How Small Businesses Benefit from the SECURE Act

 

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By Allison Brecher, General Counsel, Vestwell

Congress is close to passing legislation that will be a big win for small business owners thinking of offering retirement plans to their employees. The Setting Every Community Up for Retirement Enhancement (SECURE) Act has a number of provisions centered around improving the nation’s retirement system, but small businesses in particular stand to benefit in many ways. Most notably, the Act would:

  • Increase the business tax credit for plan startup costs to make setting up retirement plans more affordable for small businesses. The tax credit would increase from the current cap of $500 to up to $5,000 in certain circumstances.
  • Encourage small-business owners to adopt automatic enrollment by providing an additional $500 tax credit for three years for plans that add auto enrollment of new employees.
  • Simplify rules and notice requirements related to qualified nonelective contributions in safe harbor 401(k) plans, a particularly common plan design amongst small businesses because the plan automatically passes certain compliance tests.
  • Offer a consolidated Form 5500 for certain defined contribution plans to reduce costs.

Additionally, the SECURE Act allows unrelated small businesses to get together in an “open” 401(k) multiple employer plan (MEP), which could also reduce costs and administrative responsibilities. Currently, only so-called “closed” MEPs are permissible, which require employers participating in it to have some kind of connection between them, such as membership in the same industry or an established trade association, and each business bears liability in the event any employer in the plan fails to comply with legal or regulatory requirements.  “Open” MEPs eliminate those rules.

The SECURE Act would also increase plan flexibility, which is a big benefit for small plan sponsors. First off, it would permit employers to add a safe harbor feature to their existing 401(k) plans even after the plan year has started as long as they make at least a 4% of pay contribution to employees, instead of the regular 3%. Second, it would extend the period of time for companies to adopt new plans beyond the end of the year to the due date for filing the company tax return.

There are other benefits that focus on helping employees save more for retirement. For example, it’s been proven that automatic enrollment and automatic escalation features encourage long-term savings, and the SECURE Act permits safe harbor 401(k) plans to increase the auto enrollment cap from 10% to 15% of an employee’s paycheck.  And since employees are working and living longer, the bill also benefits older workers by letting them continue to contribute to their plan until age 72, up from the current age of 70 ½. Lastly, it would provide penalty-free withdrawals from retirement plans of up to $5,000 within a year of the birth or adoption of a child to cover associated expenses.

The SECURE Act’s companion bill, the Retirement Enhancement Savings Act (RESA), is now moving forward through the Senate. RESA includes many of these same beneficial provisions and also has bi-partisan support. Many industry experts expect a compromise version of the two bills to become law before the end of 2019, making it the perfect time for small businesses to take action. If an employer wants to offer a safe harbor plan, plan documents need to be signed by late summer. This way, they’ll meet the October deadline for distributing legally required notices, be able to go January, and take advantage of the full tax benefits for the year.

ERISA Bond vs. Fiduciary Insurance

ERISA bond

By Allison Brecher, General Counsel, Vestwell

With so much attention lately on fiduciary duty, as well as the surge of fiduciary litigation this past year, plan sponsors would be wise to explore their insurance options. While the ERISA fidelity bond (also referred to as a “fidelity bond” or “ERISA bond”), is required for all plans, there are other options as well. By understanding the difference – and the scenarios in which different types of insurance are used – you can help ensure your plan sponsors are properly protected.

The fidelity bond, required by ERISA, protects the plan against losses due to theft and embezzlement. Here’s an easy example: if someone steals money from the 401(k) plan, the ERISA bond compensates the plan for the damages. However, this provides no protection to the plan sponsor because the plan, not the sponsor, is the named insured. Not to mention how limited the application of this bond might be, given the unlikely scenario.

Still, the bond is legally required for anyone who “handles plan assets” (whether a fiduciary or not), and not having one can delay your plan’s Form 5500 filing and potentially result in disqualification, penalties, and personal liability for fiduciaries. Investment managers must have one, but advisors are not required to be bonded unless they make financial decisions about the plan assets or property.

An ERISA bond is easy and relatively inexpensive to obtain; sponsors using Vestwell can apply for one directly from our platform. However, it’s worth noting that the bond must be in an amount of at least 10% of the plan’s assets, and, since it’s been a good year for investment performance, sponsors should make sure their bond amount has kept pace with the plan’s growth in assets.

Some sponsors mistakenly believe they are protected on all fronts by the ERISA fidelity bond, but further protection may be needed. Fiduciary insurance, unlike an ERISA bond, is not included in a typical errors and omissions or directors and officers policy. Fiduciary insurance, as the name suggests, protects the fiduciary from damages that result from a fiduciary breach. Read the fine print on the insurance before moving forward because a fiduciary policy can cover litigation costs, foreign plans that are subject to laws similar to ERISA, and the cost of correcting plan compliance errors resulting from a fiduciary breach. Although fiduciary insurance is technically “optional,” we don’t believe a sponsor should leave anything to chance in the current litigation climate.

Mostly, it’s important for plan sponsors to know the coverage that exists to protect them and their participants, understand the liability they’re taking on, and be comfortable with the decisions they’re making. They’ll be looking to you for help.

Your Clients’ Plan Audit Qs, Answered

 

Plan Audit

If your plan sponsors aren’t already, they should be preparing their year-end report. The penalties for failing to conduct an audit can be substantial. Issues can surface during the audit that may be easier and less expensive to correct now versus down the road.

For plans with 100 or more eligible participants at the start of the plan year, the annual report must include an audit report issued by an independent qualified public account stating whether the plan’s financial statements conform with generally accepted accounting principles. An audit should comfort participants, knowing their plan’s operating processes are in good order.

We’ve put together some common questions and answers to help your plan sponsor understand the audit rules – and so you can ensure your clients are taking them seriously.

IS THE PLAN EXEMPT FROM THE AUDIT REQUIREMENTS?  

Governmental plans, church plans, and certain 403(b) plans that qualify under safe harbor are exempt from the audit requirements.

HOW DOES A PLAN SPONSOR FIND AN AUDITOR?

ERISA requires that the auditor be independent. and Sponsors should utilize a firm that is separate from the employer’s accounting firm and does not do any other business with the company or any of its directors or owners.

HOW IS THE NUMBER OF ELIGIBLE PARTICIPANTS CALCULATED?

The eligibility rules can be complicated.  In general, plans with 80 to 120 participants at the beginning of the current plan year may choose to complete the current annual report using the same “large plan” or “small plan” category used for the previous year. If the Plan previously filed as a “small plan” last year, it may wish to again for the following plan year.

WHAT DOCUMENTS DO PLAN SPONSORS NEED TO PROVIDE?

Every audit is different, but the auditor will likely need to review records relating to participant enrollment, plan contributions and distributions, auto-enrollment, and payroll files. Sponsors may need to provide records relating to tax compliance, related party transactions, and the Plan’s benefits committee (if it has one).

HOW LONG WILL THE AUDIT TAKE?

Sponsors should begin the audit process at least 90 days before the Form 5500 deadline to allow enough time to gather documents, follow up on open items, prepare financial statements, and wrap up.

HOW MUCH WILL THE AUDIT COST?

An auditor may charge $2,500 – $10,000, or more, depending on the size and complexity of the plan.