The House, following approval by the Senate, approved a $1.7 trillion omnibus spending bill (bill), which was signed into law by President Biden on Dec. 23, 2022, funding the government through Sept. 30, 2023. The spending bill does not contain significant tax changes, but provides, in the SECURE 2.0 Act, for a wide range of retirement plan and IRA law changes.

Tax changes

Topics not included in the bill, but many were hopeful for, were a repeal or deferral of the research and development amortization rules which were effective Jan. 1, 2022, or an extension of the bonus depreciation provisions, which begin phasing out in 2023. One tax provision that was included in the final bill was a change to the syndicated conservation easement rules.

Benefit plan changes

• Automatic enrollment in new 401(k) and 403(b) plans
  • Effective for plan years beginning after Dec. 31, 2024, new IRC Section 414A will require most newly-adopted 401(k) (except for SIMPLE 401(k) plans) and 403(b) plans to provide for automatic enrollment and escalating employee deferral contributions for eligible employees, subject to employee opt-out or election of a different amount. These automatic contributions will begin at 3% and increase by 1% per year until reaching at least 10% (an employer will be permitted, but not required, to increase the amount to as much as 15%, with a 10% limit for plan years ending before Jan. 1, 2025). Existing 401(k) and 403(b) plans already in effect prior to the date of enactment – Dec. 29, 2022 – of the Act will be grandfathered. Exemptions are provided for businesses with 10 or less employees, or have been in place for less than three years, and for church plans and governmental plans.
• “Starter” 401(k) and 403(b) plans
  • Effective for plan years beginning after Dec. 31, 2023, an employer that does not maintain a tax-qualified retirement plan (under which current contributions or benefit accruals are made) will be permitted to adopt a “starter 401(k) deferral-only arrangement” or a “safe harbor Section 403(b) plan”, whereby employees would automatically be enrolled (with the ability to opt out) to make elective deferrals of between 3 - 15% of their compensation.
• Required Minimum Distribution (RMD) provisions:
  • Effective for individuals who attain age 72 after 2022, the RMD required beginning date is delayed from the April 1 next following the attainment of age 72 as follows: to age 73 for an individual who attains age 72 after 2022 and age 73 before 2033, and to age 75 for an individual who attains age 74 after 2032.
  • Beginning in 2023, the existing 50% penalty for failing to take an RMD is reduced to 25%; for a plan or IRA under which a missed RMD is corrected within two tax years following the end of the failure tax year, the penalty is reduced to 10%.
  • Effective after 2023 (but not with respect to distributions required before 2024), the current rule, excepting ROTH IRAs from pre-death RMD requirements, is expanded to ROTH accounts under tax-qualified retirement plans such as 401(k) plans.
• “Catch-up” Employee Retirement Plan and IRA contributions are increased
  • Beginning in 2025, the existing age 50 and older maximum annual catch-up contribution amount for employee elective deferral contributions to non-SIMPLE 401(k), 403(b), and governmental 457(b) plans ($7,500 for 2023) is increased for participants who are age 60, 61, 62, or 63, to the greater of $10,000, or 150% of the 2024 catch-up amount indexed for inflation. In addition, the existing catch-up contribution limit for a SIMPLE Plan ($3,500 for 2023) is increased to the greater of $5,000, or 150% of the 2025 catch-up amount indexed for inflation. Both the $10,000 and $5,000 amounts will also be subject to COLA adjustments.
  • Effective as of 2024, all catch-up contributions under non-SIMPLE tax-qualified retirement plans (including 401(k), 403(b), and governmental 457(b) plans), including those for age 50 and older and those for ages 60-63, will be required to be made on a ROTH basis for any participant whose wages for the preceding plan year from the employer sponsoring the plan exceeded $145,000 (subject to COLA adjustments).
  • Beginning in 2024, the annual IRA age 50 and over catch-up maximum contribution amount ($1,000 for 2023) will be subject to COLA adjustments.
• Roth contributions
  • For contributions made after the Enactment Date, employees will be permitted to designate employer matching contributions under 401(a), 403(b), and governmental 457(b) plans (including employer matches of “qualified student loan repayments”) as ROTH contributions 
  • Beginning in 2023, SEP IRA and SIMPLE IRA employer and employee contributions will be permitted to be made on a ROTH basis by permitting such arrangements to be designated as ROTH IRAs
• Student loan repayments
  • Effective for plan years beginning after 2023, employers will be permitted to make matching contributions under any tax-qualified defined contribution retirement plan, including 401(k), 403(b), and governmental 457(b) plans, as well as under SIMPLE IRAs, against employee student loan repayments. For employer matching contributions purposes, employee “qualified student loan repayments” will be treated as employee elective deferral contributions, limited to payments equal to or less than the lesser of the employee’s compensation or the annual elective deferral limit for the year ($22,500 for 2023).
• Part-time employees
