SECURE Act: 3 Changes for Defined Benefit Plans


After months of debate, the SECURE Act was signed into law on December 20, 2019. The Act includes some of the most significant changes to retirement plans in the last decade.

Specifically, the Act added flexibility to business owners looking to set up defined benefit plans or cash balance plans. The self-employed can take advantage of the new changes for 2020.

The Act is designed to encourage retirement savings and will make it easier for companies to adopt various retirement structures. But the key question for us is how these changes impact cash balance plans and defined benefit plans.

In this post, we will take a close look at some of the key provisions and highlight a few critical components. Let’s dive in.

Quick Navigation

  1. Increased Tax Credits for Small Employer Start-Up Costs
  2. Extension of the Adoption Deadline
  3. Larger failure to file penalties
  4. The SECURE Act Takeaway

1. Increased Tax Credits for Small Employer Start-Up Costs

Back in 2001, Congress initiated a tax credit in an attempt to encourage business owners with fewer than 100 employees) to set-up qualified retirement plans. This included common retirement structures like 401(k) plans and SEPs, but also includes plans like cash balance plans and other defined benefit plans.

Scrabble pieces spelling TAX

Here’s the basic requirements of the tax credit. A business is generally eligible if the following conditions are met:

  • The company has 100 (or fewer) employees that received at least $5,000 in employee compensation during the preceding year;
  • Has at least one retirement plan participant who’s not a Highly Compensated Employee; and
  • Employees did not benefit from a previously offered plan by the company in the three years prior to the first year of tax credit eligibility.

The 2001 tax credit was limited to $500 per year. However, the SECURE Act expanded the credit to $250 per non-highly compensated employee participating in the plan. The maximum annual credit is $5,000. The credit can be taken over three years, with a total cumulative credit of $15,000. The new credit is effective for tax years beginning after December 31, 2019.

2. Extension of the Adoption Deadline

This new change is probably my favorite. Prior to the SECURE Act, a qualified plan had to be set-up before the end of the plan sponsor’s year end. This created a huge rush to adopt plans before December 31st, as most companies have a calendar year-end.

However, the SECURE Act has extended the deadline. More time to retroactively adopt retirement plans. The deadline to adopt a plan is now the due date of the company’s federal tax return (including extensions) for the year in which the plan is effective.

This deadline would in essence be the same as the SEP IRA deadline. Any company that meets this deadline will be able to treat the plan as if it was adopted on the last day of that year.

Cash Balance Plan Formula

Once key note is that this extended adoption date is applicable for stock bonus plans, cash balance plans, defined benefit plans, and profit-sharing or annuity plans. But it is not the case for 401(k) plans.

This extension is great for small business owners and will be a tremendous advantage for many of our clients. In prior years there was always a rush for the December 31st deadline.

As a result of the holiday season, many business owners did not have the time to carefully review and analyze cash balance plan illustrations in order to make a proper decision for their business. Now they can complete a final tax return with their accountant, see what the tax liability is, and then decide if the contribution make sense for them. This has changed the game.

3. Larger failure to file penalties under the SECURE Act.

While there are many benefits to the SECURE Act, there is one downside that may unknowingly hit many retirement plans. This is the increase in penalties for failing to file certain retirement plan returns:

  • The penalty for late filing of Form 5500 has now increased from $25 per day (maximum of $15,000) to $250 per day (maximum of $150,000).
  • The penalty for failure to file a registration statement has increased from $1 per participant daily (maximum of $5,000) to $10 per participant (maximum of $50,000).
  • The failure to file penalty for a required notification of change will now increase from $1 per day (maximum of $1,000) to $10 per day (maximum of $10,000).
  • The failure to provide the required withholding notice will now result in a penalty of $100 for each failure (maximum of $50,000) for all calendar year failures. This is a large increase from the current $10 for each failure (maximum of $5,000).
Cash Balance Plan Interest Crediting Rate

With tenfold penalty increases, these can be quite painful for the non-suspecting retirement plan owner. These penalty provisions will apply to tax returns, notifications, statements, and notices required to be filed or provided after December 31, 2019.

Key considerations under the SECURE Act

  • Increased pension plan start-up credit. The SECURE Act expanded the tax credit to $250 for each non-highly compensated employee who participates in the plan. The maximum annual credit is now $5,000.
  • Extension of the plan adoption deadline. The new adoption deadline is the due date of the company’s federal tax return (which includes extensions) for the year in which the plan is effective.
  • Significant failure to file penalties. With tenfold penalty increases, these can be quite painful for the non-suspecting retirement plan owner. Make sure you file timely.
  • Adjusted required minimum distributions. The RMD age has gone from 70 1/2 to 72. It has stretched the age a year and a half.
  • The stretch RMD has been eliminated. Beneficiaries must now draw down their inherited retirement account within 10 years of ownership.

4. The SECURE Act Takeaway

The SECURE Act will be a nice boost to business owners looking to stash money into retirement. Specifically, it will provide folks who are considering a cash balance plan or defined benefit plan more time and provide a tax credit to offset the costs.

Many business owners believe that cash balance plans and defined benefit plans are just too expensive to set-up and maintain. This tax credit goes a long way to minimizing overall plan costs.

Paul Sundin

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