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2023 Consolidated Appropriations Act Signed into Law; Overhauls Retirement Plan Tax Rules
(Parker Tax Publishing January 2023)
On December 29, 2022, President Biden signed into law the Consolidated Appropriations Act, 2023 (CAA 2023). CAA 2023 contains consolidated appropriations for the fiscal year ending September 30, 2023, and includes a major overhaul of retirement-related tax provisions. These retirement-related changes, dubbed SECURE Act 2.0, build on provisions enacted in the Setting Every Community Up for Retirement Enhancement Act of 2019 (the SECURE Act). Pub. L. 117-328.
Highlights of the tax provisions included in Division T of CAA 2023, which are discussed in detail below, include:
(1) expanding automatic enrollment in retirement plans;
(2) raising the age at which an individual must begin taking required minimum distributions from 72 to 73;
(3) expanding the hardship withdrawal rules so more individuals can access retirement funds without penalty;
(4) increasing the credit available for small employer pension plan startup costs;
(5) simplifying the saver's tax credit to incentivize more individuals to save for retirement;
(6) indexing IRA catch-up limit;
(7) increasing the catch-up limit to apply at age 62, 63, and 64;
(8) creating a military spouse retirement plan eligibility credit for small employers; and
(9) creating a safe harbor for correction of employee elective deferral failures.
Additionally, CAA 2023 disallows a charitable deduction for a qualified conservation contribution if the deduction claimed exceeds two and one half times the sum of each partner's relevant basis in the contributing partnership, unless (1) the contribution meets a three-year holding period test, (2) substantially all of the contributing partnership is owned by members of a family, or (3) the contribution relates to the preservation of a certified historic structure.
A detailed discussion of the tax changes made by CAA 2023 follows.
I. SECURE Act 2.0
Expanding Automatic Enrollment in Retirement Plans
One of the main reasons many Americans reach retirement age with little or no savings is that too few workers are offered an opportunity to save for retirement through their employers. However, even for those employees who are offered a retirement plan at work, many do not participate. But automatic enrollment in 401(k) plans - providing for people to participate in the plan unless they take the initiative to opt out - significantly increases participation.
Section 101 of Title I of CAA 2023 adds new Code Sec. 414A, which requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. Under the provision, all current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans.
This provision is effective for plan years beginning after December 31, 2024.
Modification of Credit for Small Employer Pension Plan Startup Costs
Under Code Sec. 45E, a credit is provided for small employer pension plan startup costs. The credit is generally available for the first tax year in which an eligible employer plan becomes effective and for each of the two tax years immediately following that year. This credit is currently for 50 percent of administrative costs, up to an annual cap of $5,000.
Section 102 of Title I of CAA 2023 amends Code Sec. 45E(e) to increase the startup credit from 50 percent to 100 percent for employers with up to 50 employees. Further, except in the case of defined benefit plans, an additional credit is provided under new Code Sec. 45E(f). The amount of the additional credit generally is a percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000. This full additional credit is limited to employers with 50 or fewer employees and phased out for employers with between 51 and 100 employees. The applicable percentage is 100 percent in the first and second years, 75 percent in the third year, 50 percent in the fourth year, 25 percent in the fifth year, and no credit for tax years thereafter.
This provision is effective for tax years beginning after December 31, 2022.
Saver's Match Repealed and Replaced
Currently, Code Sec. 25B provides for a nonrefundable credit for certain individuals who make contributions to IRAs, employer retirement plans (such as 401(k) plans), and ABLE accounts.
Section 103 of Title I of CAA 2023 repeals and replaces the credit with respect to IRA and retirement plan contributions by adding new Code Sec. 6433. The credit is changed from a credit paid in cash as part of a tax refund into a federal matching contribution that must be deposited into a taxpayer's IRA or retirement plan. The match is 50 percent of IRA or retirement plan contributions up to $2,000 per individual. The match phases out between $41,000 and $71,000 in the case of taxpayers filing a joint return ($20,500 to $35,500 for single taxpayers and married filing separate; $30,750 to $53,250 for head of household filers). In addition, Section 104 of Title I of CAA 2023 directs the Treasury Department to increase public awareness of the Saver's Match to increase use of the match by low and moderate income taxpayers.
This provision is effective for tax years beginning after December 31, 2026.
Increase in Age for Required Beginning Date for Mandatory Distributions
Currently, Code Sec. 401(a)(9) generally requires participants to begin taking distributions from their retirement plans at age 72. This rule is intended to ensure that individuals spend their retirement savings during their lifetime and not use their retirement plans for estate planning purposes to transfer wealth to beneficiaries. The SECURE Act of 2019 increased the required minimum distribution age to 72.
Section 107 of Title I of CAA 2023 amends Code Sec. 401(a)(9)(C) to further increase the required minimum distribution age to 73 starting on January 1, 2023, and to 75 starting on January 1, 2033.
Indexing IRA Catch-Up Limit
Under current Code Sec. 219(b)(5), the limit on IRA contributions is increased by $1,000 (not indexed) for individuals who have attained age 50.
Section 108 of Title I of CAA 2023 amends Code Sec. 219(b)(5) in order to index such limit for inflation, effective for tax years beginning after December 31, 2023.
Higher Catch-Up Limit to Apply at Age 60 61, 62, and 63
Employees who have attained age 50 are currently permitted under Code Sec. 414(v)(2) to make catch-up contributions under a retirement plan in excess of the otherwise applicable limits. The limit on catch-up contributions for 2023 is $7,500, except in the case of SIMPLE plans for which the limit is $3,500.
Section 109 of Title I of CAA 2023 amends Code Sec. 414(v)(2) to increase these limits to the greater of $10,000 or 50 percent more than the regular catch-up amount in 2025 for individuals who have attained ages 60, 61, 62 and 63. The increased amounts are indexed for inflation after 2025.
This provision is effective for tax years beginning after December 31, 2024.
