ESOPs & Employee Benefits Q4 2022 Client Update
Happy New Year from the K&C ESOPs & Employee Benefits group! We hope 2023 finds you off to a healthy and productive start.
The last quarter of 2022 saw significant updates in the benefits field—as the year was drawing to a close, the comprehensive retirement plan legislation that had been pending in Congress finally became law. Building on the original “SECURE Act” passed in December 2019, the newly passed “SECURE 2.0” contains nearly 100 provisions involving employee benefits. It was signed into law on December 29, 2022.
Among the dozens of benefits provisions are the following major changes (along with their generally applicable effective dates):
- Automatic Enrollment: Most newly established 401(k) and 403(b) plans will be required to include automatic enrollment and automatic escalation of employee deferrals within certain percentage ranges (1/1/25). Existing plans are exempt from this requirement, as are plans sponsored by employers that have been in business less than three years or that have fewer than ten employees.
- RMD Changes: Further extending the original SECURE Act’s increase in the required minimum distribution starting age, the new law raises the minimum age for RMDs to age 73 (1/1/23) then age 75 (1/1/33). Additionally, Roth 401(k) accounts, which previously had been subject to the regular RMD rules, are no longer subject to RMDs (1/1/24). This aligns the rules for Roth 401(k) accounts with Roth IRAs, which historically have not been subject to RMDs.
- Catch-Up Rules: Participants in employer-sponsored plans will have higher catch-up limits during years in which they are age 60, 61, 62, and 63 (1/1/25). However, participants whose compensation exceeds $145,000 (indexed) must make all catch-up contributions as Roth deferrals and can no longer make them pre-tax (1/1/24). Additionally, the IRA catch-up limits will now be indexed to increase over time, as opposed to the fixed dollar amount catch-up limit currently in effect (1/1/24).
- Matching Student Loan Payments: After limited IRS guidance that left employers uncertain over the scope of permissible employer contributions based on participants’ student loan repayments, the new law explicitly permits employers to make retirement plan contributions tied to employee student loan payments (1/1/24).
- Employer Roth Contributions: Employees may now elect to have employer contributions be treated as Roth contributions instead of pre-tax contributions (12/29/22).
- ESOPs: Historically, owners of C corporations that are sold to an ESOP could defer part of the capital gains tax by purchasing certain other types of investments; the availability of tax-deferred treatment is now available with respect to S corporations as well, but only for up to 10% of the sale proceeds (1/1/28). Additionally, the law authorizes monetary grants for the DOL to encourage employee ownership and awareness (12/29/22).
- Emergency and Penalty-Free Withdrawals: SECURE 2.0 creates several new types of emergency or penalty-free withdrawals: One $1,000-per-year emergency withdrawal for personal or financial emergencies, which can be re-contributed (1/1/24); up to $10,000 in penalty-free withdrawals for victims of domestic abuse (1/1/24); and penalty-free withdrawals for participants who have a terminal illness (12/29/22). It also authorizes the creation of small in-plan, after-tax emergency savings accounts (1/1/24). Finally, fixing an open item from the first SECURE Act, qualified birth or adoption distributions may be re-contributed to the plan within three years (the original SECURE Act did not contain a deadline) (12/29/22).
- SIMPLE IRA Changes: Historically limited to the fixed required employer contributions only, SIMPLE IRA plans can now receive additional employer contributions within certain limits (1/1/24). Participant elective deferral limits also are raised for SIMPLE IRA plans (1/1/24). Finally, where SIMPLE IRA elective deferrals previously were limited to pre-tax contributions, they may now be Roth contributions as well (1/1/23).
- Starter 401(k): To ease employers into 401(k) plan sponsorship, a new type of “starter 401(k)” with only elective deferrals and lower contribution limits is made available (1/1/24).
- Long-Term, Part-Time Employees: The original SECURE Act required 401(k) plans to allow part-time employees to contribute to the employer’s 401(k) if they worked at least 500 hours in three consecutive years; SECURE 2.0 reduces the timeline to two consecutive years (1/1/25). It also expands this rule to 403(b) plans in addition to 401(k) plans (1/1/25).
- Higher Force-Out Limits: Plans may now forcibly distribute balances of terminated employees that do not exceed $7,000 (up from the previous limit of $5,000) (1/1/24).
- New Error Correction Options: The new law significantly expands the availability of self-correction to fix plan administration mistakes (12/29/22) and provides a permanent rule for relief for correcting elective deferral errors for plans using automatic enrollment or automatic escalation of employee deferrals (1/1/24).
The law sets the plan document amendment deadline at December 31, 2025, for most plans. In the meantime, plan sponsors will need to ensure they comply with the mandatory provisions, as well as decide which optional provisions they will use, as they begin to take effect over the next several years.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.