By now you probably know that the $1.7 billion Budget Reconciliation Act of 2023 (Act) that kept the Federal government funded was enacted on December 29, 2022. You are probably also aware that the legislation known as SECURE 2.0 was part of the legislation. However, you might not know that there are close to a hundred provisions affecting retirement plans contained in over 400 pages of the 4,000+ page Act. That is far too many to try to summarize in a single blog article. Therefore, I will be summarizing key provisions over several articles in the coming weeks.
The goal of the legislation is to improve the private retirement system by providing incentives for employers to adopt plans, making it easier to administer plans and correct errors, and providing incentives for increased participation by employees. It is important to note that while some provisions are effective immediately, and affected plans must be operated accordingly, plan documents generally need not be amended before 2025. While the effective dates vary by provision, this article will address some of the provisions that are effective now.
Changes to EPCRS. The Act legislatively expands the types of plan errors that can be corrected under the IRS’s Employee Plans Compliance Resolution System (EPCRS), including creating a new type of error, the “eligible inadvertent failure” (EIF). An EIF is a failure that occurs despite the existence of practices and procedures that satisfy the EPCRS principles or similar principles for IRAs. However, an EIF cannot be an egregious failure or one relating to misuse of plan assets or an abusive tax avoidance transaction. EIFs may be self-corrected at any time.
The Act specifically includes EIFs dealing with plan loans and provides that if self-corrected under EPCRS, it shall be treated as being self-corrected under the DOL’s Voluntary Fiduciary Correction Program. The Act also directs the Treasury to expand EPCRS to allow EIFs of IRAs, including waiving the draconian excise tax for failure to take required minimum distributions and correcting erroneous rollovers by nonspouse beneficiaries of inheritied IRAs.
The Treasury Department is to issue guidance on these provisions within 2 years of the date of enactment. These are welcome changes although the IRS now has to incorporate them into EPCRS by issuing a new Revenue Procedure outlining the program. Currently, insubstantial operational failures may be self-corrected at any time and I have been a critic of how those rules are written. See IRS Revamps EPCRS: Expands SCP; Eliminates Anonymous VCP Submissions; Expands Overpayment Safe Harbor to DB Plans; and A More In Depth Look At The Expansion Of Self-Correction Under EPCRS. Hopefully, this time we will get clearer rules that reduce the risk of self-correction.
Required Minimum Distributions. The Act contains many provisions regarding required minimum distributions (RMDs). For participants turning age 72 after December 31, 2022, the age for taking RMDs is raised to age 73. It further raises the age to 75 for participants turning age 74 after 2032. The SECURE Act of 2019 had raised the age from 70 1/2 to 72.
The Act also reduces the excise tax for failing to take RMDs from 50% to 25%. If the failure to take RMDs is from an IRA it can be further reduced to 10% if corrected in a timely manner (generally the earlier of 2 years of when it should have been taken or when a notice of deficiency is received or the the tax is assessed).
Self-Certification of Hardship Event or Unforseeable Emergency. Administrators of 401(k) or 403(b) plans can now rely on an employee’s written self-certification that he or she has experienced a safe harbor hardship event described under the regulations (e.g., medical bills; home repairs, funeral expenses) when applying for a hardship distribution. Likewise, administrators of governmental 457(b) plans may rely on such self-certification that the participant is faced with an unforeseeable emergency described in regulations. Previously administrators could only rely on self-certification that the amount requested was not in excess of the amount required to satisfy the need, and the participant still had to provide evidence that the event occurred.
Election Of Roth Employer Contributions. 401(k) plans, 403(b) plans, and governmental 457(b) plans may now allow participants to elect to have matching contributions or nonelective employer contributions made on a Roth (after-tax) basis. Whether the plan so provides is up to the discretion of the plan sponsor as a matter of plan design.
Conclusion. As mentioned, there are too many provisions to try to summarize in a single blog article. These are some of the major changes made by the Act that are currently effective. Stay tuned as later posts will summarize other provisions becoming effective in later years.