Treatment of Student Loan Payments as Elective Deferrals
Some employees may not be able to save for retirement because they are overwhelmed with student debt, and thus are missing out on available matching contributions for retirement plans.
Section 110 of Title I of CAA 2023 amends Code Sec. 401(m)(4) to allow employees who have student loan debt to receive matching contributions by reason of repaying their student loans. The provision permits an employer to make matching contributions under a 401(k) plan, 403(b) plan, or SIMPLE IRA with respect to "qualified student loan payments." A qualified student loan payment is broadly defined as any indebtedness incurred by the employee solely to pay qualified higher education expenses of the employee. For purposes of the nondiscrimination test applicable to elective contributions, the provision permits a plan to test separately the employees who receive matching contributions on student loan repayments.
This provision is effective for contributions made for plan years beginning after December 31, 2023.
Application of Credit for Small Employer Pension Plan Startup Costs to Employers Which Join an Existing Plan
Under both pre- and post-SECURE Act law, the credit for small employer pension plan startup costs under Code Sec. 45E only applies for the first 3 years that a plan is in existence. For example, if a small business joins a MEP that has already been in existence for 3 years, the startup credit is not available. If, for example, the MEP has been existence for 1 or 2 years when a small business joins, the small business may be able to claim the credit for 1 or 2 years, respectively.
Section 111 of Title I of CAA 2023 fixes this issue by amending Code Sec. 45E(d)(3) to provide that employers joining a MEP (which includes PEPs) are eligible for the credit for all 3 years. The provision thus ensures the startup tax credit is available for 3 years for employers joining a MEP, regardless of how long the MEP has been in existence.
This provision is effective retroactively for tax years beginning after December 31, 2019.
Military Spouse Retirement Plan Eligibility Credit for Small Employers
Military spouses often do not remain employed long enough to become eligible for their employer's retirement plan or to vest in employer contributions.
Section 112 of Title I of CAA 2023 adds new Code Sec. 45AA to provide small employers a tax credit with respect to their defined contribution plans if they: (1) make military spouses immediately eligible for plan participation within two months of hire; (2) upon plan eligibility, make the military spouse eligible for any matching or non-elective contribution that they would have been eligible for otherwise at 2 years of service; and (3) make the military spouse 100 percent immediately vested in all employer contributions.
The tax credit equals the sum of (1) $200 per military spouse, and (2) 100 percent of all employer contributions (up to $300) made on behalf of the military spouse, for a maximum tax credit of $500. This credit applies for 3 years with respect to each military spouse and does not apply to highly compensated employees. An employer may rely on an employee's certification that such employee's spouse is a member of the uniformed services.
This provision is effective for tax years beginning after December 29, 2022.
De Minimis Financial Incentives for Contributing to a Plan
Under current law, employers may provide matching contributions as a long-term incentive for employees to contribute to a 401(k) plan. However, under Code Sec. 401(k)(4)(A), immediate financial incentives (like gift cards in small amounts) are prohibited even though individuals may be especially motivated by them to join their employers' retirement plans.
Section 113 of Title I of CAA 2023 enables employers to offer de minimis financial incentives, not paid for with plan assets, such as low-dollar gift cards, to boost employee participation in workplace retirement plans by exempting de minimis financial incentives from Code Sec. 401(k)(4)(A) and from the corresponding rule under Code Sec. 403(b).
This provision is effective for plan years beginning after December 29, 2022.
Pooled Employer Plan Modification
Section 105 of Title I of CAA 2023 amends Section 3(43) of the Employee Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. 1056) to clarify that a pooled employer plan (PEP) may designate a named fiduciary (other than an employer in the plan) to collect contributions to the plan. Such fiduciary would be required to implement written contribution collection procedures that are reasonable, diligent, and systematic.
This provision is effective for plan years beginning after December 31, 2022.
Multiple Employer 403(b) Plans
Multiple employer plans (MEPs) provide an opportunity for small employers to band together to obtain more favorable retirement plan investment results and more efficient and less expensive management services. The SECURE Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020 (Pub. L. 116-94), made MEPs more attractive by eliminating outdated barriers to the use of MEPs and improving the quality of MEP service providers.
Section 106 of Title I of CAA 2023 amends Code Sec. 403(b) to allow 403(b) plans, which are generally sponsored by charities, educational institutions, and non-profits, to participate in MEPs and PEPs, including relief from the one bad apple rule so that the violations of one employer do not affect the tax treatment of employees of compliant employers.
This provision is effective for plan years beginning after December 31, 2022.
Deferral of Tax for Certain Sales of Employer Stock to S Corporation ESOPs
Under Code Sec. 1042, an individual owner of stock in a non-publicly traded C corporation that sponsors an employee stock ownership plan (ESOP) may elect to defer the recognition of gain from the sale of such stock to the ESOP if the seller reinvests the sales proceeds into qualified replacement property, such as stock or other securities issued by a U.S. operating corporation. After the sale, the ESOP must own at least 30 percent of the employer corporation's stock.
Section 114 of Title I of CAA 2023 expands the gain deferral provisions of Code Sec. 1042 with a 10 percent limit under new Code Sec. 1042(h) on the deferral to sales of employer stock to S corporation ESOPs.
This provision is effective for sales made after December 31, 2027.
Withdrawals for Certain Emergency Expenses
Generally, an additional 10 percent tax applies under Code Sec. 72(t) to early distributions from tax-preferred retirement accounts, such as 401(k) plans and IRAs, unless an exception applies.
Section 115 of Title I of CAA 2023 provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years. No further emergency distributions are permissible during the 3 year repayment period unless repayment occurs.
This provision is effective for distributions made after December 31, 2023.
Additional Nonelective Contributions to SIMPLE Plans
Under Code Sec. 408(p)(2), employers with SIMPLE plans are required to make employer contributions to employees of either 2 percent of compensation or 3 percent of employee elective deferral contributions.
Section 116 of Title I of CAA 2023 amends Code Sec. 408(p)(2)(A) to permit an employer to make additional contributions to each employee of the plan in a uniform manner, provided that the contribution may not exceed the lesser of up to 10 percent of compensation or $5,000 (indexed for inflation).
