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Compliance Newsletter November 2022

Puerto Rico Impacts from Hurricane Fiona

As a result of Hurricane Fiona, certain special disaster distributions may be allowed for qualified retirement plans and individual retirement accounts (IRA) established under the Internal Revenue Code of Puerto Rico of 2011. Please note that this does not change distribution provisions for retirement plans or IRAs qualified within the United States.

Background

Puerto Rico Governor Pedro Pierluisi issued an executive order on September 17, 2022, declaring a state of emergency due to Hurricane Fiona. On September 27, 2022, the Puerto Rico Department of the Treasury activated the Distributions Due to a Disaster Declared by the Governor under the Puerto Rico Internal Revenue Code. As a result, qualified retirement plans and IRAs established under the Internal Revenue Code of Puerto Rico of 2011 may allow for certain distributions as a result of Hurricane Fiona.

Eligibility Requirements

  • Distributions may be a total or partial distribution to active or terminated individuals used to cover eligible expenses. Annuities or installment payments, though, will not be considered eligible distributions.
  • Other plan distribution options, such as loans, are not required prior to requesting the special disaster distribution.
  • The first $10,000 is not subject to withholding.
  • Total distributions for this purpose may not exceed $100,000.
  • Distributions must be made from pre-tax contributions and earnings first.
  • Any distribution in excess of $10,000 will be subject to a special 10% tax instead of any other tax imposed by Puerto Rico, including the Alternate Basic Tax.
  • Individuals must be a resident of Puerto Rico for the entire 2022 tax year.
  • Eligible expenses include, but are not limited to:
    • Expenses to repair a residence, motor vehicle, or business
    • Expenses needed to verify that the property meets established construction codes
    • Expenses incurred to acquire a new principal residence or business
    • Payment of medical expenses
    • Replacement or repair of furniture
    • Food or gas purchases
    • Repair power generators
    • Lodging and meal expenses during the recovery period as a result of total or partial destruction of principal residence.
  • Available to participants, their spouse, descendants, or ascendants.
  • Contributions will not be suspended after this special disaster distribution.

Effective Date

Distributions must be made between October 6, 2022,and December 31,2022. It is not necessary, though, for the expenses related to the special disaster distribution to be incurred within this period. In other words, a distribution may be requested during the eligibility period in order to defray eligible expenses incurred at a later date.

Limited Required Minimum Distribution Excise Tax Relief

The Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2022-53 that provides excise tax relief for certain beneficiaries of a 2021 or 2022 defined contribution required minimum distributions (RMDs) from a retirement plan or individual retirement arrangement (IRA).

Background

RMD requirements were amended as part of the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act). Part of the RMD changes within the SECURE Act included extending the 5-year rule to 10 years for a defined contribution retirement plan or IRA. In other words, with some exceptions, once the retirement plan participant, or IRA owner(referred to collectively as the employee)dies, the remaining account balance generally must be paid within 10 years to the designated beneficiary.

The SECURE Act also established the definition of an eligible designated beneficiary (EDB) which includes the employee’s surviving spouse, the employee’s children, a disabled or chronically ill beneficiary, or an individual not more than 10 years younger than the employee. EDBs may receive RMDs for their lifetime; however, at their death, the designated beneficiary for the EDB must receive the remaining account balance generally by the end of the 10thyear following the EDB’s death.

Proposed regulations issued on February 24, 2022,clarified that if the employee or EDB dies on or after the employee’s required beginning date, the beneficiary must continue to receive annual RMDs in the first calendar year following the year the employee died with full distribution made no later than the 10th calendar year following the employee’s death.

Tax Relief

In response to several comments received after the proposed regulations were published, the IRS is waiving the 50% excise tax that a beneficiary may ordinarily be subject to if certain RMD payments were missed in the 2020 and 2021 tax years.

The excise tax waiver is in effect if the following is true for a beneficiary of an employee:

  • Employee died in 2020 or 2021,
  • The employee died after their required beginning date, and
  • The beneficiary is not taking a lifetime or life expectancy payment of the RMD(available to EDBs only).

The EDB beneficiary may also be subject to an excise tax waiver if the following is true:

  • EDB died in 2020 or 2021and
  • EDB was taking a lifetime or life expectancy payments.

Additionally, a defined contribution plan that failed to make either of the RMDs outlined above will not be treated as having failed to satisfy the Internal Revenue Code merely because that distribution was missed in 2020 or 2021.

PBGC Proposes Withdrawal Liability Rates for Multiemployer Plans

In response to recent questions, the Pension Benefit Guaranty Corporation (PBGC) is proposing to provide a set of interest rate assumptions that may be used by plan actuaries for multiemployer plans to determine a withdrawing employer’s liability under the plan.

