Compliance Newsletter June 2023

• Congress Clarifies SECURE 2.0 Intentions
  Congress has stated their intentions regarding some unclear language in the SECURE 2.0 Act.
• SECURE 2.0 Guidance Issued for EPCRS
  The IRS has provided interim guidance for provisions of SECURE 2.0 related to EPCRS.
• Disaster Relief for Arkansas, Tennessee, Indiana, Oklahoma, Florida, California, the Northern Mariana Islands, and Guam
  The IRS and PBGC extended certain deadlines for taxpayers in response to natural disasters in several US states and territories.

Congress Clarifies SECURE 2.0 Intentions

In a letter to the Secretary of the Treasury and the Commissioner of the Internal Revenue Service (IRS), Congress provided clarifying language around their intent in certain provisions of the SECURE 2.0 Act of 2022 (“SECURE 2.0”). The letter lays the groundwork for the US Department of the Treasury and the IRS to use Congress’s intent when enforcing laws regarding the issues Congress identified.

Clarification

Since SECURE 2.0 was signed into law, questions have remained around a few provisions. Congress has provided their intent on the following sections:

• Section 102 increased the credit for small employer pension plan startup costs by giving a partial credit to eligible employers for a portion of the employer contributions to the plan. The provision could be interpreted to mean that the new startup credit was subject to existing limits. However, Congress clarified that the intent was for the new credit to be separate from the regular credit and therefore, not subject to the limits of the existing credit.
• Section 107 increased the required beginning date for required minimum distributions (RMDs) this year from age 72 to 73 for certain individuals. There has been some confusion, though, about who would be eligible for the subsequent increase to age 75 effective January 1, 2033. Congress clarified that individuals who turn 73 after December 31, 2032 will be eligible for RMD at age 75.
• Section 601 allows SIMPLE IRA plans and SEP plans to include a Roth IRA. That section could be interpreted to mean that contributions to a SIMPLE IRA or SEP plan are included in determining the contribution limit to a Roth IRA. However, Congress stated that their intention is that contributions to a SIMPLE IRA or SEP plan are not counted toward the Roth IRA contribution limit.
• Section 603 requires that catch-up contributions to retirement plans be made on a Roth basis for participants earning more than $145,000 from the employer in tax years beginning after 2023. Another change meant to align with Section 603 could be interpreted to mean that catch-up contributions will be disallowed starting in 2024. However, the intent was not to remove the ability to make catch-up contributions for participants who meet the age requirement.

Next Steps

Congress has stated that they intend to introduce technical corrections legislation that may also clarify other confusing or misleading language. As always, we’ll keep you informed of any changes that could impact retirement plans.

SECURE 2.0 Guidance Issued for EPCRS

The Internal Revenue Service (IRS) issued Notice 2023-43 (The Notice), which provides interim guidance related to the expansion of the Employee Plans Compliance Resolution System (EPCRS) provided in Section 305 of the SECURE 2.0 Act of 2022 (SECURE 2.0).

Background

EPCRS provides a system of correction programs for plan sponsors to correct plan errors. Correction programs include:

• Self-Correction Program (SCP), which allows plan sponsors to correct certain plan failures without payment of a fee or facing any sanctions, if certain conditions are met. Generally, corrections must be completed by the last day of the third plan year in which the error occurred.
• Voluntary Correction (VCP) program, where plan sponsors who are not under examination may pay a limited fee and seek/receive the IRS’s approval of a plan failure correction.
• Audit Closing Agreement Program (Audit CAP), which allows plans that are under examination to correct certain plan errors and pay a sanction.

Section 305 of SECURE 2.0 expanded the three-year timeline provided under SCP to generally an indefinite correction period for “eligible inadvertent failures” that occur despite the existence of practices and procedures that satisfy the standards set forth in EPCRS. Failures that are considered egregious, divert or misuse plan assets, or relate directly or indirectly to an abusive tax avoidance transaction are not eligible for SCP.

Clarification

Notice 2023-43 provides that the changes outlined in Section 305 of SECURE 2.0 must satisfy these EPCRS provisions in order to qualify for SCP:

• The plan sponsor must have established practices and procedures reasonably designed to promote and facilitate overall compliance with applicable Code requirements;
• The plan sponsor must apply the correction principles and rules of general applicability set forth in section six of EPCRS;
• The plan sponsor has the option to self-correct using a correction method set forth in Appendix A or B of EPCRS; and
• A plan sponsor may not use a correction method that is prohibited under EPCRS

The Notice also lists several types of inadvertent failures that would not qualify for SCP, including:

• A failure to initially adopt a written plan.
• A failure in an orphan plan.
• A significant failure in a terminated plan.
• A failure that involves excess contributions to a SEP or SIMPLE IRA plan and that is corrected by permitting the excess contributions to remain in an affected participant’s IRA.
• A demographic failure that is corrected using a method other than one set forth in Treasury Regulations.
• An operational failure that is corrected by a plan amendment that conforms the terms of the plan to the plan’s prior operations in a manner that is less favorable for a participant than the original terms of the plan.
• A failure in an ESOP that involves Section 409, in which tax consequences other than plan disqualification are associated with the failure.
• Certain document failures for SEP or SIMPLE IRA plans.

The IRS also clarified that SCP cannot be used to correct errors identified by the IRS unless the employer can demonstrate that they had already made a specific commitment to correct the failure. The self-correction must also be completed within a reasonable time frame after the failure is identified.

Plan sponsors may rely on the guidance provided in The Notice until EPCRS is updated. Self-correction of eligible inadvertent failures can be used for errors occurring before SECURE 2.0 was enacted on December 29, 2022.

Public Comments

The US Treasury Department and the Internal Revenue Service are seeing public comments, particularly in regard to:

• Additional correction methods that are required to be used to correct eligible inadvertent failures, including general principles of correction if a specific correction method is not specified by the Secretary; and
• A description of common IRA failures and suggested correction methods for those failures, and the possibility of expanding EPCRS to be available for both IRA custodians and IRA owners.

Comments should be submitted on or before August 23, 2023 via the Federal eRulemaking Portal at www.regulations.gov or by mail at:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2023-43), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Be sure to reference Notice 2023-43 when submitting public comments.

Disaster relief for Arkansas, Tennessee, Indiana, Oklahoma, Florida, California, the Northern Mariana Islands, and Guam

In response to natural disasters and severe storms in Arkansas, Tennessee, Indiana, Oklahoma, Florida, California, the Northern Mariana Islands and Guam, the Internal Revenue Service (IRS) extended various deadlines for impacted businesses and taxpayers. Pension Benefit Guaranty Corporation (PBGC) also offers deadline relief according to a one-time announcement published in the Federal Register on July 2, 2018.

Impacted Areas

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

Arkansas: Cross, Lonoke, and Pulaski counties
Tennessee: Cannon, Giles, Hardeman, Hardin, Haywood, Johnson, Lewis, Macon, McNairy, Morgan, Rutherford, Tipton and Wayne counties
Indiana: Allen, Benton, Clinton, Grant, Howard, Johnson, Lake, Monroe, Morgan, Owen, Sullivan, and White counties
Oklahoma: Cleveland, McClain, and Pottawatomie counties
Florida: Broward County
California: Modoc and Shasta counties
Commonwealth of the Northern Mariana Islands: Agrihan, Alamagan, Pagan, Rota, Saipan and Tinian islands
Guam: all of Guam

Deadline Relief

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.

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