This provision is effective for tax years beginning after December 31, 2023.
Contribution Limit for SIMPLE Plans
Under current law, the annual contribution limit for employee elective deferral contributions to a SIMPLE IRA plan for 2022 is $14,000, and the catch-up contribution limit beginning at age 50 is $3,000. A SIMPLE IRA plan may only be sponsored by a small employer (100 or fewer employees), and the employer is required to either make matching contributions on the first 3 percent of compensation deferred or an employer contribution of 2 percent of compensation (regardless of whether the employee elects to make contributions).
Section 117 of Title I of CAA 2023 amends Code Sec. 408(p)(2)(E) to increase the annual deferral limit and the catch-up contribution at age 50 by 10 percent, as compared to the limit that would otherwise apply in the first year this change is effective, in the case of an employer with no more than 25 employees. Section 117 also amends Code Sec. 408(p)(2)(C) to permit an employer with 26 to 100 employees to provide higher deferral limits, but only if the employer either provides a 4 percent matching contribution or a 3 percent employer contribution. The provision makes similar changes to the contribution limits for SIMPLE 401(k) plans.
This provision is effective for tax years beginning after December 31, 2023. The Secretary of Treasury is required to report to Congress on data related to SIMPLE IRAs by December 31, 2024, and annually thereafter.
Tax Treatment of Certain Nontrade or Business SEP Contributions
Section 118 of Title I of CAA 2023 amends Code Sec. 4972(c)(6)(B) to permit employers of domestic employees (e.g., nannies) to provide retirement benefits for such employees under a Simplified Employee Pension (SEP).
This provision is effective for tax years beginning after date of enactment.
Exemption for Certain Automatic Portability Transactions
Under current law, an employer is permitted to distribute a participant's account balance without participant consent if the balance is under $5,000 and the balance is immediately distributable (e.g., after a termination of employment). Current law also requires an employer to roll over this distribution into a default IRA if the account balance is at least $1,000 and the participant does not affirmatively elect otherwise.
Section 120 of Title I of CAA 2023 amends Code Sec. 4975(d) to permit a retirement plan service provider to provide employer plans with automatic portability services. Such services involve the automatic transfer of a participant's default IRA (established in connection with a distribution from a former employer's plan) into the participant's new employer's retirement plan, unless the participant affirmatively elects otherwise.
This provision is effective for transactions occurring on or after the date which is 12 months after December 29, 2022.
Starter 401(k) Plans for Employers with No Retirement Plan
Section 121 of Title I of CAA 2023 amends Code Sec. 401(k) and Code Sec. 403(b) to permit an employer that does not sponsor a retirement plan to offer a starter 401(k) plan (or safe harbor 403(b) plan). A starter 401(k) plan (or safe harbor 403(b) plan) generally requires that all employees be default enrolled in the plan at a 3 to 15 percent of compensation deferral rate. The limit on annual deferrals is the same as the IRA contribution limit, which for 2022 is $6,000 with an additional $1,000 in catch-up contributions beginning at age 50.
This provision is effective for plan years beginning after December 31, 2023.
Certain Securities Treated as Publicly Traded in Case of ESOPs
Section 123 of Title I of CAA 2023 amends Code Sec. 401(a)(35) to update certain employee stock ownership plan (ESOP) rules related to whether a security is a "publicly traded employer security" and "readily tradeable on an established securities market." The provision allows certain non-exchange traded securities to qualify as "publicly traded employer securities" so long as the security is subject to priced quotations by at least four dealers on a Securities and Exchange Commission-regulated interdealer quotation system, is not a penny stock and is not issued by a shell company, and has a public float of at least 10 percent of outstanding shares. For securities issued by domestic corporations, the issuer must publish annual audited financial statements. Securities issued by foreign corporations are subject to additional depository and reporting requirements. These updated definitions are intended to allow highly regulated companies with liquid securities that are quoted on non-exchange markets to treat their stock as "public" for ESOP purposes, thus making it easier for these companies to offer ESOPs to their U.S. employees.
This provision is effective for plan years beginning after December 31, 2027.
Modification of Age Requirements for Qualified ABLE Programs
Code Sec. 529A allows states to create qualified ABLE programs, which are tax-advantaged savings programs for certain people with disabilities. Distributions from an ABLE account are tax-free if used for qualified disability expenses of the account's designated beneficiary.
Section 124 of Title I of CAA 2023 amends Code Sec. 529A(e) to increase the age by which blindness or disability must occur for an individual to be an eligible individual by reason of such blindness or disability for an ABLE program.
This provision is effective for tax years beginning after December 31, 2025.
Improving Coverage for Part-Time Workers
The SECURE Act requires employers to allow long-term, part-time workers to participate in the employers' 401(k) plans. The SECURE Act provision provides that, except in the case of collectively bargained plans, employers maintaining a 401(k) plan must have a dual eligibility requirement under which an employee must complete either (1) one year of service (with the 1,000-hour rule) or (2) three consecutive years of service (where the employee completes at least 500 hours of service).
Section 125 of Title I of CAA 2023 amends Section 202 of ERISA to reduce the three year rule to two years, effective for plan years beginning after December 31, 2024. Section 125 also provides that pre-2021 service is disregarded for vesting purposes, just as such service is disregarded for eligibility purposes under current law, effective as if included in the SECURE Act to which the amendment relates. This provision also extends the long-term part-time coverage rules to 403(b) plans that are subject to ERISA.
Special Rules for Certain Distributions from Long-Term Qualified Tuition Programs to Roth IRAs
Families and students have concerns about leftover funds being trapped in Section 529 college savings accounts unless they take a non-qualified withdrawal and assume a penalty. This has led to hesitating, delaying, or declining to fund 529 accounts to levels needed to pay for the rising costs of education.
