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Among the provisions of SECURE 2.0 (effective December 29, 2022) welcomed by plan sponsors were the additions to the Internal Revenue Code that allow qualified plans to refrain from trying to recoup an “inadvertent benefit overpayment” (referred to here as an IBO), and from having to restore such payments to the plan.  In addition, the Code was amended to permit the treatment of such overpayments as eligible rollover distributions for certain purposes.

The IRS has now addressed, via interim guidance in Notice 2024-77 issued and generally effective October 15, 2024, some of the many questions that arise under the new Code IBO relief provisions. Before that date, a reasonable good faith compliance standard applies, and after that date following the guidance in the Notice will be considered compliance. Comments on the new guidance may be made to the Treasury Department by December 16, 2024.  The following is a general summary of the major points of guidance in the Notice:

IBO definition. An IBO is defined by the Notice as an “eligible inadvertent failure” consisting of a payment from a qualified plan that either (A) exceeds the amount that should have been payable under the terms of the plan or (B) exceeds a Code or regulatory limitation. The requirement that the overpayment be an eligible inadvertent failure means it must have occurred despite the existence of established practices and procedures as described in Revenue Procedure 2021-30, the current IRS EPCRS plan correction standards, and that it not be egregious, relate to diversion or misuse of plan assets nor be directly related to an abusive tax avoidance transaction.  An IBO also encompasses payments made before a proper distribution date under the plan and Code, excluding any overpayments made to “disqualified persons” as defined in the prohibited transaction provisions of the Code or to any owner-employee. The term also excludes any payment made as part of a correction for another failure under the EPCRS correction procedures.

Coordination with EPCRS. The EPCRS plan correction standards are amended to be consistent with the Notice. But note that if a plan opts to forego recoupment of an overpayment any related operational failures must still be corrected. These could include scenarios in which the overpayment resulted from incorrect account allocations, resulting in the underpayment of benefits to other participants, or where the overpayment causes an impermissible forfeiture under Code Section 411.

Recoupment compliance. If, despite the available recoupment relief, a plan still seeks recoupment of an IBO, it must do so under the EPCRS overpayment correction standards and the provisions of ERISA (as amended by SECURE 2.0) regarding the limitations on recoupment.

Eligible rollover treatment of IBOs. An IBO transferred to an eligible retirement plan will be treated as an eligible rollover distribution under the Code (with corresponding excise tax relief for early withdrawals and excess contributions) if the payor plan does not seek recoupment of the overpayment and if the payment otherwise qualifies as an eligible rollover distribution. In such cases, the overpayment cannot have resulted from a compensation limit failure under Section 401(a)(17) or an annual additions failure under Section 415. Eligible rollover distribution treatment also applies if the payor plan attempts to recoup the overpayment, and the overpayment is repaid to that plan. If the plan does seek recoupment, it must notify the payee that any amount not returned to the plan will not be eligible for tax-free rollover treatment.

Other portions of the Notice clarify plan corrections when an overpayment results from violations of Code Sections 436, 401(a)(17), or 415 and states that a plan may not correct an IBO by retroactively amending the plan to increase benefit payments already made if that amendment would result in a violation of Sections 401(a)(17) or 415 for a past year. Similar guidance applies to any retroactive amendments that increase past benefit payments in a way that violates Code Section 436 for the past year.

Please contact your Jackson Lewis Employee Benefits Attorney for more detailed advice on dealing with IBOs in light of this interim guidance. 

Attracting and retaining the right people is a critical issue for many retailers, and the 2022 federal retirement plan reform (SECURE 2.0) can help.

SECURE 2.0 requires employers to enroll long-term, part-time workers in their 401(k) plan if they work at least 500 hours per year for at least two consecutive years and are 21 years old or older. Retailers were already facing challenges under the original SECURE Act when it was introduced with a three-year minimum service requirement.   More…

Welcome to Part 10 (of 10) of our series about the SECURE 2.0 Act of 2022 (SECURE 2.0) (our other articles are on our JL Employee Benefits Blog Page).  Among the many changes within SECURE 2.0, the following allow for increased flexibility for participants to access certain retirement plan accounts when faced with qualifying emergencies, hardships, and disasters.

