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Important SECURE Act Changes Effective Jan. 1, 2021

December 1, 2020

By

Brian A. Ritchie
Counsel to the Firm, Stoll Keenon Ogden PLLC
(859) 231-3648
brian.ritchie@skofirm.com

The Setting Every Community Up for Retirement Enhancement (SECURE) Act was enacted in late 2019 and contained numerous significant changes impacting employers and their retirement plans. Part 1 of this SKO Insider discussed changes that became effective during 2020; this Part 2 discusses two important changes which become effective on January 1, 2021.

Long-Term Part-Time Employees

Prior to the SECURE Act, 401(k) plans could exclude those employees who worked less than 1,000 hours annually. However, the SECURE Act requires that an employee who works 500 to 1,000 hours per year for three (3) consecutive years must become eligible for the 401(k) arrangement. These employees are referred to as “long-term part-time” employees (“LTPT employees”).

The Act requires only that LTPT employees become eligible for the salary deferral 401(k) portion of a plan. If a plan provides for employer matching contributions or profit-sharing contributions, the employer is not required to make these employer contributions to LTPT employees.

While this provision of the SECURE Act becomes effective on January 1, 2021, employers are generally not required to count service performed prior to January 1, 2021 for purposes of determining an individual’s eligibility as an LTPT employee.

A number of special rules apply to LTPT employees:

  • In order to qualify as an LTPT employee, an individual must also have attained age 21 by the end of the last 12-month period in which the individual worked 500 or more hours.
  • Employers may elect to exclude LTPT employees from nondiscrimination testing (including ADP/ACP testing), coverage testing, and the top heavy vesting and benefit requirements.
  • LTPT employees may be excluded from 401(k) safe harbor contributions, as well as a qualified automatic contribution arrangement (QACA).
  • If an LTPT employee subsequently works 1,000 hours in a 12-month period, the individual will cease to be an LTPT employee and will become a full participant in the plan.
  • Under a special vesting rule, LTPT employees must be credited with a year of service for vesting purposes for each 12-month period in which the LTPT employee has at least 500 hours of service. If an LTPT employee works 1,000 hours and becomes a full participant in the plan (and thus eligible for any employer contributions), this special rule will continue to apply to the employee for vesting purposes. Further, all of an LTPT employee’s service with the employer must be counted for vesting purposes, even those years of service which occurred prior to January 1, 2021.

While it will be a few years before any LTPT employees become eligible, employers need to act now to make any necessary changes to their internal systems and procedures for tracking service for part-time employees, and for determining eligibility and vesting under their plan. If LTPT employees are inadvertently excluded from a plan, the employer may be required to make costly corrective contributions to the plan out of its own pocket for the “missed deferral opportunity” suffered by those employees.

Pooled Employer Plans

Another change created by the SECURE Act affects what is known as a multiple employer plan (“MEP”), which is a single retirement plan that benefits the employees of multiple employers who are not under common ownership or control. Prior to the SECURE Act, the popularity of multiple employer plans was rather limited, primarily due to certain rules of the Department of Labor (“DOL”) and Internal Revenue Service (“IRS”). The SECURE Act created a new type of MEP – referred to as a “Pooled Employer Plan” or “PEP” – and removes the barriers of these DOL and IRS rules. Employers that participate in a PEP are not required to have some commonality (such as being in the same industry), as previously required by the DOL.

A PEP must be established and maintained by a Pooled Plan Provider (“PP Provider”), which in most cases will be a financial services company, such as a bank, insurance company or recordkeeper. The PP Provider must serve as the plan administrator and named fiduciary for the PEP and is generally responsible for administration and compliance for the PEP with respect to ERISA and IRS requirements. PP Providers must register with the IRS and DOL in order to establish a PEP.

Under the IRS’s “One Bad Apple” Rule, a compliance failure by one employer participating in a MEP could put the tax qualification of the entire plan at risk, including plan assets attributable to other participating employers. However, this rule will not apply to a PEP, and a compliance failure committed by one participating employer will not adversely affect the PP Provider or other participating employers. Regulations will be issued providing a process for a PEP to transfer or spin off assets attributable to a participating employer who is responsible for compliance failures in certain circumstances.

PEPs may be advantageous for some employers, especially smaller employers, as they may:

  • Result in lower investment and other fees due to the pooling of plan assets of multiple participating employers; and
  • Reduce administrative burdens and fiduciary responsibility/exposure for the employer, as most administrative and fiduciary functions will be the responsibility of the PP Provider rather than the employer.

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Stoll Keenon Ogden attorneys are ready – as we have been for more than 120 years – to answer your questions about the SECURE Act or other issues facing you or your business.

Our firm’s Labor, Employment & Employee Benefits practice has a proven record of being trusted advisors and effective advocates. We help employers solve their problems through proactive counseling, employee training and, where possible, cost-efficient litigation, including alternative dispute resolution. We know the employment laws thoroughly, and we make it our goal to acquire a comprehensive knowledge of our clients and their businesses, so we can provide tailored solutions for each of their needs.

On our Stoll Keenon Ogden website, you’ll find a variety of resources, including the latest information on new laws and directives enacted by federal, state, and local governments; access to firm attorneys; and details about business considerations related to the Coronavirus pandemic.