Section 126 of Title I of CAA 2023 amends Code Sec. 529(c)(3) to allow for tax and penalty free rollovers from 529 accounts to Roth IRAs, under certain conditions. Beneficiaries of 529 accounts would be permitted to rollover up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA. These rollovers are also subject to Roth IRA annual contribution limits, and the 529 account must have been open for more than 15 years.
This provision is effective with respect to distributions after December 31, 2023.
Emergency Savings Accounts Linked to Individual Account Plans
Though individuals can save on their own, far too many fail to do so. As a result, many are forced to tap into their retirement savings when emergency expenses arise.
Section 127 of Title I of CAA 2023 amends ERISA to give employers the option to offer to their non-highly compensated employees pension-linked emergency savings accounts. Employers may automatically opt employees into these accounts at no more than 3 percent of their salary, and the portion of an account attributable to the employee's contribution is capped at $2,500 (or lower as set by the employer). Once the cap is reached, the additional contributions can be directed to the employee's Roth defined contribution plan (if they have one) or stopped until the balance attributable to contributions falls below the cap. Contributions are made on a Roth-like basis and are treated as elective deferrals for purposes of retirement matching contributions with an annual matching cap set at the maximum account balance - i.e., $2,500 or lower as set by the plan sponsor. The first four withdrawals from the account each plan year may not be subject to any fees or charges solely on the basis of such withdrawals. At separation from service, employees may take their emergency savings accounts as cash or roll it into their Roth defined contribution plan (if they have one) or IRA.
This provision is effective for plan years beginning after December 31, 2023.
Enhancement of 403(b) Plans
Under current law, 403(b) plan investments are generally limited to annuity contracts and publicly traded mutual funds. This limitation cuts off 403(b) plan participants - generally, employees of charities and public schools, colleges, and universities - from access to collective investment trusts, which are often used by 401(a) plans to expand investment options for plan participants at a lower overall cost.
Section 128 of Title I of CAA 2023 amends Code Sec. 403(b)(7) to permit 403(b) custodial accounts to participate in group trusts with other tax-preferred savings plans and IRAs.
This provision is effective for amounts invested after December 29, 2022.
Removing Required Minimum Distribution Barriers of Life Annuities
Section 201 of Title II of CAA 2023 amends Code Sec. 401(a)(9) to eliminate certain barriers to the availability of life annuities in qualified plans and IRAs that arise under the current actuarial test for annuities in the regulations under Code Sec. 401(a)(9). The actuarial test is intended to limit tax deferral by precluding commercial annuities from providing payments that start out small and increase excessively over time. In operation, however, the test commonly prohibits many important guarantees that provide only modest benefit increases under life annuities. For example, guaranteed annual increases of only 1 or 2 percent, return of premium death benefits, and period certain guarantees for participating annuities are commonly prohibited by this test. Without these types of guarantees, many individuals are unwilling to elect a life annuity under a defined contribution plan or IRA.
This provision is effective for calendar years ending after December 29, 2022.
Qualifying Longevity Annuity Contracts
In 2014, the Treasury Department published final regulations on qualifying longevity annuity contracts (QLACs) in T.D. 9673 (2014 regulations). QLACs are generally deferred annuities that begin payment at the end of an individual's life expectancy. Because payments start so late, QLACs are an inexpensive way for retirees to hedge the risk of outliving their savings in defined contribution plans and IRAs. The minimum distribution rules were an impediment to the growth of QLACs in defined contribution plans and IRAs because those rules generally require payments to commence at age 72, before QLACs begin payments. The 2014 regulations generally exempted QLACs from the minimum distribution rules until payments commence. However, due to a lack of statutory authority to provide a full exemption, the regulations imposed certain limits on the exemption that have prevented QLACs from achieving their intended purpose in providing longevity protection.
Section 202 of Title II of CAA 2023 addresses these limitations by directing the Treasury Secretary to amend Reg. Sec. 1.401(a)(9)-6 and Reg. Sec. 1.408-8 to repeal the 25 percent limit and allow up to $200,000 (indexed for inflation) to be used from an account balance to purchase a QLAC. Section 202 also direct the Treasury Secretary to amend Reg. Sec. 1.401(a)(9)-6 to facilitate the sales of QLACs with spousal survival rights, as well as to clarify that free-look periods are permitted up to 90 days with respect to contracts purchased or received in an exchange on or after July 2, 2014.
This provision is effective for contracts purchased or received in an exchange on December 29, 2022, and the Treasury Secretary must update the relevant regulations within 18 months of December 29, 2022.
Insurance-Dedicated Exchange-Traded Funds
Exchange-traded funds (ETFs) are pooled investment vehicles that are traded on stock exchanges. They are similar to mutual funds, except the shares can be traded throughout the day on the stock market, rather than having to be held until after the market closes. ETFs are widely available through retirement plans, IRAs, and taxable investment accounts. However, outdated regulations in Reg. Sec. 1.817-5 have prevented ETFs from being widely available through individual variable annuities. Simply because the regulations were written before ETFs existed, ETFs cannot satisfy the regulatory requirements to be "insurance-dedicated."
Section 203 of Title II of CAA 2023 directs the Treasury Department to update Reg. Sec. 1.817-5 to reflect the ETF structure to provide that ownership of an ETF's shares by certain types of institutions that are necessary to the ETF's structure would not preclude look-through treatment for the ETF, as long as it otherwise satisfies the current-law requirements for look-through treatment. This essentially would facilitate the creation of a new type of ETF that is "insurance-dedicated."
This provision is effective for segregated asset account investments made on or after seven years after December 29, 2022 of this Act, and directs the Treasury Secretary to update the relevant regulations by that time.
Eliminating a Penalty on Partial Annuitization
If a tax-preferred retirement account also holds an annuity, the regulations under Code Sec. 401(a)(9) require that the account be bifurcated between the portion of the account holding the annuity and the rest of the account for purposes of applying the required minimum distribution rules. This treatment may result in higher minimum distributions than would have been required if the account did not hold an annuity.