Sections 312 & 602 — Effective after December 31, 2022, an employer may rely on an employee’s self-certification that they have experienced an event that qualifies as a financial hardship.  Specifically, the new rules allow for self-certifications as to both (i) the fact that they have a hardship; and (ii) that the amount of the distribution is not in excess of the employee’s financial need.  This welcome change is expected to significantly streamline the plan administration of hardship applications.

Section 312 of SECURE 2.0 also allows an employer to rely on an employee’s written certification for participants of a 457(b) plan experiencing an unforeseeable emergency.  The certification is similar to those for the 401(k) and 403(b) plans in that it must state (i) the participant faces an unforeseeable emergency and (ii) the requested amount is not greater than the emergency need. 

Also, effective for plan years beginning after December 31, 2023, the new 403(b) plan hardship rules now align with similar rules for 401(k) plans.  Specifically, Section 602 eliminates the plan loan prerequisite to a hardship distribution for 403(b) plans, which now may also include certain employer contributions.

Section 331— Effective for disasters after December 27, 2020, SECURE 2.0 finally makes the exception to the 10% early withdrawal tax for federally declared disasters permanent.  Under the new rules, eligible distributions are up to $22,000 per disaster.  Individuals receiving eligible distributions are not subject to the early withdrawal penalty of 10% ordinarily applied to hardship withdrawals.  For the distribution to qualify for the exemption, the individual’s principal residence must be in a federally declared disaster area.  Also, there must be a corresponding economic loss to receive such a distribution.  Individuals are also eligible to repay the declared disaster distributions within three years.  While the recipients must pay tax on the distribution, if not repaid, they can spread the taxable income over three tax years.  

Additionally, employers may permit larger loans (up to a maximum of $100,000 or 100% of the vested account balance) as part of the qualified disaster distribution.  Typically plan loans, not for the purchase of a principal residence, may not exceed a five-year payoff.  Qualified individuals may be eligible for a delay of certain repayments for up to one year, which is disregarded when calculating the five-year payoff timeframe.    

Lastly, for qualified individuals who received a qualified distribution for the purchase or construction of a principal residence during a specified timeframe surrounding the declared disaster but could not purchase or construct the principal residence due to the qualified disaster, Section 331 allows them to re-contribute that distribution. 

We are available to help plan administrators understand and implement the requirements of SECURE 2.0.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

The SECURE 2.0 Act of 2022 (the Act) contains several provisions that liberalize the rules for fixing particular retirement plan administrative mistakes that happen occasionally.  The IRS has a comprehensive program for correcting retirement plan failures, the Employee Plans Compliance Resolution System (EPCRS), including a self-correction program and a voluntary compliance program (VCP).  Most sponsors prefer to self-correct because the VCP filing can be time-consuming and costly, and sponsors must suffer the indignity of admitting their mistakes to the IRS.  Three provisions in the Act provide employers with some relief for fixing retirement plan mistakes. 

  1. Expansion of EPCRS – Eligible Inadvertent Failures.  The Act significantly expands the types of retirement plan failures that can be self-corrected.  Instead of identifying the types of failures that can be self-corrected, the Act provides that a retirement plan can self-correct for an “eligible inadvertent failure” (EIF) unless the IRS discovers the failure before the sponsor has demonstrated a specific commitment to self-correct it.  In other words, once the self-correction has started, it can be self-corrected even if the IRS discovers the failure before the employer completes the correction.  To take advantage of the new rule, the employer must correct the failure within a reasonable period.  Under the current EPCRS, the IRS defines a reasonable period as the last day of the third plan year after the plan year in which the error occurs, but the Act extends the deadline indefinitely unless the IRS discovers the failure before the sponsor begins the self-correction process.  The moral of the story is that if employers want to take advantage of the new liberal self-correction rules, they need to find the failure before the IRS does and start making the correction. 

