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Compliance Newsletter January 2023

SECURE 2.0 Act of 2022

President Joe Biden signed into law the Consolidated Appropriations Act of 2023 on December 29, 2022, which contains within it the SECURE 2.0 Act of 2022 (SECURE 2.0) that includes changes to retirement plans and Individual Retirement Arrangements (IRAs).

Changes

Listed below are highlights of many of the changes that impact retirement plans and IRAs.

Auto Enrollment for 401(k) and 403(b) Plans

For plan years beginning on or after January 1, 2025, auto enrollment is required for newly established 401(k) and 403(b) plans with some exceptions. The default contribution rate must be at least 3 percent, but not more than 10 percent, plus an automatic contribution increase of 1 percent per year up to a maximum of at least 10 percent, but not more than 15 percent.

Saver’s Match

Effective January 1, 2027, individuals with a modified adjusted gross income of $41,000 to $71,000 (if filing on a joint return), $30,750 to $53,250 (if filing as head of household), or $20,500 to $35,500 (if filing single or married filing separately) and are contributing more than $100 in the tax year to an IRA or retirement plan may receive up to the lesser of 50 percent contributed or up to $2,000 per individual as a matching contribution. This matching contribution is paid by the federal government directly to the individual’s IRA or retirement plan after income taxes have been filed.

Age Increase for Required Minimum Distributions

Effective January 1, 2023, the required minimum distribution (RMD) age will increase from age 72 to age 73 for individuals who will be attaining age 72 on or after January 1, 2023. For individuals who will attain age 74 on or after January 1, 2033, the RMD age will increase to 75.

Indexing IRA Catch-up Limit

The IRA contribution limit for individuals who have attained age 50 or older is currently $1,000. Effective January 1, 2024, this limit will be indexed similarly to the regular IRA contribution limit.

Increase Catch-up Limit

Effective January 1, 2025, catch-up limits for individuals aged 60 to 63 will increase to the greater of $10,000 or 150 percent of the regular catch-up amount in 2024. Catch-up contributions for participants with compensation in excess of $145,000 in the prior year must be made as a Roth contribution.

Matching on Student Loan Payments

Effective for plan years beginning on or after January 1, 2024, SIMPLE IRAs, 401(k) and 403(b) retirement plans, as well as governmental 457(b) plans allow employers to make matching contributions to “qualified student loan repayments,” which would be considered elective contributions for this purpose.

De Minimis Financial Incentives for Contributing to Retirement Plan

Effective for plan years beginning on or after December 30, 2022, plan sponsors may offer de minimis financial incentives, such as low-dollar gift cards, to boost employee participation. These incentives may not be paid from plan assets.

Withdrawals for Certain Emergency Expenses

Effective January 1, 2024, plans may allow for one emergency expense withdrawal per year for personal or family emergency expenses for up to a maximum of $1,000. This withdrawal may be repaid within a 3-year period. If it is not repaid, then a new emergency withdrawal may not generally be taken until the 3-year repayment period ends.

Coverage for Part-Time Workers

Effective for plan years beginning on or after January 1, 2025, 401(k) and 403(b) plans that are subject to ERISA will need to maintain dual eligibility where an employee may become eligible for the plan after either completing one year of service in which they work 1,000 hours or 2 consecutive years in which they work at least 500 hours each year. Service for 12-month periods beginning prior to January 1, 2023, will be excluded.

Rollovers from Section 529 College Savings Accounts to Roth IRAs

Effective January 1, 2024, unused Section 529 college savings that have been maintained for 15 years may be directly rolled over to a Roth IRA under certain conditions.

Emergency Savings Linked to an Individual Account Plan

Effective January 1, 2024, plan sponsors of defined contribution plans may allow non-highly compensated individuals to save up to $2,500 in a Roth account under the plan for the purpose of short-term savings. Participants must be allowed to take at least one withdrawal per month and these distributions will not be considered eligible rollover distributions. Plan sponsors may automatically opt employees into these accounts at no more than three percent of the participant’s salary.

