IRS Offers Guidance for Safe Harbor Plans on SECURE Act Provisions

A Q&A addresses the auto-enrollment cap and safe harbor notice requirements.

The IRS has issued Notice 2020-86, which provides guidance in the form of questions and answers with respect to Sections 102 and 103 of the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Section 102 of the SECURE Act increases the 10% cap for automatic enrollment safe harbor plans. Section 103 eliminates certain safe harbor notice requirements for plans that provide for safe harbor nonelective contributions, and it adds new provisions for the retroactive adoption of safe harbor status for those plans.

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Notice 2020-86 is intended to help employers that maintain safe harbor plans comply with the SECURE Act. The notice provides initial guidance on these provisions of the SECURE Act and how they impact certain safe harbor 401(k) and 401(m) plans, including 403(b) plans that apply the 401(m) safe harbor.

The guidance says that in order to maintain its status as a qualified automatic contribution arrangement (QACA) safe harbor 401(k) plan, the plan is not required to increase the maximum qualified percentage of compensation used to determine automatic elective contributions. The qualified percentage under a QACA safe harbor 401(k) plan may be any percentage of compensation determined under the plan, as long as the percentage is applied uniformly and does not exceed 15%, or 10% during the initial period of automatic elective contributions.

If a plan incorporates the maximum qualified percentage of 15% by reference but continues to apply the 10% maximum, it will fail to operate in accordance with its terms unless an amendment is adopted by the deadline determined in Section 601(b) of the SECURE Act, as described in IRS Notice 2020-68.

The new IRS guidance also explains that Section 103(a) of the SECURE Act amended the requirements for a traditional safe harbor 401(k) plan that satisfies the safe harbor nonelective contribution requirements by eliminating the safe harbor notice requirement, including the requirement to provide a safe harbor notice within a reasonable period before an employee becomes eligible. However, Section 103(a) of the SECURE Act did not eliminate the safe harbor notice requirements for a traditional safe harbor 401(m) plan that satisfies the safe harbor nonelective contribution requirements.

For example, if a traditional safe harbor 401(k) plan satisfies the safe harbor nonelective contribution requirements but also provides non-safe harbor matching contributions that are structured so the plan is not required to satisfy the actual contribution percentage (ACP) test, then the plan still must satisfy the safe harbor notice requirements. If a traditional safe harbor 401(k) plan that satisfies the safe harbor nonelective contribution requirements also provides non-safe harbor matching contributions and is required to satisfy the ACP test, then the plan need not satisfy the safe harbor notice requirements.

The guidance says Section 103(a) of the SECURE Act does not change any other requirements that may apply to a plan that satisfies the safe harbor nonelective contribution requirements applicable to a traditional or QACA safe harbor 401(k) plan.

“Notice 2020-86 is intended to assist taxpayers by providing guidance on particular issues while the Treasury Department and the IRS develop regulations to fully implement these provisions of the SECURE Act,” the IRS says.

Equity Opportunity May Exist Outside U.S. in 2021

The change in presidential administration could result in more opportunities in Chinese companies, for example.

It might seem difficult for equity investors to develop a strategy for 2021 with so much uncertainty still looming in the areas of politics and the pandemic.

During a webcast sponsored by Natixis Investment Managers, Amber Fairbanks, global equity portfolio manager at Mirova US, a Natixis affiliate, said that, in just the past month, more asset managers have been gaining a higher visibility into the new year. She said the election result and COVID-19 vaccine announcements will have an effect on equity markets in 2021.

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“[President-elect Joe] Biden has outlined two policies that bear watching,” Fairbanks said. “His policy on taxes would raise the federal income tax on people making over $1 million and raise taxes on capital gains and corporate income. We saw U.S. company cash reserves decline after the previous policy that increased taxes, so, obviously, raising the tax rate could have a negative short-term effect on the markets.”

On the other hand, in Biden’s climate policy, he says he is committed to spending on clean energy, will get back into the Paris climate agreement and will move the U.S. toward net-zero emissions. Fairbanks said those actions will give a boost to energy companies working on sustainable efforts and improve their stock returns.

As for coronavirus vaccines, she said their availability portends a potential economic recovery as early as the spring.

Looking to 2021, WCM Investment Management, a Natixis affiliate, is keeping an eye on the relationship between the U.S. and China. “It’s been a rocky few years, but, with the new administration, it could change direction. Hopefully, there will be warmer relations,” Mike Tian, portfolio manager, global equity manager and business analyst at WCM Investment Management, said.

He added that this will affect a broad range of investment themes. For example, many tech companies could benefit from warmer relations, and current sanctions against companies related to the government and military could be loosened.

If trade tensions get worse, that might not bode well for offshoring and Asia manufacturing, Tian said. “On the positive side, perhaps Chinese businesses further dominate and maybe they can be induced to set up shop here in the U.S.,” he added. “For example, companies that deal in solar energy and batteries, because those are very export dependent.”

Tian said WCM Investment Management is still finding interesting new companies in China. “China is one of the biggest untapped frontier source for alpha for active managers all over world,” he said.

Fairbanks said Mirova is also finding good opportunities outside of the U.S. right now, especially in Europe. Specifically, she said one of her favorite stocks is from renewable energy company Ørsted, based in Denmark. She noted that the firm converted from an oil and gas company to a wind utility company. “I believe countries will move away from relying on fossil fuelscountries,” Fairbanks said.

When looking at opportunities, Fairbanks noted, Mirova believes the equity market underestimates opportunities coming from long-term secular trends, as well as the risk coming from poor environmental, social and governance (ESG) practices, so it works to address these issues.

She explained that while the equity market is high, gross domestic product (GDP) is down, so the market is not reflecting what is happening in the economy. She added that Mirova believes companies that are putting effort into managing ESG risks will succeed in the long term.

Tian said there are two major tenets his firm focuses on: moat trajectory and corporate culture.

An economic moat is a distinct advantage a company has over its competitors which allows it to protect its market share and profitability. It is often an advantage that is difficult to mimic or duplicate— such as brand identity or patents—and thus creates an effective barrier against competition from other firms.

“We think a mistake investors make is to assume that a company’s moat status is static—some firms are strengthening their offerings and brands, but others are being eroded by the competition,” Tian said. “Investors want to own stock in companies that are not just becoming bigger, but also are becoming better.”

To that end, corporate culture is ultimately important, he added. “Success is not just about having the right strategy, but the hard part is execution of that strategy. Invest in companies that are making right decisions consistently from the CEO to front-line employees,” Tian said. “We look for corporate culture to align with moat trajectory.”

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