To qualify for self-correction under the new rule, an employer must also have established practices and procedures reasonably designed to promote and facilitate overall compliance in form and operation with the Internal Revenue Code’s requirements.  In addition, self-correction is not available for egregious failures or failures involving diversion or misuse of plan assets or whose purpose is tax avoidance. 

Self-correction is also available for several specific types of failures. 

  • Participant Loan Failures.  The Act provides that EIFs related to participant loan failures can be self-corrected if the failure is corrected following existing EPCRS procedures for that type of failure.  The failure will also be considered corrected under the DOL’s separate correction procedures, subject to any reporting or procedural requirements the DOL may decide to impose. 
  • IRA Failures.  The Act expands self-correction to include failure where the employer is seeking a waiver of the excise tax associated with certain IRA failures and failures related to non-spouse beneficiaries’ distributions to inherited individual retirement plans as long as the beneficiary had reason to believe the funds could be rolled over without tax liability. 

The Act requires the Treasury Secretary to issue guidance regarding the correction of EIFs, including corrections for specific failures and general correction principles for failures for which there is no specific correction.   The Secretary must also revise EPCRS revenue procedure to reflect the above changes within two years. 

  1. Retroactive Amendments Increasing Benefits.  The Act also extends the deadline for amending plans to increase benefit accruals until the due date of the plan sponsor’s tax return (including extensions).  Under prior law, amendments not required by law to retain the plan’s qualified status had to be made by the last day of the plan year.  Under the new law, an employer could adopt an amendment that retroactively increases benefits to participants under the plan after the plan year is over but before the sponsor must file its tax return.  For a calendar year corporation with a filing extension, the deadline would be September 15th of the subsequent year.  This rule does not apply to matching contributions.  This provision will be helpful only to a small group of plan sponsors who want to increase benefits retroactively after the plan year ends.  This provision is effective for plan years beginning after December 31, 2023.   
  1. Safe Harbor Corrections for Employee Elective Deferral Failures.  The Act provides relief to plans with failures related to automatic enrollment or escalation features and plans that fail to offer an eligible participant an opportunity to make an affirmative deferral election because the plan improperly excluded them.  Under prior law, employers with these types of plan failures did not have to make up for missed employee elective deferrals if they made the corrections within a specified time period.  Still, that rule was set to expire on December 31, 2023.  The Act makes the relief permanent. 

To take advantage of the relief, a plan sponsor must correct the failure by the earlier of:

  • The date of the first payment of compensation to the employee on or after the last day of the nine-and-a-half month-period after the end of the plan year during which the error occurred; or
  • The first compensation payment date on or after the last day of the month following the month in which the employer receives notification of the error.

    The employer still must make up any matching contributions associated with the missed deferrals (plus earnings) but may forego making up for missed elective contributions.

    What Plan Sponsors Should Do.  To take advantage of the new law, plan sponsors should:

    • Identify and correct errors before the IRS discovers them – the race is on
    • Establish practices and procedures designed to promote and facilitate compliance with IRS requirements
    • Before filing a VCP application with the IRS, determine whether the failure qualifies for self-correction under the new law
    • If employers want to increase benefits for the prior year based on better-than-expected financial results, they have until the due date of their tax return to do so

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance. 

    Welcome to Part 8 of our series about the SECURE 2.0 Act of 2022 (SECURE 2.0) (our other articles may be found on our JL Employee Benefits Blog Post Page).  Among the many changes within SECURE 2.0 are two provisions that may help employers reduce the number of retirement plan accounts of terminated vested participants: (i) the retirement savings lost and found program and (ii) the increase in the threshold for mandatory plan distributions.  