Certain RMD Barriers Removed from Annuity Payments

Required minimum distribution (RMD) rules may have prohibited certain annuity provisions, such as cost of living increases and some period certain guarantees. Effective January 1, 2023, these provisions may be allowed under certain circumstances.

QLAC

Qualifying longevity annuity contracts (QLACs) are generally deferred annuities that begin payment at the end of an individual’s life expectancy. The Secretary of the Treasury is expected to amend QLAC regulations within the next 18 months. Changes should include repealing the 25 percent limit for QLAC premiums and increase the dollar limit initially from $125,000 to $200,000, with indexing in future years.

RMD Excise Tax Reduced

Effective January 1, 2023, the penalty for failure to take an RMD drops from 50 percent to 25 percent. Also, if a failure to take an RMD from an IRA is corrected in a timely manner as defined in SECURE 2.0, the penalty is dropped from 25 percent to 10 percent.

Retirement Lost and Found

Within two years, the Department of Labor will establish an online searchable database to be known as the “Retirement Savings Lost and Found” that will allow individuals to locate contacts for retirement savings that they may have lost track of.

Increase Small Amount Force Out (SAFO) limits

Effective January 1, 2024, the SAFO limit will be increased from $5,000 to $7,000.

Expand EPCRS

Within the next two years, guidance will be published to update the IRS Employee Plans Compliance Resolution System (EPCRS) to allow for more types of errors to be corrected through self-correction and allow for the correction of inadvertent IRA errors.

Governmental 457(b) Eliminate “First Day of the Month”

Effective January 1, 2023, participants in governmental 457(b) plans will no longer be required to request changes to deferral rates prior to the beginning of the month. Instead, they will be allowed at any time prior to the date the compensation being deferred is available.

IRA Qualified Charitable Distributions

Effective January 1, 2023, IRA one-time charitable distributions may increase from $50,000 to $100,000. This new limit may be indexed for inflation in future years.

Top Heavy Testing for Excludable Employees

Effective for plan years beginning on or after January 1, 2024, employers may exclude employees who are otherwise excludable under the general age and service rules for top heavy testing purposes.

Qualified Birth or Adoption Repayments Limited to Three Years

Repayment for Qualified Birth or Adoption distributions will be limited to three years from the date of distribution. Qualified Birth or Adoption distributions made before December 29, 2022, have until December 31, 2025 to make a repayment.

Employee Certification for Hardship Withdrawals

Effective for plan years beginning on or after December 30, 2022, 401(k) or 403(b) plan sponsors may rely on an employee’s written certification that their deemed hardship withdrawal is on account of a valid financial need according to the plan, not in excess of the amount required to satisfy the financial need, and that there are no reasonable alternative means to satisfy such financial need. A similar rule applies for unforeseeable emergency distributions from a governmental 457(b) plan.

Domestic Abuse Withdrawals

Effective January 1, 2024, a plan may allow for the lesser of $10,000, indexed for inflation, or 50 percent of the participant’s vested account balance for domestic abuse reasons, such as escaping an unsafe situation. This withdrawal may be repaid to the retirement plan within three years from the date the distribution is made.

Eliminating Certain Notices Related to Unenrolled Participants

Effective for plan years beginning on or after January 1, 2023, plan sponsors will no longer be required to provide certain notices to participants who are not participating in the retirement plan but have received the summary plan description and any other required eligibility notices. Instead, plan sponsors must provide an annual reminder notice of the participant’s eligibility to participate and provide any participant-requested documents.

RMD Not Required from Roth During Participant’s Lifetime

Effective for 2024 RMD payments and later, designated Roth accounts in an employer retirement plan are not required to distribute an RMD while the participant is still living.

Permanent Rules for Federally Declared Disaster Distributions

Effective for disasters with incident periods beginning on or after January 26, 2021, IRAs and retirement plans may allow for distributions for federally declared disasters up to $22,000. The distribution will be accounted for as gross income for the individual over a three-year period. Distributions may be repaid to the IRA or retirement plan. Additionally, plans may permit a larger loan amount and additional time for repayment for affected individuals.

Paper Statement Requirements

Effective for plan years beginning on or after January 1, 2026, an annual paper statement is required for defined contribution plans unless a participant elects otherwise. For defined benefit plans, a paper statement is required once every three years unless the participant elects otherwise. Additional guidance is expected by December 31, 2024.

Grace Period for Elective Deferral Failures

Effective for errors with a required correction date on or after January 1, 2024, the IRS will allow plan sponsors 9 ½ months after the end of the plan year in which the mistake was made (may be earlier if employee notified the plan sponsor of the error) to correct reasonable errors in administering automatic enrollment and automatic escalation features.

Exceptions to the Federal 10 Percent Additional Income Tax

Highlighted below are new distribution types that will not be subject to the federal 10 percent additional income tax generally applied to distributions before age 59 ½. Some or all of these distributions may not be allowed in all retirement plans:

  • Distributions to a terminally ill individual
  • Emergency expense withdrawals (first four per year)
  • Distributions to firefighters
  • Domestic abuse withdrawals
  • Distributions to public safety officers with at least 25 years of service with the employer sponsoring the retirement plan
  • Distributions to state and local government corrections officers
  • Federally declared disaster distributions
  • IRA corrective excess contribution distributions

403(b) plan changes

  • Allowed to form multiple employer or pooled employer plans (MEP/PEPs)
  • Hardship withdrawal rules conformed to those for 401(k) plans which expands the available contribution sources, including earnings, for such withdrawal.
  • Allowed 403(b) plans to invest in collective investment trusts (CITs) but contains tax law change only. Additional statutory changes will be needed in the future for this provision to be workable.

Starter 401(k) or Safe Harbor 403(b)

Effective for plan years beginning on or after January 1, 2024, an employer who does not currently sponsor a qualified retirement plan may adopt a starter 401(k) or safe harbor 403(b) plan that includes the following:

  • Contribution limit set at $6,000 per calendar year (indexed)
  • Exempt from nondiscrimination and top-heavy testing
  • Must have auto enrollment, which can be anywhere between 3 percent and 15 percent
  • Does not permit employer contributions

Conclusion

There is additional guidance expected from the IRS and DOL in the coming months. As always, we will keep you informed of any changes.

Proposed Regulations for Remote Notary or Plan Sponsor Witnessing

On December 30, 2022, the Internal Revenue Service (IRS) published proposed regulations relating to the use of an electronic medium for participant elections and spousal consents by providing alternatives to in-person witnessing. Proposed regulations may be relied upon until the final regulations are published.

History

In response to social distancing concerns related to COVID-19, the IRS issued temporary relief beginning in 2020 from the physical presence requirement outlined within Treasury Regulations when participant or spousal signatures must be witnessed by a plan representative or notary public. Plan representatives or notary publics were required to meet specific criteria in order to qualify for relief. This relief was subsequently extended through December 31, 2022.

Proposed Regulations

Proposed regulations largely follow what was in place beginning in 2020. They also clarify that the “special rules” for the use of an electronic medium for participant elections also apply to spousal consents. Highlighted below are requirements for notary public and plan representatives to remotely witness participant elections or spousal consents (the individual):

Notary public:

  • Live audio-video technology is used,
  • “Special rules” are met (see below),
  • Remote witnessing is consistent with state law requirements that apply to the notary public, and
  • Plans that accept remote notary must also accept physical presence witnessing.

Plan Representative

  • Live audio-video technology is used,
  • “Special rules” are met (see below),
  • The live audio-video technology must allow for direct interaction,
  • A recording of the audio-video conference must be retained by the plan,
  • The individual must fax or transmit the signed document electronically to the plan representative on the same day it was signed, and
  • The plan representative must acknowledge that the signature has been witnessed and transmit the signed document, including the acknowledgement, back to the individual.
    • The individual must have effective ability to access the electronic medium, and
    • At the time the notice is provided, the individual must be advised that they may request and receive the notice on paper at no charge.

Special rules that apply to the individual:

  • The individual must be effectively able to access the electronic medium,
  • The system must be reasonably designed to preclude any person other than the individual from making the election or spousal consent,
  • There must be reasonable opportunity for the individual to review, confirm, modify, or rescind the terms of the election or consent before it becomes effective, and
  • The individual must receive confirmation within a reasonable period of time of the effect of the election or consent through either written paper or electronic medium.

Comments and Public Hearing

Written or electronic comments must indicate IRS and REG-114666-22 and must be received by March 30, 2023. Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at www.regulations.gov.

A telephonic public hearing is scheduled for April 11, 2023, at 10:00 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received by March 30, 2023. If no outlines are received, the public hearing will be cancelled.

Disaster Relief for Florida and New York

In response to Hurricane Nicole that impacted parts of Florida beginning November 7, 2022, and severe winter storms in parts of New York that began December 23, 2022, the Internal Revenue Service (IRS) extended certain deadlines for taxpayers in impacted areas. Penson Benefit Guaranty Corporation (PBGC) also offers relief for certain deadlines according to a one-time announcement published in the Federal Register on July 2, 2018.

Impacted Areas

Individuals who reside or have a business anywhere within the covered area, as well as relief workers affiliated with a recognized government or philanthropic organization assisting in the relief effort, may be eligible for extended deadline relief.

Florida covered areas include the counties of Alachua, Baker, Bradford, Broward, Calhoun, Charlotte, Citrus, Clay, Collier, Columbia, DeSoto, Dixie, Franklin, Gadsden, Gilchrist, Glades, Gulf, Hamilton, Hardee, Hendry, Hernando, Highlands, Hillsborough, Holmes, Indian River, Jackson, Jefferson, Lafayette, Lee, Leon, Levy, Liberty, Madison, Manatee, Marion, Miami-Dade, Nassau, Okeechobee, Orange, Osceola, Palm Beach, Pasco, Pinellas, Polk, Putnam, Sarasota, Seminole, St. Johns, St. Lucie, Sumter, Suwannee, Taylor, Union, Volusia, Wakulla, and Washington. The Miccosukee Tribe of Indians of Florida and the Seminole Tribe of Florida also qualify for tax relief.

The covered areas in New York include Erie and Genesee counties.

Deadline Relief

For Florida, certain deadlines are extended until March 15, 2023, if they fall on or after November 7, 2022. In New York, certain deadlines are extended until April 18, 2023, if they fall on or after December 23, 2023.

Below is a partial list of retirement-impact tax filing and payment deadlines that may be extended:

  • Retirement plan loan repayments under Internal Revenue Code section 72(p)(2)
  • Required minimum distributions under Internal Revenue Code section 401(a)(9)
  • The 10% additional income tax continues to not apply even if the following is missed during the relief period:
    • Substantially equal payments made over the participant’s life or joint lives of the participant and designated beneficiary
    • Deadline for using a distribution from an IRA for a first-time home purchase by the close of the 120th day after the distribution is received
  • Prior tax year contribution deadlines for retirement plans
  • Indirect rollover distribution deadlines
    • 60-day rollovers
    • Rollover of qualified loan offsets
  • Refunds as a result of
    • Excess deferrals
    • ADP/ACP non-discrimination testing
    • Eligible automatic contribution arrangement (EACA) withdrawals
    • Excess IRA contributions
  • Deadline for recontributing qualified reservist distributions
  • Form 5500 and Form 8955-SSA filing Form 5498 for IRAs
  • PBGC premium payments
  • PBGC deadlines that are based on the Form 5500 deadline
  • Single Employer Plan Termination Forms 500 and 501

Additional Resources

For any questions related to IRS deadlines and other disaster-related issues, the IRS has a toll-free number at 1-866-562-5227. For PBGC disaster-related questions, call 1-800-736-2444 ext. 4136.

The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Company®, a member of the Principal Financial Group®, Des Moines, IA 50392.

Principal Life Insurance Company, Des Moines, Iowa 50392-0001, www.principal.com, Principal®, Principal Financial Group® and the Principal logo design are registered trademarks of Principal Financial Services, Inc., a Principal Financial Group company, in the United States and are trademarks and service marks of Principal Financial Services, Inc., in various countries around the world.

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