As we move into the final quarter of 2022, Congress is considering two separate bills that would make significant changes to retirement plans. The Senate is expected to act on the bipartisan Enhancing American Retirement Now (EARN) Act introduced by the Senate Finance Committee in September 2022. In addition, the Securing a Strong Retirement Act of 2022 (SECURE 2.0) was passed by the House in June 2022 and has bipartisan support. SECURE 2.0 expands and clarifies certain provisions of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019. With all of that said, the following topics of interest will be important for you to consider both for year-end tax planning and perhaps for tax planning in the coming year:
- Maximum age for IRA contributions: As of 2020, there is no longer an age limit prohibition for making contributions to a traditional IRA.
- IRA catch-up contributions: Currently, catch-up contributions to IRAs are limited to $1,000. Both SECURE 2.0 and the EARN Act would index the limit on an annual basis. Catch-up contributions to IRAs would continue to be pre-tax.
- Required age for required minimum distributions (RMD) is age 72: This allows taxpayers to retain their retirement savings in tax-favored arrangements, thus delaying income tax on the RMDs. SECURE 2.0 would gradually increase the RMD age to 75 over a 10-year period. The EARN Act would eliminate the graded schedule and increase the RMD age to 75 from 72 beginning in 2032.
- Deadline for plan amendments to tax qualified plans is extended: The IRS extended the deadline for adopting plan amendments to comply with the SECURE Act and the Coronavirus Aid, Relief and Economic Security (CARES) Act to 2025 from 2022. However, the amendment deadline for COVID-19 relief provisions in the CARES Act has not been extended: coronavirus-related distributions, increase in the plan loan cap and extension of loan repayment periods. Therefore, plan sponsors should proceed with amendments for these provisions based on the original deadline which ends the last day of the first plan year beginning in January 2022.
- Catch-up contributions to employer-sponsored plans: Under current law, catch-up contributions are pre-tax unless the employer-sponsored retirement plan allows them to be after-tax Roth contributions. The EARN Act would require catch-up contributions to employer-sponsored qualified retirement plans to be designated Roth contributions for taxable years beginning in 2024. Although this provision is also included in SECURE 2.0, the effective date would be for taxable years beginning in 2023.
- Extended due date for adopting a qualified retirement plan: 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, including 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 2022 has until Sept. 15, 2023, for a partnership or corporate employer, or Oct. 15, 2023, for a self-employed employer, to adopt the plan.
- 401(k) plan sponsors with long-term, part-time employees: An employer who sponsors a 401(k) plan is required to include eligible part-time employees as participants for purposes of making elective deferrals. An eligible part-time employee is an employee who has worked at least 500 hours in three consecutive years and is at least age 21. Both SECURE 2.0 and the EARN Act would reduce the three-year rule to two years.
- Pooled employer plans for retirement benefits: Pooled employer plans permit unrelated employers to participate in a single plan. Employers must follow the qualification requirements to ensure that one employer’s failure to meet the qualification requirements will not result in the disqualification of the plan.
- Nonrefundable tax credit for startup costs of adopting a new qualified retirement plan: To encourage an employer to adopt a new qualified retirement plan, the employer may take advantage of a tax credit up to 50% of startup costs incurred for adopting the plan. The tax credit is available to an employer with 100 or fewer employees. The amount of the credit for a taxable year is the greater of (1) $500 or (2) the lesser of (a) $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan or (b) $5,000. The credit is for three years. Both SECURE 2.0 and the EARN Act would modify the credit by reducing the number of employees for an employer to qualify and increasing the credit.
- Federal Insurance Contributions Act (FICA) taxation rules for nonqualified deferred compensation: As a reminder, an employer is required to subject deferred compensation to FICA taxation at the appropriate time. Generally, pursuant to a “special timing rule,” deferred compensation is required to be taken into account at such time as the benefit becomes vested. However, the Self-Employed Contributions Act (SECA) rules generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit.
For more information on this topic, contact our team.