On December 20, 2019 the President signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) into law. This law made a lot of positive changes in IRAs and retirement plans.
Below are a couple key tax law provisions impacting retirement plans effective as of January 1, 2020
New Plans Can be Adopted AFTER the Close of Year
Under the old rule, for a qualified retirement plan to be treated as maintained for a tax year, the plan must be adopted by the last day of the employer’s tax year. Contributions made by the due date (plus extensions) of the tax return for the employer maintaining the plan for a tax year are treated as contributed on account of that tax year.
New law: For plans adopted for tax years beginning after December 31, 2019, the SECURE Act allows businesses to treat qualified retirement plans adopted before the due date (including extensions) of the tax return for the tax year as having been adopted as of the last day of the tax year. That’s right – you can set up a retirement plan in 2021 (up to the extended due date of the tax return) but it’s legally effective for 2020.
The additional time to establish a plan provides flexibility for employers that are considering adopting a plan and the opportunity for employees to receive contributions for that earlier year and begin to accumulate retirement savings.
Caveat: The new law does not change the timing of making elective deferrals under a cash or deferral arrangement (i.e. a 401(k)). In other words, a 401(k) plan which is established retroactively may not permit participants to elect to defer their income retroactively; 401(k) employee elective deferrals must always be made on a going forward basis.
Long Term Part-Time employees must be allowed to participate
Effective for plan years beginning after December 31, 2020, employers with 401(k) plans must offer employees who work between 500 and 1000 hours per year an additional means to participate in the plan. Employees must be able to satisfy participation requirements by completing either:
- A one year of service requirement (with the 1,000-hour rule), or
- Three consecutive years of service where the employee completes at least 500 hours of service.
The rule change would only affect 401(k) cash or deferral arrangements. Also, employers with collectively bargained plans are not required to have the 500-hour track.
These employees must be given the opportunity to defer a portion of their own income. The employer has the option to decide whether they want to make matching or profit sharing employer contributions for Long Term Part Time employees even if they do so for regular full-time employees.
If you have questions, contact your Wegner CPAs tax expert for more information on how this new law may help/change your company retirement plans beginning in 2020.