should look at eliminating from their plan as soon as possible.
Margaret Miley: And then finally, there was a provision in SECURE about lifetime income investments. And these are in actual investment options on the plan's investment lineup that have guaranteed income features in them. And under this provision of SECURE, if that type of investment option is being eliminated from the plan's fund lineup, SECURE now allows a distribution to be made to the participant equal basically to the assets in that lifetime, in that investment option, or that lifetime income investment. You can either roll it over to an IRA or distribute it as an annuity contract. So there's a change there. Next slide.
Margaret Miley: And now we're getting to provisions of SECURE that have to do with MEPS and PEPs. Although MEPs were not created by any means under SECURE, there is a provision affecting defined contribution MEPs in SECURE. And it is provision that says eliminates the one bad apple rule for defined contribution MEPS, that either have common interests beyond planned participation, i.e. the closed MEPS, or that have a pooled plan provider. And we're going to talk about what a pooled plan provider is in a couple of slides.
Margaret Miley: So this one bad apple rule, that was the rule that said, if one employer's plan inside this MEP fails to satisfy the tax code rules, then the tax qualified status of the entire MEP could be, the entire MEP could be jeopardized. That's the one bad apple rule, that's going away for defined contribution MEPs that either had these common interests, or that have a pooled plan provider. And that's effective for plan years beginning after 2020. Now that is also something that proposed IRS regulations would have eliminated. So I guess we're going to wait and see as to what develops with those IRS regulations, because there is some differences in the criteria. Next slide.
Margaret Miley: The other thing that SECURE did, is it created this thing called a Pooled Employer Plan. A Pooled Employer Plan simply put, is an open MEP. It's a MEP where the participating employers have no common interest, other than they've all adopted this plan of the pooled plan provider. So it's basically an open MEP that gets treated as a closed MEP. It's a PEP. And if you're a PEP, you're treated as a single plan under ERISA. That means you only have to file a single 5500. You're only subjected to a single audit. Your ERISA bonds requirements are based on the assets of the PEP on an aggregate basis, rather than on the individual employers, et cetera. And that is effective for plan years beginning after December 31st of 2020. Next slide.
Margaret Miley: Now, in order to take advantage of the elimination of the one bad apple rule or in order to have a PEP, you have to have ... Oh, I'm sorry, I jumped ahead. I'm sorry. On this slide it, there are some provisions that you have to satisfy in order to be considered a Pooled Employer Plan, and those are listed on this slide. You have to have a pooled plan provider that's been designated as a named fiduciary. The PEP has to designate one or more trustees who cannot be the employers participating in the plan that are responsible for collecting contributions. The PEP document has to provide that each participating employer has fiduciary responsibility to select the pooled plan provider and the other fiduciaries, and to invest and manage the plan's assets if not delegated to another fiduciary.
Margaret Miley: So on that point, it is possible for the PEP or some other fiduciary associated with the PEP, to assume responsibility for the investment and management of plan assets. The participating employer is responsible for those, for the investment and management of plan assets, only when it's not delegated to another fiduciary. But in any event, the participating, employer is always going to be responsible for selecting the pooled plan provider. Meaning, for making sure that the pooled plan provider is competent to serve as a pooled plan provider, and that the compensation that's being paid to that provider and other plan fiduciaries is reasonable and continues to be reasonable.
Margaret Miley: So the employer does have some residual fiduciary responsibilities. But in general, most of the fiduciary responsibilities including investment and management of plan assets is going to be assumed by the professionals that are handling, that are sponsoring the PEP and handling it.
Mike DiCenso: There's a huge point here. As you look at the marketplace and you look at what could develop, where you have plans that aren't just small plans or start-up plans, the plans of size with assets in them, where you have the plan sponsor today who is on their own, who is the plan administrator, named in the documents, has full fiduciary duty, responsibility, obligations and liabilities, and is paying a certain price for that plan. You could possibly see here in the very near future where those employers say, "Well gee, if I can go into a PEP, and I can have the same costs or potentially reduce costs for my plan, I'm no longer operating my plan, I'm not processing, I'm not signing 5500s, I am not doing anything from the standpoint of the plan itself, and I've relieved myself all the fiduciary liability other than monitoring that lead employer or sponsoring employer, why would I not put my plan into a PEP? Why would I want it to continue to have a standalone plan where I have all the duties and obligations of the plan administrator, and the foremost fiduciary. So just something to think about out there as to how this PEP marketplace may develop here in the very near future.