Section 204 of Title II of CAA 2023 directs the Treasury Secretary to amend the regulations under Code Sec. 401(a)(9) to permit the account owner to elect to aggregate distributions from both portions of the account for purposes of determining minimum distributions.
The modifications and amendments required under this provision are deemed to have been made as of the date of the enactment.
More Leeway Given on Recovering Retirement Plan Overpayments
Situations can arise where a retiree mistakenly receives more money than he or she is owed under a retirement plan. Such mistakes cause problems when they occur over time, and plan fiduciaries later seek to recover the overpayments from unsuspecting retirees. When an overpayment has lasted for years, plans often compel retirees to repay the amount of the overpayment, plus interest, which can be substantial. Even small overpayment amounts can create a hardship for a retiree living on a fixed income.
Section 301 of Title III of CAA 2023 amends Section 206 of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1056) to allow retirement plan fiduciaries the latitude to decide not to recoup overpayments that were mistakenly made to retirees. If plan fiduciaries choose to recoup overpayments, limitations and protections apply to safeguard innocent retirees. This protects both the benefits of future retirees and the benefits of current retirees. Rollovers of the overpayments also remain valid.
Section 301 also amends Code Sec. 414 to provide that a plan will not fail to be treated as a qualified plan because it fails to obtain payment from a plan participant of an inadvertent benefit overpayment made by the plan or the plan sponsor amends the plan to increase past, or decrease future, benefit payments to affected participants and beneficiaries in order to adjust for prior inadvertent benefit overpayments or the plan sponsor amends the plan to increase past, or decrease future, benefit payments to affected participants and beneficiaries in order to adjust for prior inadvertent benefit overpayments.
Additionally, Section 301 also amends Code Sec. 402(c) to provide that an eligible rollover distribution will not be treated as ineligible because of such overpayments.
This provision is generally effective on December 29, 2022. However, plans, fiduciaries, employers, and plan sponsors may proceed with respect to determinations made before December 29, 2022 to seek or not to seek recovery of overpayments.
Reduction in Excise Tax Penalty on Failure to Take Required Minimum Distributions
Under Code Sec. 4974(a), the owner or beneficiary of a retirement plan who fails to take a required minimum distribution (RMD) is subject to an excise tax (i.e., a penalty tax) equal to 50 percent of the amount by which the RMD exceeds the amount actually distributed.
Section 302 of Title III of CAA 2023 amends Code Sec. 4974(a) to reduce the penalty for failing to take an RMD from 50 to 25 percent. Further, if a failure to take an RMD from an IRA is corrected in a timely manner, new Code Sec. 4974(e) reduces the excise tax from 25 percent to 10 percent.
This provision is effective for tax years beginning after December 29, 2022.
Establishment of Retirement Savings Lost and Found
Every year, thousands of people approach retirement but are unable to find and receive the benefits that they earned often because the company they worked for moved, changed its name, or merged with a different company. Similarly, every year there are employers around the country ready to pay benefits to retirees, but they are unable to find the retirees because the former employees changed their names or addresses.
Section 303 of Title III of CAA 2023 adds a new provision to the Employee Retirement Income Security Act of 1974 which creates a national online searchable lost and found database for Americans' retirement plans at the Department of Labor (DOL). The database will enable retirement savers, who might have lost track of their pension or 401(k) plan, to search for the contact information of their plan administrator.
Section 303 directs the creation of the database no later than two years after December 29, 2022.
Increase in Dollar Limit for Mandatory Distributions
Employers may transfer former employees' retirement accounts from a workplace retirement plan into an IRA if their balances are between $1,000 and $5,000. Section 304 of Title III of CAA 2023 amends ERISA to increase the limit from $5,000 to $7,000.
This provision is effective for distributions made after December 31, 2023.
Expansion of Employee Plan Compliance Resolution System
Because of the ever growing complexity of retirement plan administration, Section 305 of Title III of CAA 2023 expands the Employee Plans Compliance Resolution System (EPCRS) to (1) allow more types of errors to be corrected internally through self-correction, (2) apply to inadvertent IRA errors, and (3) exempt certain failures to make required minimum distributions from the otherwise applicable excise tax. For example, the provision allows for correction of many plan loan errors through self-correction.
Section 305 also directs the Secretary of Treasury to expand the IRS Employee Plans Compliance Resolution System (EPCRS) to allow custodians of individual retirement plans to address eligible inadvertent failures with respect to an individual retirement plan (as so defined), including (but not limited to) (1) waivers of the excise tax which would otherwise apply under Code Sec. 4974, and (2) rules permitting a nonspouse beneficiary to return distributions to an inherited individual retirement plan described in Code Sec. 408(d)(3)(C) in a case where, due to an inadvertent error by a service provider, the beneficiary had reason to believe that the distribution could be rolled over without inclusion in income of any part of the distributed amount.
This provision is effective on December 29, 2022 and directs that any guidance or revision of guidance required by this provision be issued no later than two years after December 29, 2022. The provision directs that Rev. Proc. 2021-30 (or any successor guidance) be updated to take into account this provision no later than two years after December 29, 2022.
Elimination of "First Day of the Month" Requirement for Section 457(b) Plans
Participants in a governmental 457(b) plan must request changes in their deferral rate before the beginning of the month in which the deferral will be made. This rule does not exist for other defined contribution plans. Section 306 of Title III of CAA 2023 allows such elections to be made at any time before the date that the compensation being deferred is available.
This provision is effective for tax years beginning after December 29, 2022.
Expansion of IRA Charitable Distribution Provision
Otherwise-taxable IRA distributions from a traditional or Roth IRA are excluded from
gross income to the extent they are qualified charitable distributions. The exclusion may not
exceed $100,000 per taxpayer per tax year. A qualified charitable distribution is any distribution from an IRA directly by the IRA trustee to an organization described in Code Sec. 170(b)(1)(A) other than a supporting organization (as described in Code Sec. 509(a)(3)) or a donor advised fund (as defined in Code Sec. 4966(d)(2)). Distributions are eligible for the exclusion only if made on or after the date the IRA owner attains age 70 1/2 and only to the extent the distribution would be includible in gross income (without regard to this provision).