    RETIREMENT SAVINGS LOST AND FOUND (Section 303)

    Section 303 of SECURE 2.0 requires the Department of Labor (DOL), in consultation with the Department of the Treasury, to create an online searchable lost and found database of retirement plans.  The database will enable plan participants, who might have lost track of their retirement plan, to search for the contact information of their plan administrator.  

    The deadline for the DOL to establish the database is December 29, 2024.  Under yet-to-be-drafted regulations, plan administrators must furnish the DOL with information about the plan and terminated plan participants for plan years beginning after December 31, 2023.

    UPDATING DOLLAR LIMIT FOR MANDATORY DISTRIBUTIONS (Section 304)

    Current law permits a retirement plan, without participant consent, to cash out a participant who had a distributable event if the participant’s account balance is $5,000 or less.  Section 304 of SECURE 2.0 increases to $7,000, the threshold at which plans may automatically cash out a participant, effective for distributions made after December 31, 2023.  This change is optional and may require a plan amendment.

    Before an employer chooses to raise the mandatory distribution limit on its retirement plan, it should consider how it might affect the fees of its service provider.  For example, raising the cash-out threshold may be appropriate if fees increase with an increase in plan assets or the number of plan accounts.  However, an increase in the threshold might not be warranted in certain fee arrangements, such as where the fee rate decreases as plan assets increase. 

    Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    Additional Tools for Employers to Encourage Retirement Savings

    Matching Contributions on Student Debt Payments

    One of the most eagerly anticipated provisions of the “SECURE 2.0” legislation is the ability for employers to “match” within a defined contribution savings plan employees’ payments of student debt.   This provision is just one of the many changes in SECURE 2.0 aimed at enhancing and encouraging retirement savings opportunities for Americans.

    In 2018, the IRS issued a Private Letter Ruling (PLR) to Abbott Laboratories approving a proposed amendment to its 401(k) plan to allow a matching contribution based on student debt repayments rather than employee deferrals to the plan.  While binding only on the employer receiving it, the favorable ruling piqued interest in other employers looking for ways to recruit, retain and encourage retirement savings for an employee population that may not have otherwise deferred to the plan due to student debt obligations.  Over the past few years, that interest has grown for many employers looking at creative benefits solutions, but a clear, compliant, and universally available path forward was lacking until now.

    Under the new provisions of Internal Revenue Code Section 401(m)(4), any match must be based on student debt repayments for higher education expenses.  Eligibility, match rate, and vesting also must be the same as that for the match on elective deferrals.  The employee must annually certify that the loan payments have been made.  Employers may rely on this self-certification. 

    From an administrative perspective, it is significant to note that the statute anticipates possible issues for nondiscrimination testing of elective contributions.  A plan can test separately those employees who receive matching contributions on student loan repayments from those who receive matching contributions on elective deferrals.  The amount of loan repayments made by the employee count towards the annual limit on elective deferrals under Code Section 402(g) but not as a contribution for the limit on annual additions under Code Section 415(c).  These provisions of the Act have laid the framework to make the inclusion of such a provision less administratively burdensome.

    This is an optional provision that plan sponsors can implement in 401(k), 403(b), Governmental 457(b), and SIMPLE IRA plans for plan years beginning on and after January 1, 2024.  The IRS will issue implementing regulations and a model plan amendment for those plans wishing to adopt.

    But Wait, There’s More!  Financial Incentives

    In the same spirit of encouraging participation in defined contribution savings plans, SECURE 2.0 also allows employers to provide limited financial incentives to encourage participation in a 401(k) or 403(b) plan.  These incentives must be “de minimis,” although the statute does not define the threshold.  This likely means modest-value gift cards and other small incentives to encourage employees to participate, but notably, incentives may not be paid for with plan assets.  This tool is also optional and effective immediately, with no amendment to the plan required.

    If you have any questions about these new plan design opportunities or SECURE 2.0 generally, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    The SECURE 2.0 Act of 2022 (SECURE 2.0) eliminates the requirement for plan sponsors to provide certain notices to eligible but unenrolled employees in defined contribution plans, changes the delivery method plan sponsors must use to furnish benefit statements to participants in retirement plans, and modifies the language required in annual funding notices under defined benefit plans.  It also requires agencies to perform significant studies on several notices and report their findings to Congress. 

