The Internal Revenue Service released question-and-answer guidance Wednesday to help small businesses and other employers that maintain 401(k) and certain 403(b) plans comply with the Setting Every Community Up for Retirement Enhancement (Secure) Act of 2019.
In Notice 2020-86, the IRS explains that the Secure Act generally increases from 10% to 15% the maximum automatic elective deferral under an automatic enrollment safe harbor plan.
The Act “also eliminates certain safe harbor notice requirements for plans that provide safe harbor nonelective contributions and adds new provisions for the retroactive adoption of safe harbor status for those plans,” the IRS states.
IRA and tax specialist Ed Slott with Ed Slott & Co., told ThinkAdvisor in a Thursday morning email that in light of the guidance, advisors should remind 401(k) clients who are affected.
“This would include companies who use ‘safe harbor’ arrangements,” Slott said. “Many companies use safe harbors to avoid nondiscrimination testing, which might require them to limit 401(k) contributions for ‘highly compensated employees.’”
Under the tax code, Slott continued, “a ‘highly compensated employee’ is either a 5% owner of the company or someone making more than $130,000 (that number is indexed). With that low threshold, almost every company will have at least one employee in that category.”
In its notice, the IRS provided guidance on two Secure Act changes to 401(k) plans using certain safe harbors, Slott explained.
“One safe harbor requires employers to use automatic enrollment, under which employees are treated as having elected to make elective deferrals — unless they affirmatively opt out,” Slott said. “Prior to the Secure Act, the cap on automatic enrollment deferrals was 10% of pay. The Secure Act increased that cap to 15%. For certain safe harbor arrangements, the Secure Act also liberalized the rules requiring employers using the safe harbor to give advance notice to employees before putting it into effect.”
Section 103 of the Secure Act eliminates certain safe harbor notice requirements for plans that provide for safe harbor non-elective contributions and adds new provisions for the retroactive adoption of safe harbor status for those plans, according to the notice.
These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.
— Check out Ed Slott on RMDs, Backdoor Roths and the Death of the Stretch IRA on ThinkAdvisor.