Section 307 of Title III of CAA 2023 expands the IRA charitable distribution provision by amending Code Sec. 408(d)(8) to allow for a one-time, $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts, effective for distributions made in tax years beginning after December 29, 2022.
The exclusion applies only if a charitable contribution deduction for the entire distribution otherwise would be allowable, determined without regard to the generally applicable percentage limitations. Thus, for example, if the deductible amount is reduced because of a benefit received in exchange, or if a deduction is not allowable because the donor did not obtain sufficient substantiation, the exclusion is not available with respect to any part of the IRA distribution. In addition, a distribution from an IRA to a split-interest entity qualifies for the one-time
election only if: (1) no person holds an income interest in the split-interest entity other than the
individual for whose benefit such account is maintained, the spouse of such individual, or both;
and (2) the income interest in the split-interest entity is nonassignable.
Section 307 also adds Code Sec. 408(d)(8)(G), which indexes for inflation the annual IRA charitable distribution limit of $100,000.
This provision is effective for distributions made in tax years ending after December 29, 2022.
Extension of Age-50 Rule to Private Sector Firefighters
If an employee terminates employment after age 55 and takes a distribution from a retirement plan, the 10 percent early distribution tax of Code Sec. 72(t) does not apply. However, there is a special rule for "qualified public safety employees" in governmental plans, under which age 50 is substituted for age 55 for purposes of this exception from the 10 percent tax. This exemption applies to public sector firefighters, but not private sector firefighters.
Section 308 of Title III of CAA 2023 amends Code Sec. 72(t)(10) to extend the age 50 rule to private sector firefighter employees.
This provision is effective for distributions made after December 29, 2022.
Exclusion of Certain Disability-Related First Responder Retirement Payments
Section 309 of Title III of CAA 2023 adds new Code Sec. 139C, which allows first responders to exclude service-connected disability pension payments from gross income after reaching retirement age.
This provision is effective for amounts received in tax years beginning after December 31, 2026.
Application of Top Heavy Rules to Defined Contribution Plans Covering Excludable Employees
Qualified retirement plans must pass the top-heavy test, in addition to other nondiscrimination tests. Plans that are deemed top-heavy are required to provide employees with a minimum of a 3 percent of pay nonelective contribution, which is a significant cost to small businesses.
Other nondiscrimination tests that apply to 401(k) plans allow an employer to test otherwise excludable employees (e.g., those who are under age 21 and have less than one year of service) separately. This was intended to encourage plan sponsors to permit employees to defer earlier than the minimum age and service conditions permitted under the law because it reduces the situations where plans would fail the nondiscrimination tests if these employees were included when performing the test. However, this separate testing is not allowed for the top-heavy test.
Small business retirement plans often do not cover excludable employees because, if the plan is or becomes top heavy, the employer may be required to contribute a top-heavy employer contribution for all employees who are eligible to participate in the plan, straining the budget for these small businesses.
Section 310 of Title III of CAA 2023 allows an employer to perform the top-heavy test separately on the non-excludable and excludable employees. This removes the financial incentive to exclude employees from the 401(k) plan and increases retirement plan coverage to more workers.
This provision is effective for plan years beginning after December 31, 2023.
Repayment of Qualified Birth or Adoption Distribution Limited to Three Years
The SECURE Act, which was passed as part of the Consolidated Appropriations Act of 2020, included a provision that allows individuals to receive distributions from their retirement plan in the case of birth or adoption without paying the 10 percent additional tax under Code Sec. 72(t) (known as a qualified birth or adoption distribution, or "QBAD"). The distributions can be recontributed to a retirement plan at any time and are treated as rollovers. The problem with this provision, however, is the allowance of recontributions at any time. Code Sec. 6511 prevents a refund from being provided to a taxpayer after the statute of limitations for the return has closed, which is generally a three-year period. Thus, there would not be a mechanism under the Code allowing someone who took a birth/adoption distribution to recontribute the distribution more than three years later and amend their return to receive a refund for the taxes that were paid in the year of the withdrawal.
Section 311 of Title III of CAA 2023 amends the QBAD provision to restrict the recontribution period to three years.
This provision is effective with respect to distributions made after the date of the enactment and retroactively to the three-year period beginning on the day after the date on which such distribution was received.
Employees May Self-Certify That Deemed Hardship Distribution Conditions Are Met
Section 312 of Title III of CAA 2023 amends Code Sec. 401(k)(14) to provide that an employer may rely on an employee certifying that deemed hardship distribution conditions are met. Section 312 provides that, under certain circumstances, employees are permitted to self-certify that they have had an event that constitutes a hardship for purposes of taking a hardship withdrawal.
Observation: This is a logical step in light of the success of the coronavirus-related distribution self-certification rules and the current hardship regulations that already permit employees to self-certify that they do not have other funds available to address a hardship.
This provision is effective for plan years beginning after December 29, 2022.
Limitation on Length of Statute of Limitations for Excise Tax on Excess Contributions and Certain Accumulations
The statute of limitations for excise taxes imposed on excess contributions, or required minimum distribution failures starts running as of the date that a specific excise tax return (Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts) is filed. Individuals are often unaware of the requirement to file Form 5329, and this can lead to an indefinite statute of limitations period that can cause hardship for taxpayers due to the accumulation of interest and penalties.
In order to provide finality for taxpayers in the administration of these excise taxes, Section 313 of Title III of CAA 2023 amends Code Sec. 6501(l) to provide that a three-year statute of limitations period begins when the taxpayer files an individual tax return (Form 1040) for the year of the violation, except in the case of excess contributions, in which case the statute of limitations runs six years from the date Form 1040 is filed. There is a further exception from this six-year rule for taxes that arise out of a bargain sale to an IRA. In general, these changes are intended to ensure that there is a reasonable statute of limitations period for violations of which taxpayers were not aware and thus did not file an excise tax return, while retaining existing law in scenarios that involve a bargain sale.