  • For plan years beginning after 2024, a 401(k) plan and a 403(b) plan subject to ERISA must permit a part-time employee who had at least 200 hours of service for the employer during each of two consecutive 12-month periods to make elective deferral contributions under the plan. Pre-2021 service will not be considered for vesting purposes.
• Distributions for long-term care insurance premiums
  • Effective three years after the Enactment Date, distributions from tax-qualified retirement plans and IRAs will be permitted to be made without applicability of the IRC Section 72(t) 10% additional tax on early distributions for certain long-term care insurance premiums.
• Emergency and other distributions for which the IRC Section 72(t) (10% penalty) will not apply:
  • Beginning in 2024, a tax-qualified retirement plan or IRA withdrawal will be available for “emergency personal expense distributions” – distributions due to an unforeseeable or immediate financial need relating to necessary personal or family emergency expenses and limited to the lesser of $1,000, or the participant’s total vested plan benefit or total IRA balance less $1,000. These withdrawals will be permitted to be repaid to the plan or IRA within three years.
  • Effective after the Enactment Date, distributions from tax-qualified retirement plans or IRAs made to a recipient who has an illness or condition reasonably expected to result in death within 84 months or less, as certified by a physician.
  • Effective for disasters with an “incident period” beginning 30 days after the enactment date of the Taxpayer Certainty and Disaster Relief Act of 2020 (Jan. 26, 2021), distributions from tax-qualified retirement plans and IRAs for up to $22,000 per disaster. The distributed amounts may be taxed ratably over a three-year period and can be repaid without tax within three years of the distribution date.
  • IRA distributions made after the Enactment Date to correct excess IRA contributions.
  • Effective for 2024, a plan participant who is a victim of domestic abuse by a spouse or domestic partner and who needs additional funds (e.g., to escape an unsafe domestic situation) will be permitted for up to one year to take a plan distribution of the lesser of $10,000 (indexed for inflation) or 50% of his/her vested plan account balance.  Such withdrawal may be repaid to the on a non-taxable basis within three years.
• Tax-free rollover by beneficiary of Section 529 Plan account balance to ROTH IRA: 
  • Effective as of 2024, the beneficiary of a Section 529 Plan account that has been open for more than 15 years may roll as much as $35,000 (lifetime limit) from the account to a ROTH IRA, subject to certain limitations.
• Changes relating to business owners
  • Effective for plan years beginning after the Enactment Date, an individual who owns the entire interest in an unincorporated trade or business and who is the only employee, may make elective deferrals under a newly-established 401(k) plan until the deadline for filing the individual’s federal income tax return (without regard to any extensions).
  • Effective for post- 2027 sales, IRS Section 1042 provisions, which permit certain shareholders to defer the gain on the sale of a privately-held C Corporation’s shares to an ESOP sponsored by the C Corporation, will be expanded to ESOPs sponsored by S Corporations; For an S Corporation ESOP, however, the maximum amount eligible for deferral will be limited to 10% of the amount realized by the selling shareholder on the sale.
• Expansion of small employer pension plan start-up credit
  • Beginning in 2023, the IRC Section 45E three-year credit of 50% of “qualified startup costs” for employers with no more than 100 employees that adopt a new retirement plan is expanded to 100% for employers with no more than 50 employees. Additional changes – greatly expanding this credit for employers with less than 50 employees, with a phase-out for employers with up to 100 employees – are also included. 
• Expansion of saver’s credit
  • Beginning in 2027, the IRC Section 25B “saver’s credit” will be changed, among other changes, from a nonrefundable credit to a government matching contribution that will be required to be deposited into the plan or IRA.
• National data base for lost retirement accounts
  • Within 2 years of the Enactment Date, the Secretary of Labor, the Secretary of the Treasury, and the Secretary of Commerce are required to establish a retirement savings lost and found national data base.

What does CohnReznick think?

This $1.7 trillion spending package is interesting – both in terms of what it does and what it doesn’t do. This bill funds the government through Sept. 30, 2023, makes significant changes to various retirement plan/IRA provisions, yet does not contain any significant personal or corporate income tax changes.  In addition to the provisions noted above, the bill contains many other provisions which are not described in this alert due to the sheer number.

With respect to the 2.0 Secure Act (which is incorporated into the bill), the bipartisan nature of many aspects are interesting given the recent history involving the lack of bipartisan support on many matters, with Congress providing enhanced Roth and “catch-up” contributions, and significantly reducing penalties where relief on early distributions seems warranted.  However, the breadth and extent of the 2.0 Secure Act’s changes impose significant challenges on, and will require expansive efforts by, both the Internal Revenue Service and the U.S. Department of Labor to provide the further guidance needed for many of the Act’s provisions.

Contact

Dana Fried, JD, LLM, Managing Director, National Tax Services

516.417.5064

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