As we move into the final quarter of 2023, we are waiting for guidance relating to provisions of the retirement plan legislation, known as SECURE 2.0, that are effective in 2024 and 2025. Although the cost-of-living adjustments were issued for health plans, they have not yet been released for retirement plans and IRAs. In the meantime, the following topics of interest will be important for you to consider both for year-end tax planning and for tax planning in the coming year:
A recent IRS announcement delays the deadline until 2026 for requiring that catch-up contributions for employees making more than $145,000 in the prior year be designated as Roth after-tax catch-up contributions. The announcement also clarifies that catch-up contributions which had been inadvertently eliminated by SECURE 2.0 are reinstated. This means that employees will continue to have the choice of making pre-tax or after-tax Roth catch-up contributions in 2024 and 2025.
Employers and plan sponsors should consider the following action steps during the two-year transition period:
Effective in 2023, 401(k) and 403(b) plans may be amended to give plan participants the choice to receive employer contributions on an after-tax Roth basis. Roth employer contributions are taxable to the employee when made. In addition, participants must be 100% vested at the time the contribution is made. If the plan also has non-Roth employer contributions that vest over a period of time, it could result in an employer maintaining multiple vesting schedules for each participant. Employers should consult with the plan’s record keeper and payroll provider to ensure the employer contributions are recorded correctly. Since the legislation does not address how a Roth designated employer contribution should be reported for tax purposes, (e.g., Form W-2, Form 1099-R), guidance from the IRS is anticipated. Until guidance is issued, employers may want to postpone offering this optional provision.
Beginning in 2024, student loan payments made by an employee may be treated as deferrals for purposes of matching contributions. If an employer chooses to implement this provision, the employer will make matching contributions under a 401(k) or 403(b) plan with respect to qualified student loan payments as though those payments were elective deferrals. The employee is required to certify to the employer that the employee actually made the student loan payment; the employer may rely on the employee’s certification. This provision requires a plan amendment.
An employer may adopt a qualified retirement plan for a taxable year after the last day of the taxable year provided it is adopted before the due date, included extensions, for filing the employer’s tax return for the taxable year. For example, an employer who wants to adopt a qualified retirement plan for calendar year 2023 has until Sept. 15, 2024 for a partnership or corporate employer pass-through entity, or Oct. 15, 2024 for a C-corporation or self-employed employer, to adopt the plan.
Employer-sponsored retirement plans may correct failures to maintain the plan’s tax qualified status under the Employee Plans Compliance Resolution System (EPCRS). With the enactment of SECURE 2.0, plan corrections are made easier by expanding self-correction and eliminating the deadline to make the correction. One area where self-correction will be beneficial is with plan loans that do not satisfy the requirements as to amount and payment terms. Employers should review plan loans to participants and self-correct any that are not compliant. Treasury is required to revise Rev. Proc. 2021-30 to take into account the changes made by SECURE 2.0 no later than Dec. 29, 2024.
If a part-time employee has worked at least 500 hours in three consecutive years and is at least age 21 by the last day of the three consecutive year period, he or she must be offered the opportunity to make elective deferrals to the employer’s 401(k) plan. For purposes of determining whether an employee has worked at least 500 hours per year in three consecutive years, plans are not required to take into account hours of service in plan years beginning before 2021. This rule is changed to two years beginning in 2025.
Although not required until the 2025 plan year, planning for automatic enrollment is an important consideration for employers who adopt new 401(k) or 403(b) plans on or after Dec. 2022. The employer will be required to automatically enroll participants in the plan at an initial deferral rate of between 3% and 10% of compensation once they satisfy the plan’s eligibility requirements. After the initial year, the rate of deferral automatically increases by 1% until it reaches at least 10% but not more than 15%. This provision does not apply to 401(k) or 403(b) plans adopted prior to Dec. 29, 2022, small businesses with 10 or fewer employees, new businesses in existence for less than three years, church plans, or governmental plans. This provision requires a plan amendment.
The timing for retirement plan amendments made pursuant to SECURE 2.0 is on or before the last day of the first plan year beginning on or after Jan. 1, 2025; governmental plans have until 2027. Although the deadline for plan amendments is not for another year, plans must be operationally compliant with required provisions and any optional provisions that are implemented.
The applicable dollar limits for health savings accounts (HSAs), high-deductible health plans (HDHPs) and excepted benefit health reimbursement arrangements (HRAs) for 2024 are as follows:
|Health and welfare benefit plan limitation
Health savings account (HSA) contribution limits (CY 2024):
HDHP plan annual deductible (CY 2024):
HDHP out-of-pocket minimums (CY 2024):
Excepted benefit under HRA annual contribution limit (PY beginning in 2024)
We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the Federal Insurance Contributions Act (FICA) “special timing rule”, deferred compensation is required to be considered at the later of the time of the performance of services or when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit -- this is usually at such time as the benefit becomes vested. This, of course, contrasts with the Self-Employed Contribution Act (SECA) rules that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should confirm that the deferred compensation, even if not distributed, is taken into account in accordance with the “special timing rule” so that required FICA taxes are correctly paid.
Since 2020, there is no longer an age limit prohibition for making contributions to a traditional IRA.
Individuals who have reached age 50 are eligible to make catch-up contributions. Beginning in 2024, the $1,000 catch-up amount will be indexed for inflation on an annual basis. Catch-up contributions to traditional IRAs will continue to be pre-tax. The indexed amounts are released in the third quarter.
The required beginning age for an RMD is 73 for individuals who reach age 72 in 2023 or later. For example, an individual who attains age 72 in 2023 does not have an RMD requirement until the individual turns age 73 in 2024. In addition, the individual has until April 1, 2025 to take the first RMD. This RMD requirement applies to employer-sponsored retirement plans and IRAs, including SEP IRAs and SIMPLE IRAs. By prolonging the RMD age, individuals will have more time to increase their retirement savings to use during their lifetime.
The RMD rules do not apply to Roth IRAs. Beginning in 2024, the RMD requirement will no longer apply to Roth 401(k) accounts.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.