By: Mark Mirsky, CPA; Rob Jacobson, CPA; and Paul Wilkin, CPA
On Thursday, December 22, the Senate passed the Consolidated Appropriations Act, 2023, which was then passed by the House on Friday, December 23. On Thursday, December 29, President Biden signed the bill into law.
This summary will focus on the sections of the bill known as the SECURE 2.0 Act of 2022, which includes many retirement related provisions.
Increase in Age for Required Beginning Date (Required Minimum Distributions)
The age required minimum distribution from retirement plans increases to 72 (if a taxpayer reaches this age by April 1 of the following year) and after December 31, 2022, increases the age to 73. Over the next ten year period beginning January 1, 2033, the age requirement will rise to 75.
Higher Catch-Up Limits at Age 60-63
For taxable years beginning after December 31, 2024, if an eligible participant would attain age 60 but less than age 64 during a plan year, the catch-up amount (other than a SIMPLE) is increased from $7,500 to the greater of $10,000 or 150% of the regular catch-up amount. For a SIMPLE, the catch-up amount is increased from $3,000 to the greater of $5,000 or 150% of the regular catch-up amount. Cost of living adjustments will begin for taxable years after December 31, 2025.
Increase in Credit for Setting up Retirement Plans
For taxable years starting after December 31, 2022, the Act modifies the three year small business start up credit for plan administrative costs from 50% of plan expenses to 100% with a maximum credit of $5,000. This new provision applies to employers with less than 50 employees and applies for a five year period under the new law. The 100 percent credit is phased out for employers with 51-100 employees and also drops incrementally to 25 percent in the fifth year of the plan. The credit does not apply to defined benefit plans.
Expansion of Automatic Enrollment in Retirement Plans
Effective for plan years beginning after December 31, 2024, qualified 401(k), 403(b) and defined contribution plans will have a requirement to add an automatic enrollment to their plan at a pre-tax level of not less than 3% and not more than 10% (unless the participant elects to not have contributions made to the plan). For each subsequent year, the contribution % shall increase by 1% annually until it reaches at least 10% (but not more than 15%). All current 401(k) and 403 (b) plans are grandfathered. Small businesses with 10 or fewer employees, new businesses that have less than a three year life, church plans and government plans are exempt from this rule.
Treatment of Student Loan Repayments as Elective Deferrals for Purposes of Matching Contributions
For plan years beginning after December 31, 2023, an employer can make matching contributions under a 401 (k) plan or 403 (b) plan, or SIMPLE IRA plan for student loan payments up to the maximum deferral amounts. These matching contributions must have the same vesting schedule as any other matching contributions.
Deferral of Tax for Certain Sales of Employer Stock to Employee Stock Ownership Plan Sponsored by S Corporation
For sales of shares after December 31, 2027, S corporation shareholders may defer taxation on sales of 10% of the amount realized on sales to an ESOP for purposes of determining the amount of gain not recognized and the extent to which the amount realized on such sales exceeds the cost of qualified replacement property under Section 1042. This used to only apply to C corporations.
Withdrawals for Certain Emergency Expenses
For distributions after December 31, 2023, the 10% early withdrawal penalty shall not apply to any distribution of up to the lesser of $1,000 or an amount equal to the excess of the non-forfeitable accrued balance over $1,000 per calendar year. The individual has 3 years to repay the distribution should they choose to do so. If they do not repay the distribution, they may not take another distribution for three years.
Allow Non-elective Contributions to a SIMPLE Plan
For taxable years beginning after December 31, 2023, the bill allows employers to make non-elective contributions of a uniform percentage (up to 10% of compensation) for each employee who has at least $5,000 of compensation (maximum of $5,000 per employee)
Roth Provisions
For taxable years beginning after the date of enactment, plan participants may choose whether matching contributions to a defined contribution plan are considered Roth (after-tax basis). The employee would have to be 100% vested in the matching or non-elective contribution.
For taxable years after December 31, 2023, SEP and SIMPLE IRA plans may be designated as Roth IRAs. Contributions would be made on an after-tax basis with distributions excludable from income. The employee would be allowed to make this election.
Also, for taxable years after December 31, 2023, catch-up contributions to qualified plans, 403(b) or 457(b) plans would be required to be considered Roth (after-tax). This mandate only applies to employees with wages over $145,000. For those earning under $145,000, they may elect to treat catch-up contributions as Roth.
For taxable years beginning after December 31, 2023, 401(k) and 403(b) owners of Roth amounts within these plans are no longer required to take an annual RMD for the Roth amounts.
Improving Coverage for Part-Time Workers
For plan years beginning after December 31, 2024, for a qualified plan or 403(b) plan, allow participation for the first 24-month period consisting of 2 consecutive 12-month periods during each of which the employee has at least 500 hours of service.
Special Rules for Certain Distributions from Long-Term Qualified Tuition Programs to Roth IRAs (529 to Roth)
For distributions after December 31, 2023, taxpayers who had a 529 plan in place for a beneficiary for at least 15 years prior to the distribution, no tax or penalty shall apply on a direct transfer to a Roth IRA. The amounts that could be rolled over are subject to the annual Roth IRA contribution limit and the maximum that could be converted over a taxpayer’s lifetime is $35,000. No income limitation applies to these rollovers.
Qualified Charitable Distributions to CRT
For distributions in taxable years beginning after the date of enactment, a taxpayer may make a one-time $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
There are many other provisions included in the Act. KRD attempted to summarize the provisions we thought were most common.
Additional Updates Related to Form 1099-K
On Friday, December 23, in Notice 2023-10, the IRS delayed by one year the implementation of 1099 reporting for Venmo and other third-party processors for payments over $600, leaving in place the previous threshold of $20,000. This means fewer taxpayers than originally anticipated will receive Form 1099-K for 2022.
Should you have any questions regarding the above, or wish to discuss other planning issues, please contact us.