    Before SECURE 2.0, plan sponsors of defined contribution plans were required to furnish eligible but unenrolled employees with all notices and other documents, such as summary plan descriptions (SPDs).  Effective for plan years beginning after December 31, 2022, plan sponsors no longer have to furnish unenrolled, eligible employees with notices as long as they provide the unenrolled, eligible employee an SPD and other notices upon their initial eligibility and then deliver an “annual reminder notice” advising of their eligibility to participate in the plan and any otherwise required document the unenrolled participant may request. 

    Generally, plan sponsors must provide benefit statements to participants in defined contribution plans every quarter and participants in defined benefit plans once every three years.  Effective after December 31, 2025, defined contribution plans must provide at least one benefit statement on paper in written form each year, and defined benefit plans must provide at least one benefit statement on paper in written form every three years.  Participants may elect to opt out of receiving the paper statement. 

    SECURE 2.0 adds another requirement to the 2002 e-delivery safe harbor:  effective for participants first eligible to participate in a retirement plan after December 31, 2025, plan sponsors must now provide a one-time initial paper notice of their right to request all required documents be furnished on paper in written form before the plan sponsor may begin furnishing benefits statements electronically under the safe harbor.  A plan may deliver a duplicate electronic statement in any situation where the plan furnishes a paper benefit statement.

    The annual funding notice, provided annually to defined benefit plan participants, is no longer required to disclose the plan’s “funding target attainment percentage” and will instead need to describe the plan’s “percentage of plan liabilities funded.” This change is effective for plan years beginning after December 31, 2023.

    Congress also demonstrated an interest in improving certain plan-related participant notices and disclosures by assigning these tasks:

    • The Government Accountability Office (GAO) will prepare a report analyzing the effectiveness of Internal Revenue Code §402(g) notices required to be provided by plan administrators of qualified plans to recipients of eligible rollover distributions, describing different distribution options and related tax treatment.  The GAO’s report must analyze the effectiveness of §402(g) notices and make recommendations, if needed, to enhance eligible rollover distribution recipients’ understanding of various distribution options, the tax consequences of each option, and spousal rights.  The GAO has 18 months to complete this task. 
    • The Department of Labor (DOL) must review its fiduciary disclosure requirements for participant-directed individual account plans.  They must explore potential improvements to the disclosure requirements that could enhance participant understanding of defined contribution plan fees and expenses and the impact of such fees and expenses over time.  The DOL will then report to Congress on their findings, including the advisability of potential consumer education around financial literacy concepts applicable to retirement plan fees and any recommended legislative changes needed to address those findings.  The DOL has three years to complete this task.
    • The DOL and Treasury (IRS) will adopt regulations permitting, but not requiring, the consolidation of certain retirement plan participant notices.  The participant notices eligible for consolidation include, among others, the §404(c)(5)(B) notice — concerning default investment arrangements under participant-directed individual account plans and the §514(e)(3) notice — concerning automatic contribution arrangements.  Any combined notice must still satisfy the requirements of all notices and may not obscure or fail to highlight the primary information required by each notice.  The DOL and IRS have two years to complete this task.                   

    If you have questions about SECURE 2.0, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    Employees, especially those far from retirement, are sometimes hesitant to put money into their employer’s 401(k) plan, knowing that their money won’t be available to them if unexpected expenses arise. Congress and the Biden administration, recognizing the long-term benefit of incentivizing retirement savings, included two new means for plan participants to access emergency funds in the new “SECURE 2.0” legislation, which was signed into law at the end of last year.   We provide overviews of SECURE 2.0 here and here, and below discuss these new emergency distribution and Roth emergency savings account options. 