Margaret Miley: Thanks Mike, good comments. Real briefly, because I know we're running out of time. There are a few other provisions that you have to satisfy in order to be a PEP. Those are listed here. And then on the next slide, the PEP has to have a pooled plan provider. The defined contribution MEP has to have a pooled plan provider, if it wants to avoid having to worry about the one bad apple rule. And this last slide tells you what a pooled plan provider is. Now that's a pooled plan provider is any type of entity that is designated by the plan as a named fiduciary, the plan administrative, the plan, and the person responsible for basically all of the duties needed to ensure compliance with code and ERISA rules.
Margaret Miley: And that can be any type of entity including financial service firms such as advisers, including banks, including record-keepers, et cetera. So there's no restriction on who can be a pooled plan provider as long as they register as a pooled plan provider. We don't know what form registration is going to take, and we don't have that guidance from the Department of Labor or the IRS yet. But I'm sure it'll be forthcoming.
Margaret Miley: Now the pooled plan provider has to acknowledge its status as a fiduciary and plan administrator in writing. It has to ensure that all persons who handle assets are appropriately bonded. And of course, then it has to make sure that all of the tax code and ERISA rules are complied with. With that, we are out of time. But I'm going to turn it over to Michael Haun, and thank everyone for spending the hour with us.
Michael Haun: Thank you, Margaret. Mike, do you want to try to answer maybe a question or two real quickly? Yeah, because we've received a lot.
Mike DiCenso: Yes, we're starting to get some drop-off, because we hit the hour, but yes, let's answer a question or two.
Michael Haun: So yeah, let's do two real quick. Mike this talks about what Margaret was just talking about. Why would a bonafide group or association choose to put a MEP in place, rather than a PEP?
Mike DiCenso: Well, the biggest reason that I'd see that that would occur, is that the bonafide group would want to cater to its members inside of that association, PEO, Better Business Bureau or Chamber of Commerce. And so therefore, would want to focus on those individuals that are in their membership. Where with a PEP, it would be no geographic exclusions, where the MEPs, they are geographically located. And from the standpoint of the MEP, it is going to be that bonafide group definition of it a group of employers that are members of that firm or a members of that a community. And so in this, that is why it would be a focal point from the standpoint of focusing on the membership and the community.
Michael Haun: And one last question. What liability does the adopting employer possess in a PEP?
Mike DiCenso: Yeah, this is something we covered that is an extremely large point to emphasize here. This with the PEPs, that the adopting employers are relieving themselves of operational duties, as well as fiduciary duties and liabilities by adopting into that PEP. And in that, what they're doing is, they are only having to monitor that lead employer plan sponsor as a fiduciary duty. That is it. And that is a major change from what they have to do today with running their own plan from the operational side, as well as from the fiduciary liability side.
Mike DiCenso: With that, we have attached a couple of documents here for you. You can download these documents, print them off. We are creating other documents as well. One of the documents that is in our compliance department right now, there's a comparison chart of open MEPs to closed MEPs, to PEPs, to the group plans. And showing what all the differences are amongst those different types of plans that could be put in place.
Mike DiCenso: The Newport is a leader in the MEP marketplace, both open and closed, and will become a leader in the PEP marketplace. We are one of the only integrated 31(6)’s in the nation. It is Newport, and this can bring great consistency, ease of operation, and efficiency to the plans. So if you're out there as an advisor, as you should be working with these closed MEPs, the open MEPs and the PEPs, please contact Newport and our distribution team, out in the field that works with you. So we can help you to create the solutions for your clients and for you yourselves in operating a PEP. Michael.
Michael Haun: Thanks Mike. And just one more thing to add before we wrap up, we did receive a lot of questions. We're going to be working on answering all the questions that you submitted in advance of the webinar and during the webinar. You'll get an email in the days ahead with that information, as well as with the link to the replay and some other great information that Mike mentioned. Also, when you exit the webinar, you'll see a couple of quick questions. If you can take some time to answer those. Those will help us out with future webinars.
Michael Haun: And lastly, Lori, if you could advance to the next slide. We have our next webinar takes place next week, next Wednesday. It's on our Compensation, Retirement and Benefits Trends Report; always one of our popular webinars. There's information on how to sign up for that in the chat pane. And look for an email from us with more information on how to sign up for that one as well. And with that, thank you so much for your time and your attendance today. We really appreciate it. And we look forward to seeing you at our next webinar. Have a great afternoon.