This provision is effective on December 29, 2022.
Penalty-free Withdrawals from Retirement Plans for Individual Case of Domestic Abuse
A domestic abuse survivor may need to access his or her money in a retirement account for various reasons, such as escaping an unsafe situation. Section 314 of Title III of CAA 2023 amends Code Sec. 72(t) and allows retirement plans to permit participants that self-certify that they experienced domestic abuse to withdraw a small amount of money (the lesser of $10,000, indexed for inflation, or 50 percent of the participant's account).
A distribution made under Section 314 is not subject to the 10 percent tax on early distributions.
Additionally, a participant has the opportunity to repay the withdrawn money from the retirement plan over three years and will be refunded for income taxes on money that is repaid.
This provision applies to distributions made after December 31, 2023.
Reform of Family Attribution Rules
Tax laws provide that certain related businesses must be aggregated when performing the coverage and nondiscrimination tests relating to qualified plans. The aggregation rules are generally based on the degree of common ownership of the businesses. In determining the level of ownership in a business, the tax laws have certain attribution rules whereby an individual is deemed to own stock held by other individuals or entities. Section 315 of Title III of CAA 2023 amends Code Sec. 414 and Code Sec. 318 to (1) addresses inequities where spouses with separate businesses live in a community property state when compared to spouse who reside in separate property states, and (2) modify the attribution of stock between parents and minor children.
This provision is effective for plan years beginning on or after December 29, 2022.
Increase in Benefit Accruals Under Plan for Previous Plan Year Allowed Until Employer Tax Return Due Date
Section 201 of the SECURE Act permits an employer to adopt a new retirement plan by the due date of the employer's tax return for the fiscal year in which the plan is effective. However, plan amendments to an existing plan must generally be adopted by the last day of the plan year in which the amendment is effective. This precludes an employer from adding plan provisions that may be beneficial to participants.
Section 316 of Title III of CAA 2023 amends Code Sec. 401(b) to allow discretionary amendments that increase participants' benefits to be adopted by the due date of the employer's tax return.
This provision is effective for plan years beginning after December 31, 2023.
Retroactive First Year Elective Deferrals for Sole Proprietors
Under the SECURE Act, an employer may establish a new 401(k) plan after the end of the tax year, but before the employer's tax filing date and treat the plan as having been established on the last day of the tax year. Such plans may be funded by employer contributions up to the employer's tax filing date.
Section 317 of Title III of CAA 2023 amends Code Sec. 401(b)(2) to allows these plans, when they are sponsored by sole proprietors or single-member LLCs, to receive employee contributions up to the date of the employee's tax return filing date for the initial year.
This provision is effective for plan years beginning after December 29, 2022.
Clarification of Tax Treatment of IRA Involved in a Prohibited Transaction
When an individual engages in a prohibited transaction with respect to their IRA, the IRA is disqualified and treated as distributed to the individual, irrespective of the size of the prohibited transaction.
Section 322 of Title III amends Code Sec. 408(e)(2)(A) to clarify that if an individual has multiple IRAs, only the IRA with respect to which the prohibited transaction occurred will be disqualified.
This provision is effective for tax years beginning after December 29, 2022.
Clarification of Substantially Equal Periodic Payment Rule
A 10 percent additional tax is imposed on early distributions from tax-preferred retirement accounts. However, an exception applies to substantially equal periodic payments that are made over the account owner's life expectancy.
Section 323 of Title III of CAA 2023 amends Code Sec. 72(t), Code Sec. 72(q), and Code Sec. 6724 to provide that the exception continues to apply in the case of a rollover of the account, an exchange of an annuity providing the payments, or an annuity that satisfies the required minimum distribution rules. It also provides a special rule for that limits penalties where certain reporting requirements are met.
This provision is effective for transfers, rollovers, exchanges after December 31, 2023, and effective for annuity distributions on or after December 29, 2022.
Treasury Guidance on Rollovers
Section 324 of Title III of CAA 2023 requires the Treasury Secretary to simplify and standardize the rollover process by issuing sample forms for direct rollovers that may be used by both the incoming and outgoing retirement plan or IRA.
Development and release of the sample forms must be completed no later than January 1, 2025.
Elimination of Pre-Death Distribution Requirement for Roth Accounts in Employer Plans
Required minimum distributions are not required to begin prior to the death of the owner of a Roth IRA. However, pre-death distributions are required in the case of the owner of a Roth designated account in an employer retirement plan (e.g., 401(k) plan).
Section 325 of Title III of CAA 2023 amends Code Sec. 402A(d) to eliminate the pre-death distribution requirement for Roth accounts in employer plans.
This provision is generally effective for tax years beginning after December 31, 2023. However, it does not apply to distributions which are required with respect to years beginning before January 1, 2024, but are permitted to be paid on or after such date.
Exception to Penalty on Early Distributions from Qualified Plans for Individuals with a Terminal Illness
Under Code Sec. 72(t), an additional 10 percent tax applies to early distributions from tax-preferred retirement accounts. Code Sec. 72(t)(2) provides an exception to this tax for certain distributions.
Section 326 of Title III of CAA 2023 amends Code Sec. 72(t)(2) to provide an exception to the tax in the case of a distribution to a terminally ill individual.
This provision is effective for distributions made after December 29, 2022.
Surviving Spouse Can Elect to Be Treated As Employee for Determining Distribution Period
A surviving spouse receives a more favorable distribution period of his or her spouse's interest in a retirement plan if the surviving spouse rolls the amount to an IRA. To ease the burden on surviving spouses, Section 327 of Title III of CAA 2023 amends Code Sec. provides a similar distribution period under a retirement plan to that provided under an IRA. Thus, in the case of an employee who dies before the distribution of required minimum distributions has begun under the plan, and who has designated a spouse as his or her sole beneficiary, the provision permits the spouse to elect to be treated as the employee for purposes of determining the distribution period.