    Emergency Distributions

    Effective for plan years starting on or after January 1, 2024, 401(k) plans (along with 403(b) plans, 457(b) plans and IRAs) may allow participants to access up to $1,000 of their account balance (including pre-tax contributions) without penalty, in the event of an “unforeseeable or immediate financial needs relating to necessary personal or family emergency expenses.”  This new plan feature is modeled after certain other special in-service distribution options—namely, qualified birth/adoption distributions (QBADs) and the coronavirus-related distributions (CRDs) allowed under the CARES Act. Participants need only self-certify their need for the emergency distribution in order to request it. 

    Emergency distributions may be requested once per calendar year. However, a participant may not take another emergency distribution from the same plan or IRA within three years, unless the participant has already rolled their prior distribution back into the plan or IRA (as described below), or contributed to the same plan or IRA in an amount at least equal to their prior distribution.

    As with QBADs and CRDs, a participant who takes an emergency distribution can also roll the distribution back into the same plan or into an IRA within three years to avoid taxation on the distribution. If the amount is rolled back into a plan/IRA in a later year, however, it will require an amendment of the participant’s tax return for the year of the distribution.

    Roth Emergency Savings Accounts

    Also effective in 2024, plans may allow participants who are non-highly compensated employees (i.e., for 2024, those who earned less than $150,000 in 2023) to contribute up to $2,500 in post-tax deferrals to an emergency savings account under such plan, which will be treated as Roth contributions. Sponsors may even elect to set up automatic enrollment in this plan feature, with contributions of up to 3% of a participant’s pay until the contribution limit is hit, unless a participant affirmative opts out.

    Of note and likely key for both plan administration and investment communications – participants’ emergency savings account contributions must be invested in a manner that preserves capital – e.g., riskier investments that may be available under a plan, such as equity, aren’t allowed.

    Plan sponsors may not themselves contribute amounts to participants’ emergency savings accounts but are required (if their plan provides for matching contributions) to match any emergency savings account contributions by putting the corresponding match into the non-emergency savings account portion of the plan.  

    Participants may withdraw from the emergency savings account on at least a monthly basis, penalty free (though plans may charge a fee after the first four withdrawals per year). The legislation does, however, give plan sponsors some authority to prevent participants from using these accounts in a manner other than that intended by the SECURE 2.0 Act of 2022, by putting money into the emergency savings account, receiving the match, and then immediately withdrawing their own contributions. 

    When a participant with an emergency savings account balance terminates employment, a plan must allow for their balance to be (1) rolled into their plan Roth account (if applicable), (2) rolled into another plan or IRA, or (3) distributed to the participant. Since contributions to the emergency savings accounts are treated like Roth deferrals, any distribution (including earnings) will not be taxable to the participant. 

    ***

    While each of these new features are optional for plans, we do expect they will be implemented by many sponsors, and that they will be popular with potentially hesitant plan participants. 

    If you have questions about emergency distributions and/or savings accounts under SECURE 2.0, please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work.

    The SECURE 2.0 Act of 2022 (SECURE 2.0) provides welcome relief to private sector single employer sponsors of defined benefit pension plans (Pension Plan(s)). Effective for plan years beginning on and after January 1, 2024, SECURE 2.0 caps the variable rate premium paid by Pension Plan sponsors to the Pension Benefit Guaranty Corporation (PBGC) at $52 per $1,000 or 5.2% of a Pension Plan’s unfunded, vested benefit liability. SECURE 2.0 does not change the flat rate premium also paid by Pension Plan sponsors and charged on a per participant basis.

    The purpose of the PBGC is to protect the vested benefit of Pension Plan participants if the Pension Plan in which they participate fails. The PBGC collects premiums from employers that sponsor Pension Plans to fund its responsibility. Because the PBGC is not funded by general tax revenue, it must heavily rely on the premiums paid by Pension Plan sponsors.