Background

When an employer withdraws from a multiemployer plan, they are responsible for funding their share of any unfunded vested benefits (UVBs) under the plan as of the end of the plan year prior to the plan year in which the employer withdraws. UVBs are calculated by determining the amount by which the present value of nonforfeitable benefits under the plan exceeds the value of plan assets. Present values are calculated using a set of actuarial assumptions and methods, including an interest rate that is used to discount future benefit payments to their present value and mortality tables that are used to calculate the likelihood that each payment will be made. Using higher interest rates generally results in lower UVBs and vice versa.

Under ERISA, a reasonable set of assumptions and methods may be used to calculate the withdrawal liability. Plan actuaries have used a variety of approaches, including:

  • Using the same interest rate assumption used to determine minimum funding requirements, based on the expected average return on plan assets over the long term. These rates are prescribed in section 431(b)(6) of the Internal Revenue Code and section 304(b)(6) of ERISA.
  • Focusing on the contrast between contributing employers and withdrawing employers using PBGC settlement rates prescribed under section 4044 of ERISA.
  • An interest rate assumption that uses both funding and settlement rate assumptions.

Proposed Rates and Public Comments

The proposal does not specify a set of rates to be used. Instead, it allows a plan actuary to use an “interest rate anywhere in the spectrum from 4044 rates alone to funding rates alone.” In response to recent litigation, the proposed rule clarifies that 4044 rates, either on their own or in conjunction with another set of rates, are acceptable for the purposes of determining withdrawal liabilities. PBGC is seeking public comments regarding whether the final rule should give specific assumptions and methods other than interest assumptions.

Public comments maybe submitted by November 14, 2022,using any of the following methods:

  • Federal eRulemaking Portal: https://www.regulations.gov.
  • Email: reg.comments@pbgc.gov with subject line “4213 proposed rule.”
  • Mail or Hand Delivery: Regulatory Affairs Division, Office of the General Counsel, Pension Benefit Guaranty Corporation, 445 12th Street SW, Washington, DC 20024-2101.

The PBGC strongly encourages commenters to submit their comments electronically.

2023 Dollar Limits

The contributions and retirement benefits for qualified retirement plans and Individual Retirement Arrangements (IRAs) are subject to certain limits that are adjusted by the Secretary of the Treasury annually for cost-of-living increases. Highlighted below are the various 2022 and 2023 limits that impact IRAs and retirement plans.

Compensation Limits

Limit 2022 2023
Compensation Limit $305,000 $330,000
Defined Contribution §415 Limit $61,000 $66,000
Defined Benefit §415 Limit $245,000 $265,000
Key Employee Officer $200,000 $215,000
Highly Compensated Employee $135,000 $150,000
Governmental Plan Compensation Limit $450,000 $490,000
ESOP §409(o) Limits $1,230,000
$245,000		 $1,330,000
$265,000

Deferral and Catch-up Contribution Limits

Limit 2022 2023
401(k), 403(b), 457(b) Plan Deferral Limit $20,500 $22,500
401(k), 403(b), Governmental 457(b) Catch-up Limit $6,500 $7,500
SIMPLE Plan Deferral Limit $14,000 $15,500
SIMPLE Plan Catch-up Limit $3,000 $3,500

IRA Limits

The limit on contributions to a traditional or Roth IRA will increase to $6,500 in 2023, up from $6,000 in 2022. The limit that applies to IRA catch-up contributions (contributions for individuals age 50 and older) remains at $1,000.

Social Security

The Social Security Administration (SSA) announced an increase in the taxable wage base (TWB) for 2023 to $160,200 (was $147,000 in 2022). Workers pay Social Security tax on wages up to the TWB and some retirement plans use the TWB when allocating contributions or calculating benefits.

HSA Contribution Limits

Although not a formal retirement plan, health savings accounts (HSA) often factor into retirement savings. The IRS announced the following 2023 limits earlier this year. These apply to individuals under a high deductible health plan (HDHP). The minimum deductibles and maximum out-of-pocket expenses the IRS uses to define HDHPs are outlined below, as well.

Limit Individual Family
2022 2023 2022 2023
HSA Contribution Limits $3,650 $3,850 $7,300 $7,750
Minimum Deductible for HDHPs $1,400 $1,500 $2,800 $3,000
Maximum Out-of-Pocket Expenses $7,050 $7,500 $14,100 $15,000

Disaster Relief for North and South Carolina

In response to Hurricane Ian, the Internal Revenue Service (IRS) extended various deadlines for impacted businesses and tax payers in North and South Carolina. The Pension 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 North or South Carolina, 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.

Deadline Relief

For North Carolina, certain deadlines are extended until February 15, 2023if they fall on or after September28, 2022 and before February15, 2023. For South Carolina, deadlines are also extended until February 15, 2023; however, the extension in South Carolina is for deadlines that fall on or after September 25, 2022 and before February 15, 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 120thdayafter the distribution is received
  • Prior tax year contribution deadlines for retirement plans
  • Indirect rollover distribution deadline so 60-day rollovers
    • Rollover of qualified loan offsets
  • Refunds as a result of o 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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