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Tax

Tax Strategy: Retirement change from SECURE 2.0

ByMark A. Luscombe
February 2, 2023 9:00 AM

SECURE 2.0, enacted on Dec. 29, 2022, as part of the omnibus spending legislation, follows up on the SECURE Act, enacted in 2019, to update and improve the retirement provisions of the Tax Code. SECURE 2.0 is very broad in scope, involving nearly 100 provisions. In this column, we will focus on the more significant provisions effective for 2023. Other provisions become effective over the next five years.

These changes will require a careful review of plan operations and procedures during 2023.

RMD requirements

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The SECURE Act had increased the age for required minimum distributions from age 70 ½ to 72, and SECURE 2.0 further increases the age to 73 for 2023. The age will eventually increase to 75 in 2033. Other recent changes affecting RMDs involve revisions to the life expectancy tables and annual RMDs for heirs where the IRA owner had begun RMDs prior to death.

Employer contributions

Employers may permit participants in 401(k), 403(b) and governmental 457(b) plans to elect to have matching or nonelective contributions treated as Roth contributions. This provision was scored as a revenue-raiser under SECURE 2.0, since electing employees would be required to treat the employer contributions as taxable income. In the long run, it will be a revenue loser, as Roth distributions come out tax free.

Hardship distributions

Plan sponsors are allowed to rely on an employee's self-certification that the employee has experienced the hardship related to the withdrawal and that the withdrawal is not in excess of the financial need related to the hardship. The plan sponsor's permitted reliance is restricted to circumstances where there is no actual knowledge to cast doubt on the employee's certification.

RMDs and annuities

SECURE 2.0 continues an effort that started under the SECURE Act to make it easier to elect to have lifetime distributions made through annuity contracts. The legislation further modifies the required minimum distribution regulations to make it easier to make annuity elections. The legislation also modifies the rules with respect to qualifying longevity annuity contracts by relaxing some of the regulatory restrictions on their use.

Participation incentives

Employers are now permitted to provide "de minimis" financial benefits to encourage employees to participate in 401(k) plans, such as low-cost gift cards. We do not yet know how "de minimis" will be defined.

Waiver of early withdrawal penalties

The 10% early withdrawal penalty is waived for distributions to individuals who have received a physician's certification that the individual has an illness reasonably expected to result in death within 84 months. SECURE 2.0 also modifies a provision in the SECURE Act waiving the penalty for birth- or adoption-related distributions to require recontribution within a three-year period. Participants may also make penalty-free withdrawals of up to $22,000 within 180 days after a federally declared disaster. Such amounts may be repaid within 10 years or taken into income over three years. Plans may also increase the maximum loan limit and repayment period related to qualified disasters. Later effective dates apply to early withdrawals for emergencies or cases of domestic abuse.

RMD penalty

The 50% excise tax on failure to take required minimum distributions each year is reduced to 25%, with a possible reduction to 10% for timely corrective action.

Plan overpayments

Plan fiduciaries are no longer required to collect overpayments from plan participants or to make corrective contributions to a plan for overpayments not recovered. Participant safeguards are provided where recovery is sought, and, in some cases ­— such as a long elapse of time — overpayment collections are prohibited. Funding requirements for defined benefit plans would still have to be maintained.

SIMPLE and SEP Roths

SIMPLE and SEP IRAs are allowed to provide employees the option to designate contributions as Roth contributions, as is allowed for other types of plans.

Domestic employees

SEP IRAs may be offered to domestic employees.

Qualified charitable distributions

The $100,000 limit on qualified charitable distributions from an IRA is indexed for inflation, and distributions of up to $50,000 under a one-time election may be made to charitable gift annuities, remainder unitrusts, and remainder annuity trusts.

Statutes of limitations

Statutes of limitations are imposed with respect to a taxpayer's failure to take required minimum distributions or remove excess contributions where no Form 5329 had been filed by the taxpayer. Previously, the statute of limitations had no expiration date if no Form 5329 had been filed.

Statutory notices

Under SECURE 2.0, an unenrolled participant is required to receive only an annual reminder of their eligibility to participate in the employer plan. This significantly reduces plan notification obligations.
Mark A. Luscombe
Principal Federal Tax Analyst, Wolters Kluwer Tax & Accounting
Tax Retirement planning Wealth management Financial planning RMDs
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