SECURE Act Allows for ADP Failure Relief by Retroactive Adoption of Nonelective Contribution Safe Harbor Retirement Plan Status

May 8, 2020
Hall Benefits Law, LLC

Signed into law in late December 2019, the Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”) of 2019 includes a number of provisions designed to increase access to tax-advantaged accounts for American workers struggling to save for retirement.

According to the U.S. Bureau of Labor Statistics, approximately 55% of U.S. employees participate in employer-sponsored retirement plans.  However, a majority of these participants are not saving at a rate that would ensure a financially stable retirement.  In fact, the median 401(k) balance for Americans aged 65 years and older is just over $58,000.

The SECURE Act includes provisions designed to encourage more employers to adopt retirement plans and simplifies issues that have bedeviled plan sponsors and taxpayers for years.  One key provision amends prior rules for the late adoption of safe harbor plans.

Safe Harbor Plan Adoption Timing

Prior to adoption of the SECURE Act, the deadline for implementing a new safe harbor 401(k) plan was October 1.  For existing plans, the safe harbor provision had to be amended by January 1 of the year in which the provision was enacted.

Under the SECURE Act, employers now have more time to determine if they want to transition to or adopt a safe harbor.  Employers now have up to 30 days before the end of a plan year to adopt a safe harbor plan or amend an existing plan to include safe harbor provisions by providing a three percent non-elective contribution.

In addition, a traditional 401(k) plan may be retroactively converted to a safe harbor plan after the 30-day requirement by making a four percent non-elective contribution to eligible employees by the end of the following plan year.  This provides employers with a way to correct a 401(k) plan that fails the actual deferral percentage (ADP) test.

Note that these options are not available for plans that use a safe harbor matching contribution to satisfy ADP or certain automatic contributions arrangements governed by the IRS.  These new rules are in effect for plan years after December 31, 2019.

If you are interested in making changes to the benefits your company offers, reach out to the experienced, responsive benefits attorneys at Hall Benefits Law. We will help you review available options and make sure they are offered in a compliant manner. Call 678-439-6236 today.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.