Section 327 directs the Treasury Secretary to amend Reg. Sec. 1.401(a)(9), Q&A 5 to provide that the distribution period for the spouse in such a case is determined using the Uniform Life Table. Thus, the provision allows a designated beneficiary who is a spouse to receive a
similar distribution period for lifetime distributions under an employer-sponsored retirement plan
as is permitted under present law in an IRA. The provision also permits the spouse to elect whether to apply the present-law rule that treats the spouse as the employee for purposes of determining the distribution period in cases where the spouse dies before distributions have begun.
The provision provides for the elections to be made in such time and manner as prescribed by the IRS. The election must include a timely notice to the plan administrator, and once made it may not be revoked except with IRS consent.
This provision is effective for calendar years beginning after December 31, 2023.
Repeal of Direct Payment Requirement on Exclusion from Gross Income of Distributions from Governmental Plans for Health and Long-Term Care Insurance
Code Sec. 402(l)(2) provides an exclusion from gross income of $3,000 for a distribution from a governmental retirement plan to a public safety officer to pay for their health insurance premiums. The exclusion requires that the plan directly pay the insurance premiums.
Section 328 of Title III of CAA 2023 repeals the direct payment requirement.
The provision is effective for distributions made after December 29, 2022.
Modification of Eligible Age for Exemption from Early Withdrawal Penalty
Under Code Sec. 72(t)(10), the 10 percent additional tax on early distributions from tax preferred retirement savings plans does not apply to a distribution from a governmental plan to a public safety officer who is at least age 50.
Section 329 of Title III of CAA 2023 amends Code Sec. 72(t)(10) to extend the exception to public safety officers with at least 25 years of service with the employer sponsoring the plan.
The provision is effective for distributions made after December 29, 2022.
Exemption from Early Withdrawal Penalty for Certain State and Local Government Corrections Employees
Under Code Sec. 72(t)(10), the 10 percent additional tax on early distributions from tax preferred retirement savings plans does not apply to a distribution from a governmental plan to a public safety officer who is at least age 50.
Section 330 of Title III of CAA 2023 extends the public safety officer exception to the 10 percent early distribution tax to corrections officers who are employees of state and local governments.
This provision is effective for distributions made after December 29, 2022.
Special Rules for Use of Retirement Funds in Connection with Qualified Federally Declared Disasters
For taxpayers affected by a federally declared disaster, the IRS has the authority under Code Sec. 7508A and ERISA Section 518 to postpone various tax deadlines for a period of up to one year.
Section 331 of Title III of CAA 2023 provides permanent rules relating to the use of retirement funds in the case of a federally declared disaster. The permanent rules allow up to $22,000 to be distributed from employer retirement plans or IRAs for affected individuals. Such distributions are not subject to the 10 percent additional tax and are taken into account as gross income over three years. The distributions can be repaid to a tax preferred retirement account.
Additionally, amounts distributed before the disaster to purchase a home can be recontributed, and an employer is permitted to provide for a larger amount to be borrowed from a plan by affected individuals and for additional time for repayment of plan loans owed by affected individuals.
This provision is effective for disasters occurring on or after January 26, 2021.
Employers Allowed to Replace SIMPLE Retirement Accounts with Safe Harbor 401(K) Plans During a Year
A SIMPLE IRA plan is an employer-sponsored retirement plan funded with individual retirement arrangements that also allows employees to make elective deferrals.
Section 332 of Title III of CAA 2023 allows an employer to replace a SIMPLE IRA plan with a SIMPLE 401(k) plan or other 401(k) plan that requires mandatory employer contributions during a plan year.
This provision is effective for plan years beginning after December 31, 2023.
Elimination of Additional Tax on Corrective Distributions of Excess Contributions
If an individual contributes to much to an IRA a corrective distribution is required. The corrective distribution includes the excessive contribution and any earnings allocable to that contribution.
Section 333 of Title III of CAA 2023 exempts the excess contribution and earnings allocable to the excess contribution from the Code Sec. 72(t) 10 percent additional tax on early distributions.
This provision is effective for any determination of, or affecting, liability for taxes, interest, or penalties which is made on or after December 29, 2022, without regard to whether the act (or failure to act) upon which the determination is based occurred before December 29, 2022.
Long-Term Care Contracts Purchased With Retirement Plan Distributions
Section 334 of Title III of CAA 2023 amends Code Sec. 401(a) to permit retirement plans to distribute up to $2,500 per year for the payment of premiums for certified long-term care insurance contracts. There is a reporting requirement under new Code Sec. 6050Z for the issuer of such certified long-term care insurance. In addition, distributions from plans to pay such premiums are exempt from the Code Sec. 72(t) additional 10 percent tax on early distributions.
This provision is effective three years after December 29, 2022.
Corrections of Mortality Tables
Section 335 of Title III of CAA 2023 generally requires that for purposes of the minimum funding rules, a pension plan is not required to assume beyond the plan's valuation date future mortality improvements at any age greater than 0.78 percent. Section 335 directs the Treasury Secretary to amend the relevant regulation on this matter within 18 months.
This provision is deemed to take effect on December 29, 2022.
Modification of Required Minimum Distribution Rules for Special Needs Trust
The SECURE Act placed limits on the ability of beneficiaries of defined contribution retirement plans and IRAs to receive lifetime distributions after the account owner's death. Special rules apply in the case of certain beneficiaries, such as those with a disability.
Section 337 of Title III of CAA 2023 clarifies that, in the case of a special needs trust established for a beneficiary with a disability, the trust may provide for a charitable organization as the remainder beneficiary.
This provision is effective for calendar years beginning after December 29, 2022.
Safe Harbor for Corrections of Employee Elective Deferral Failures
Under current Code Sec. 414, employers that adopt a retirement plan with automatic enrollment and automatic escalation features could be subject to significant penalties if even honest mistakes are made. In Rev. Proc. 2021-30, the IRS issued guidance on the correction of failures relating to default enrollment of employees into retirement plans. Rev. