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With a multitude of questions surrounding implementation and administration, late on a summer Friday afternoon, the IRS issued Notice 2023-62 (Notice), providing Plan Sponsors with a transition period until 2026 to implement Roth catch-up contributions.

Catch-up contributions are a defined contribution plan feature many 401(k) and 403(b) Plan Sponsors are familiar with. Since being introduced in 2001 as part of the Economic Growth and Tax Reconciliation Act (EGTRRA), a catch-up contribution feature allows participants who are age 50 or over in a plan year to make elective contributions that exceed an otherwise applicable limit under the Internal Revenue Code, a plan-imposed limit, or the actual deferral percentage (ADP) limit for Highly Compensated Employees. For 2023, the limit on catch-up contributions is $7,500, subject to indexing in future years.

Enter one of the many tax-qualified retirement plan-related changes enacted as part of the SECURE 2.0 Act of 2022 (SECURE 2.0). SECURE 2.0 provides, among many other things, that effective January 1, 2024, catch-up contributions for participants whose wages (for FICA/FUTA purposes) from the employer sponsoring the plan were more than $145,000 in the prior year must be made on a Roth (after-tax) basis. Further, when the plan provides for mandatory Roth catch-up contributions for those earning over $145,000 in the prior year, the plan must also allow Roth catch-up contributions for all eligible participants.

How hard could it be?

Although simple enough in concept, “flipping a switch” to require Roth catch-up contributions for those earning over $145,000 in the prior year has raised several questions and proved administratively tricky for many.

Not insignificantly, wages for determining which participants must be subject to mandatory Roth catch-ups is not something plans already capture. Designing and testing compliance systems requires a complicated and coordinated effort between Plan Sponsors, recordkeepers, and payroll vendors. With only four months until the statutory effective date, Plan Sponsors have expressed consternation over participant communications, sequencing of which dollars are considered catch-up, obligations related to collectively bargained plans, and the need for further guidance on open questions about whether new participant elections would be needed and mid-year amendment implications for safe harbor plans.

These issues and others have led some Plan Sponsors to consider eliminating all catch-up contributions or at least for those earning over $145,000 in the prior year as a route to compliance. Certainly, not an intended consequence of SECURE 2.0. Other Plan Sponsors considered requiring that any catch-up contribution made only be as Roth for all participants, regardless of wage level.

What is next?

The relief provides important breathing room for plans to work towards compliance by explicitly providing that any catch-up contributions made between January 1, 2024, and December 31, 2025, will be treated as meeting the requirements of SECURE 2.0, even if made only as pre-tax contributions.

The Notice also confirmed that for plan years after 2023, those 50 and over will remain eligible to make catch-up contributions. A technical error in the Secure 2.0 legislation inadvertently eliminated the catch-up provision from the Internal Revenue Code.

The Notice clarifies that additional guidance will be forthcoming. The guidance is expected to include (1) guidance stating that the Plan Administrator and Employer are permitted to treat an election by the participant to make catch-up contributions on a pre-tax basis as an election to make catch-up contributions that are designated Roth contributions and (2) guidance stating that in a plan maintained by more than one employer (including a multiemployer plan), wages are not aggregated between participating employers to determine whether a participant reaches the $145,000 threshold.

The IRS specifically invites comments and suggestions on whether a plan that offers Roth catch-up contributions in order to comply, but not the ability to make Roth contributions generally, violates the provisions of the Code requiring that all eligible participants must be allowed to make the same election regarding catch-up contributions, or whether restricting catch-up contributions to only those participants whose prior year earnings do not exceed $145,000 is permissible.

For those plans that are not far along in implementation, and certainly, for those who have never offered a Roth contribution or Roth in-plan conversion approach, Plan Sponsors may choose to proceed with implementing some design features that move towards compliance. Introducing Roth contributions generally, including the acceptance of Roth amounts in rollover contributions and the ability of all participants to designate catch-up as Roth, may be viewed as plan enhancement before the mandate to require only Roth catch-up contributions for high-wage earners.

We will continue to provide updates on all forthcoming IRS guidance on this issue and other changes introduced by SECURE 2.0. 

If you have questions about this subject matter or any other employee-benefits-related question, members of the Jackson Lewis Employee Benefits Practice Group are available to assist. 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.

Natalie's Dog

On July 17, the Internal Revenue Service (IRS) issued an advance version of Notice 2023-54 (the Notice) which will include transition relief for plan administrators in connection with the change in the required beginning date for required minimum distributions (RMDs) under §401(a)(9) of the Internal Revenue Code (Code) under §107 of the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0). Plan administrators welcome this guidance as if it had big brown eyes, floppy ears, and a happily wagging tail.

Waiting For Your Puppy to Grow (Effective Date of Final Regs.  Extended)

The IRS previously issued Notice 2022-53, stating that final RMD regulations would not take effect until the 2023 distribution calendar year. The Notice extends that relief and provides, “Final regulations regarding RMDs under § 401(a)(9) and related provisions will apply for calendar years beginning no earlier than 2024.”

It’s OK to Have Accidents (Mischaracterized RMDs Can Be Rolled Over Until September 30, 2023)

Congress modified the RMD rules with the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) in 2019 and again with SECURE 2.0 in 2022. These two modifications changed the date an individual would need to take an RMD. However, due to the timing of the change in the law, some individuals born in 1951 unnecessarily took an RMD in early 2023, and the Notice provides relief to these individuals. Specifically, the Notice states that if a participant born in 1951 received a distribution in 2023 that was treated as ineligible for rollover because it was believed to be a required RMD, that participant has until September 30, 2023, to roll over that distribution.

Consistent Messaging is the Key to Successful Training (IRS – Take Note)

The IRS’s proposed regulations were misunderstood by some who thought that the 10-year rule would apply as the long-standing 5-year rule always had, so there would be no RMD due until the last year of the 5- or 10-year period following the specified event (the death of the employee, the death of the eligible designated beneficiary, or the attainment of the age of majority for the employee’s child who is an eligible designated beneficiary.)  To be clear, the 10-year rule does not allow for a 10-year delay in all cases; if the beneficiary is not an eligible designated beneficiary, annual RMDs are required throughout the 10-year period if the plan participant died on or after his required beginning date.

Conclusion

Compliance with the new rules will require careful analysis, plan amendment, and updated administration like a new puppy requires housebreaking, crate training, and constant supervision. Ultimately, both will provide the warm fuzzy feeling of a job well done.

If you have any questions, the Jackson Lewis Employee Benefits Practice Group members are available to assist. 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.

As discussed in an earlier blog post, the SECURE 2.0 Act of 2022 (the Act) expanded the Employee Plans Compliance Resolution System (EPCRS), a comprehensive IRS program for correcting common qualified retirement plan failures.  Plan sponsors have three ways to correct mistakes under EPCRS: the self-correction program (SCP), the voluntary correction program (VCP), and the Audit Closing Agreement Program (Audit CAP). 

The Act requires the IRS to update EPCRS consistent with the Act no later than December 29, 2024.  On May 25, 2023, the IRS issued Notice 2023-43 to provide interim guidance on the expansion of EPCRS. 

The Act significantly expands the types of retirement plan failures that can be self-corrected under SCP.  Many plan sponsors prefer SCP over the other programs because it does not involve the IRS or a fee.  Under the expanded program, plan sponsors may self-correct an “eligible inadvertent failure” (EIF) unless the plan or plan sponsor is under examination by the IRS and the plan sponsor has not demonstrated a specific commitment to self-correct it.  However, insignificant failures may be self-corrected even if the plan or plan sponsor is under examination and the plan sponsor has not taken action to correct the failure.  The expanded program is not limited to failures that occurred on or after the Act was adopted; failures that occurred before December 29, 2022, may also be self-corrected under the expanded EPCRS.

Until EPCRS is formally updated, plan sponsors may rely on the Notice and self-correct failures if these conditions are met:

  • The plan sponsor has actively pursued action to self-correct the failure before the plan or plan sponsor is under examination (except for insignificant failures, which may be self-corrected while the plan is under examination).
  • The failure is self-corrected by the last day of the 18th month following the date the failure was identified.  Except for failures related to employer eligibility failures, which must be corrected by the last day of the 6th month following the date the failure was identified.
  • The failure is not egregious, does not directly or indirectly relate to an abusive tax avoidance transaction, and does not relate to the diversion or misuse of plan assets.
  • The self-correction satisfies EPCRS’ provisions for self-correction, except these requirements in the current EPCRS procedure which no longer apply when self-correcting an EIF:
    • The plan must have a favorable determination letter.
    • The prohibition of self-correction for demographic failures and employer eligibility failures.
    • The prohibition of self-correction of certain loan failures.
    • The provisions relating to self-correction of significant failures that have been substantially completed before the plan or plan sponsor is under examination.
    • The requirement that significant failures must be completed or substantially completed by the last day of the third plan year following the plan year in which the failure occurred.

    However, the following are some, but not all, failures that may not be self-corrected until EPCRS is formally updated:

    • A failure to initially adopt a written plan.
    • A failure in an orphan plan.
    • A significant failure in a terminated plan.
    • A demographic failure that is corrected using a method other than a method in Treas. Reg. §1.401(a)(4)-11(g).
    • Plan amendments to conform the terms of the plan to the plan’s past operations if such amendment is less favorable for a participant or beneficiary than the original plan terms.
    • A failure in an ESOP that involves section 409 (other than plan disqualification).

    What Plan Sponsors Should Do:

    • Identify and correct errors before the IRS discovers them.
    • 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 expanded program.
    • Keep adequate records showing when the failure was identified, the participants affected, and how and when the failure was corrected.

    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. 

    Cake-with-candles-1

    With another National Employee Benefits Day upon us, it is a good reminder for all involved in the world of Employee Benefits to pause (take three deep breaths) and use it as an opportunity to look back at where we’ve been over the last year and where we are going. While the challenges are many, the work is more valuable than ever.

    One constant over the last few tumultuous years is change. From the compliance perspective, employers like certainty (plan advisors do, too), and recently there has been anything but. This is true now more than ever across all areas of benefits and is likely to be the case for years to come.

    It is no surprise (pun intended) that health and welfare plan administration continues to occupy more time and attention than ever before. Plans continue to grapple with compliance with Mental Health Parity, Transparency in Coverage, the No Surprises Act, and other recent changes that define how group health plans need to operate (both at the federal and state level). Traditionally, an area in which plans operated more autonomously, health plan administration and compliance have become increasingly complex and will continue to grow more complicated, particularly for multi-state plans. Add to that already full plate the need to navigate the issues following the U.S. Supreme Court’s decision in Dobbs, many of which will continue to evolve for years to come, and recent state and federal attention on pharmacy benefits.

    As we approach the end of the Public Health Emergency and National Emergency, benefit plans should also pay close attention to unwinding the temporary relief provided at the outset of the pandemic. This includes close attention to COBRA, special enrollment and claims deadlines, and decisions on coverage of COVID-19 diagnostic testing, treatment, vaccines, and telehealth under group health plans. And for good measure, plans now need to consider a recent court decision invalidating the ACA’s preventative care mandate.

    Retirement plan design and administration are not immune from the wave of change. Eagerly awaited retirement plan legislation in the form of SECURE 2.0 finally arrived at the end of last year, bringing with it a panoply of mandatory and optional changes for the consideration of plan sponsors. With an eye toward increasing retirement savings and expanding coverage within the private plan system, SECURE 2.0 will spawn more guidance and implementation efforts for years to come. Plan fiduciaries are also confronting the push and pull of the role of ESG investments in retirement plan fund lineups – including trying to keep straight the regulatory, legislative, and judicial attempts to weigh in on the proper role of ESG investments, and for that matter, what even is an ESG investment. All of this change comes against the broader backdrop of market volatility and continued concerns of a recession/inflation, increasing the spotlight on financial wellness initiatives.

    Finally, and perhaps most important, well-being, balance, and mental health remain at the forefront. Clearly not confined to the pandemic, attention to the needs of all employees’ pursuit of the elusive “work-life balance” is more important now than ever, especially as the lines between work and home promise to be blurred for the foreseeable future given the persistence of remote/hybrid work. While many of these change-inducing events are far beyond our control, as benefits professionals, we have ridden this wave before and will continue to do so. We are reminded that change creates new opportunities to design important, sustaining benefits that serve the lives of employees and their families. Keep up the fight, and Happy Employee Benefits Day!

    As we enter the fourth quarter of 2022, sponsors and administrators of employee benefit plans have a lot to juggle.  From open enrollment and required notices to plan document deadlines, it is a busy time of year.  Yet, there always seems to be something new to add to the mix.   This year is no different.  Following are some 4th quarter topics for consideration: 

    RxDC Reporting Is Due December 27, 2022.   The Prescription Drug Data Collection (RxDC) reporting requirement was added as part of the Consolidated Appropriations Act, 2021.  It requires plans to annually submit to the Department of Health and Human Services, Department of Labor, and Department of Treasury a report detailing the plan’s prescription drug usage, including the most frequently dispensed, the most expensive, and those with the greatest increase in cost, among others.  The Centers for Medicare & Medicaid Services (CMS) is collecting this information on behalf of the Departments and has issued detailed reporting instructions.

    Although plans can contract with their third-party administrators, pharmacy benefit managers or other plan providers to meet these requirements, not all providers are willing to report all of the data elements.  This means that employers may need to register for a Health Insurance Oversight System (HIOS) account to submit some of the required information. 

    With the first RxDC reporting deadline of December 27, 2022, fast approaching, plan administrators should discuss RxDC reporting with their providers now to develop a compliance plan.  As the CMS warns, HIOS accounts can take up to two weeks to create.  So, waiting until December to start working on this is not recommended.  

    HDHP Amendments to Cover Insulin.  Making a splash across the headlines was the Inflation Reduction Act of 2022 (IRA), which President Biden signed on August 16, 2022.  The 273 pages of text make sweeping changes.  However, few will affect employer-sponsored benefit plans, and most of those will have only indirect effects. 

    One change that does directly affect a High Deductible Health Plan (HDHP) is the exception added to Section 223 of the Internal Revenue Code effective for plan years beginning after December 31, 2022, to enable HDHPs to cover the cost of insulin without first meeting the deductible.  This first dollar coverage for insulin will protect Health Savings Account (HSA) eligibility for those who require an insulin regimen.  Employers should determine if their plan requires an amendment to implement this change. 

    Contraceptive Coverage Requirements, Reimbursements.  On July 28, 2022, the Departments of Labor, Treasury, and Health and Human Services (collectively, the Departments), jointly issued Frequently Asked Questions About Affordable Care Act Implementation Part 54 (the FAQs).  The FAQs address required coverage of contraceptives by non-grandfathered group health plans and insurers, including guidance designed to:

    • Confirm the contraceptive coverage mandate;
    • Clarify the rules regarding medical management techniques for contraceptive coverage;
    • Address federal preemption of state law; and
    • Discuss enforcement actions for noncompliance. 

    The FAQs also confirm that health reimbursement arrangements, health savings accounts, and health flexible spending accounts can reimburse the costs of over-the-counter contraception that is not otherwise paid or reimbursed by a health plan or issuer.  Employers should review their plans to determine if any amendments are needed to conform to the FAQs. 

    Sponsors of retirement plans will get some welcome relief, however:

    The CARES Act and Relief Act Amendment Deadline for Retirement Plans generally is delayed until December 31, 2025.  In August, the IRS issued IRS Notice 2022-33 extending the deadline for sponsors to amend their retirement plans to reflect certain changes under the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), Section 104 of the Bipartisan American Miners Act (Miners Act), and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). That guidance failed to delay the deadline to adopt other amendments due by the end of 2022, including amendments to implement certain optional pandemic-related distribution and loan provisions permitted under the CARES Act and the provisions of Section 302 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) affording favorable tax treatment to qualified individuals with respect to qualified disaster distributions.

    To align the amendment deadlines for the referenced Acts, the IRS issued Notice 2022-45 on September 26, 2022.  Notices 2022-33 and 2022-45, together, postpone the deadline for sponsors of nongovernmental plans to adopt amendments to conform their retirement plans to the Acts until December 31, 2025. The deadline for governmental plans likewise is extended generally until 90 days after the close of the third regular session of the applicable legislative body that begins after December 31, 2023. 

    By that time, sponsors may have additional amendments to make, owing to a number of legislative proposals (referred to colloquially as SECURE 2.0) that have been under consideration since the passage of the SECURE Act of 2019.  These proposals include the Securing a Strong Retirement Act, the RISE & SHINE Act, and now the Senate’s Enhancing American Retirement Now (EARN) Act, which was approved by the Finance Committee in June, but not formally introduced until the Act language was released in September.  Monitor our blog for more on these developing laws and 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.

    On August 3, 2022, retirement plan sponsors welcomed IRS Notice 2022-33 (“Notice”), which extends the deadline for adopting amendments to comply with the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”), Section 104 of the Bipartisan American Miners Act (“Miners Act”), and certain provisions of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).  For most plans, the amendment deadline is delayed three years to December 31, 2025, but some amendments are still required before year-end.

    Deadline Extension

    The most helpful delay applies to a CARES Act provision that requires changes to defined contribution plan language governing required minimum distributions.  Plan sponsors were struggling with the concept of amending the plan language governing the distribution timing rules for benefits paid upon the death of a participant, given that the governing Regulations are still in proposed form.  Employers now expect the Regulations to be finalized before the 2025 amendment deadline.

    Under the Notice, the deadline for amending a plan for the 2020 required minimum distribution waiver under the CARES Act was extended to December 31, 2025.  Likewise, the SECURE Act requirement to change the age at which required minimum distributions begin has been delayed until 2025.  Other amendments for which the deadline has been delayed include the change in eligibility rules for part-time employees who work at least 500 hours during each of three consecutive years and permitting penalty-free withdrawals of qualified birth or adoption distributions of up to $5,000 per child. The extension also applies to the provision of the Miners Act, which permits in-service distributions after age 59½ in pension and governmental 457(b) plans.

    Non-Governmental Qualified Plans, 403(b) Plans, and IRAs

    For those required amendment items covered by the Notice, the December 31, 2025, amendment deadline applies to non-governmental qualified plans, 403(b) plans not maintained by a public school, and IRAs. For governmental qualified plans and 403(b) plans maintained by a public school, the deadline is 90 days after the close of the third regular legislative session of the legislative body with the authority to amend the plan that begins after December 31, 2023.  Finally, the deadline for amending a governmental plan under Section 457(b) is the later of 90 days after the close of the third regular legislative session of the legislative body with the power to amend the plan that begins after December 31, 2023, or, if applicable, the first day of the first plan year beginning more than 180 days after the date of notification that the plan was administered so it is inconsistent with the requirements of Section 457(b).

    CARES Act Deadline Not Universally Extended

    Commentators are accusing the IRS of having missed an opportunity to extend meaningful relief by failing to include all provisions of the CARES Act.  There is speculation that if Congress passes the retirement plan legislation currently pending (SECURE 2.0), the deadline for these missed CARES Act provisions will also be extended.  However, if additional relief is passed, given the busy year-end schedules and winter holidays, plans may have already been amended by the time it is announced.

    2022 Action Items

    The deadline for the following plan amendments remains December 31, 2022:

    1. Amending the plan to allow coronavirus related distributions;
    2. Amending the plan to allow increased limits on plan loans; and
    3. Amending the plan to allow an extended loan repayment period.

    Similarly, the amendment deadline for the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (included in the Consolidated Appropriations Act of 2021) which provided limited distribution and loan relief for participants in qualified disaster areas was not extended.

    If you have questions or would like assistance drafting your 2022 year-end amendments, please contact your Jackson Lewis attorney.