    Single employer sponsors of Pension Plans must pay two types of premiums to the PBGC: (i) a per participant flat rate premium ($96 for 2023) and (ii) a variable rate premium based on a percentage of a given Pension Plan’s unfunded, vested benefit liability. In addition, under the Bipartisan Budget Act of 2013, both the flat rate and variable rate premium became subject to inflation indexing tied to increases in wage growth.

    The change to index premiums has been widely criticized because the increased expense further discourages Pension Plan formation and encourages Pension Plan sponsors to terminate, freeze, or “de-risk” their Pension Plans partly to manage such ever increasing costs. In response to these criticisms and likely because the funded status of the single employer PBGC “insurance” fund has improved, Congress seized the opportunity to end the indexing of variable rate premiums. Note, however, Congress may increase the variable rate premium again, but to do so, it must amend SECURE 2.0. 

    We are available to help plan administrators understand and implement the requirements of SECURE 2.0. Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.

    Most Americans prefer not to pay more in income tax than absolutely required or to pay taxes any sooner than necessary.  This includes many retired individuals who do not need to tap into their employer-sponsored retirement plan benefits yet but are required to do so – and to pay taxes on those benefits – once they attain a certain age.  The amount a retiree must take for a given year (and on which the retiree must pay taxes) is based on the value of the retiree’s account divided by the Internal Revenue Service’s applicable life expectancy table.  For retirees hoping to further postpone the year as of which they must begin taking retirement plan benefits, Division T of the SECURE 2.0 Act of 2022 (SECURE 2.0) delivered a holiday gift – one of several delivered by a bipartisan group of legislators in the Consolidated Appropriations Act of 2023.

    Before SECURE 2.0, a required minimum distribution (RMD) generally must begin by April 1st, following the year in which a retiree attains age 72.  This is the RMD beginning date set by the 2019 SECURE Act, effective for distributions after December 31, 2019.  Before that, retirement plan participants had to start taking RMDs from their retirement plans by April 1st after attaining age 70 ½.

    Effective for distributions made after December 31, 2022, Section 107 of SECURE 2.0 increases the RMD age to 73 for retirees who (a) attain age 72 after December 31, 2022, and (b) attain age 73 before January 1, 2033.  It then increases the RMD age to 75 for retirees who attain age 74 after December 31, 2032.

    Additionally, Congress directed the Internal Revenue Service to update its regulations to eliminate what can amount to a penalty on plan participants with accounts that include annuity contracts.  Under current regulations, if a retirement account holds an annuity contract in addition to other assets, the RMD amount is determined by bifurcating the account between the annuity portion and the other assets, with the result that RMD amounts can be higher than they otherwise would be if no part of the account value was attributable to an annuity contract.  Section 204 of SECURE 2.0 essentially provides that the plan participant can elect to have the RMD calculated based on the aggregated account.  Until new regulations are issued, plans can rely on a good faith interpretation of the law. 

    For RMD errors, Section 302 of SECURE 2.0 reduces the excise tax applicable when there’s a failure to take the full amount of an RMD timely.  Under prior law, the excise tax was equal to 50% of the amount by which a retiree’s RMD exceeded the amount actually distributed, if any, by the retiree’s required beginning date.  SECURE 2.0 reduces that excise tax penalty to 25% of the amount that should have been distributed.  (The penalty is further reduced to 10% if the retiree takes a corrective distribution within two years.) 

    Finally, under prior law, RMDs from a Roth IRA account did not have to begin before the account owner’s death, but no such exception to the RMD distribution rules existed for Roth accounts under employer plans, like 401(k) plans.  Section 325 of SECURE 2.0 ends the pre-death RMD requirement for Roth designated accounts in a 401(k) plan, effective for taxable years beginning after December 31, 2023.  However, note that, for retirees who attain age 73 in 2023, Roth account RMDs still must be made by April 1, 2024.     

    Stay tuned for more in our series on SECURE 2.0.  Please contact a Jackson Lewis employee benefits team member or the Jackson Lewis attorney with whom you regularly work if you have questions or need assistance.