Provisions Affecting Employer Plans

This Tax Blast addresses two changes in the SECURE Act that benefit employers for implementing retirement plans for their employees. The first change protects unrelated employers in a multiple employer plan against the chance that some participants might jeopardize the tax-preferred status of the plan. The second change incentivizes small businesses to establish new retirement plans for their employees by increasing the annual maximum credit available to help pay for the start-up costs.
No more “bad apple rule” for multiple employer plans
Before the SECURE Act, the failure by one employer in a multiple employer plan (or by the plan itself) to satisfy a qualification requirement could result in disqualification of the plan for all employers. Reg. Secs. 1.413-2(a)(3)(iv) and 1.416-1. Thus, a violation of the plan requirements by one or more employers in the plan could jeopardize the tax-favored status of the plan for all employers.
The SECURE Act added an exception to this so-called “bad apple rule.” If the employers have a common interest (other than having adopted the plan) or the plan has a “pooled plan provider,” then the failure by one or more employers to follow the plan requirements will not constitute a failure by all employers. Sec. 413(e)(1). The term “pooled plan provider” means a designated fiduciary or plan administrator who performs all administrative duties and ensures that plan requirements are followed.
The SECURE Act also provides detailed requirements for the Form 5500 filing and indicates that more guidance (i.e., rules and procedures for pooled plan providers) from the Secretary is forthcoming.
This new rule applies for plan years beginning after December 31, 2020. Starting in 2021, employers with a common interest can take better advantage of the lower administrative costs and tax savings associated with a multiple employer plan. However, they must wait until 2021 to benefit from these changes, and then must carefully navigate the new rules to ensure compliance.
Increasing the annual limit on the credit for small employer pension plan start-up costs
The Code permits some small businesses (that have no more than 100 employees who receive at least $5,000 in compensation) to claim a “small employer pension plan startup credit” for start-up costs related to establishing or implementing certain retirement plans. Sec. 45E. Eligible plans include qualified pensions, profit sharing plans, stock bonus plans, qualified annuity plans, simplified employee pension plans, and simple retirement accounts.
The credit is available beginning with the year the plan is first effective (or, at the election of the employer, beginning with the year preceding that year), and continues for two years thereafter. Before the SECURE Act, the annual credit maximum was $500, or $1,500 for all three years.
The SECURE Act increases the annual credit maximum to $5,000 (for employers with more than 20 non-highly compensated employees), or $15,000 for all three years. Sec. 45E(b)(1). For other employers, the credit amount is $250 multiplied by the number of eligible employees. By increasing the maximum annual credit amount, the SECURE Act makes it more affordable for small businesses to set up retirement plans for their employees.
This change applies for plan years beginning after December 31, 2019.
For more information on this Tax Blast, please contact any of the following individuals:
Name:          Meghan Andersson, JD, LLM
Office:          Irvine, CA
Phone:         (949) 623-0542
Email:          [email protected]
Name:          Donna Sirois, CPA, JD, MBA, MST
Office:          Irvine, CA
Phone:         (949) 623-0546
Email:          [email protected]
Name:          Mark Cook, MBA, CPA, CGMA
Office:          Irvine, CA
Phone:         (949) 623-0478
Email:          [email protected]