The Internal Revenue Service recently issued Notice 2020-68, providing guidance with respect to the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE Act”). Key highlights from the Notice included the following:
New automatic contribution arrangement tax credit — effective for taxable years beginning on and after January 1, 2020. The SECURE Act provides a three-year $500 annual tax credit for a small employer that establishes an eligible automatic contribution arrangement to its retirement plan. For this purpose, a “small employer” is an employer with no more than 100 employees with at least $5,000 of compensation for the preceding year.
Long-term part-time employees eligible to participate in 401(k) portion of plan — effective for plan years beginning on and after January 1, 2021. A plan can generally require an employee to reach age 21 and/or complete one year of service to be eligible to participate in a qualified plan. Under the SECURE Act, however, a 401(k) plan must allow “long-term part-time employees” to participate in the elective deferrals portion of the plan after three consecutive 12-month periods in which the employee completes at least 500 hours of service. Years prior to January 1, 2021, can be excluded for purposes of these eligibility rules. That means long-term part-time employees will not have to be eligible for the elective deferrals portion of a plan before January 1, 2024.
- Note: The SECURE Act does not require long-term part-time employees to participate in the employer contribution portions of a plan. In other words, a plan can continue to require an employee to complete 1,000 hours of service in a 12-month period to become eligible for matching, safe harbor, and profit sharing contributions.
If the plan permits long-term part-time employees to participate in the employer contribution portions of the plan, these employees will be credited with a year of vesting service upon completing 500 hours of service in a 12-month period. All years of service, including years of service before January 1, 2021, must be counted for vesting purposes.
Qualified birth or adoption distribution — effective January 1, 2020. Generally, participants are subject to a 10% additional tax if they receive a distribution from a retirement plan before attaining age 59-1/2. The SECURE Act added an exception to this additional tax for a “qualified birth or adoption distribution” which meets the following requirements: (1) The distribution cannot be greater than $5,000 for a child, and (2) The distribution is made in the one-year period beginning on the date on which a child is born or legal adoption is finalized.
A participant can recontribute all or a portion of the distribution to the same plan, or any other eligible retirement plan, if the plan accepts rollover contributions. Plans are permitted, but not required, to permit qualified birth or adoption distributions.
Plans are required to adopt SECURE Act amendments no later than the last day of the 2022 plan year. For calendar year plans, the deadline is December 31, 2022. Governmental plans do not have to adopt a SECURE Act amendment until the last day of the 2024 plan year.
If you have any questions about the SECURE Act and how it applies to your plan, please contact your Union Bank & Trust Relationship Manager.