The year-end legislation that was passed to fund the Federal government through September 2023 included almost 100 provisions changing Retirement Plan and IRA rules or requiring IRS or U.S Department of Labor regulatory action or studies regarding Retirement Plan-related issues. This part of the law is referred to as SECURE 2.0 because it enhances changes made by the SECURE Act passed in December 2019.
There are SECURE 2.0 effective dates that vary from immediate to several years from now. Over the coming months, information will be provided about items that have delayed effective dates. This article highlights and summarizes some of the more notable changes which are effective now.
Startup Tax Credits: The Federal tax credits available for “small employers” who start Retirement Plans have been “supercharged”. In recent years, the tax credit has been up to 50% of the “ordinary and necessary” start-up and administrative costs, for the first three (3) Tax Years, in connection with establishing and operating the plan. Now, employers with up to 50 employees are eligible for a potential tax credit of 100% of these out-of-pocket expenses. The $5,000 maximum per-year limit for the tax credit is unchanged.
Also, a new Federal startup tax credit has been added for the first five (5) Tax Years, equal to a percentage of the employer contributions to the plan, up to $1,000 per employee (excluding certain highly paid employees). Employer contributions that are eligible for the tax credit include, for example, safe harbor and non-safe harbor matching contributions and non-elective contributions such as profit sharing contributions, but not defined benefit plan contributions. The percentage starts at 100% for employers with up to 50 employees, and the starting percentage is reduced if 51 to 100 employees. The annual percentage phases down over the 5-year period.
The modified and new tax credits begin with the 2023 Tax Year.
Mandatory Distributions (MRDs or RMDs): The age for beginning minimum required distributions was changed from 70-1/2 to 72 under the SECURE Act. SECURE 2.0 changes the age to 73 for those whose 72nd birthday is after 2022. (In a decade, the beginning age for RMDs will move to age 75.)
Retroactive Adoption of One-Person 401k Plans: The Secure Act allowed employers to adopt a profit sharing plan (“PS Plan”) and/or defined benefit plan (including a cash balance plan) by the employer’s Federal tax return due date, retroactive to the beginning of the prior Tax Year. Beginning (generally) with the 2023 Plan Year, a sole proprietor (or single member LLC taxed as such) may include a 401k feature in a retroactively adopted PS Plan, and the business owner may make 401k deferral contributions up to the Federal tax return due date. In other words, a 401k Plan can be retroactively adopted by the sole proprietor by April 15, 2024, and $30,000 in deferrals can be contributed (i.e., the 2023 401k deferral limit, if at least age 50), plus any permitted employer profit sharing contributions, for the 2023 Plan Year.
Simplified Distribution Rules for Plan-Related Notices: An employee who does not elect to contribute to a 401k or 403b plan, and does not have a plan account, is not required to receive any plan-related notices distributed during the Plan Year, provided such employee receives an annual eligibility notice. This is effective for the 2023 Plan Year.
“ROTHification” of Employer Contributions: Effective for any matching contributions and other employer contributions (e.g., profit sharing) “made” after December 29, 2022, the employer has the option to permit employees to designate those contributions as ROTH contributions. Such a designation will require the contributions to be taxed to the employee, and to be 100% vested. We need much guidance from the IRS on how to implement such a dramatic change in plan operation and income taxation. As such, we recommend that employers not rush to amend plans to permit this option until we know more.
ACSI is available to help our clients learn more about the SECURE 2.0 changes to your Retirement Plan.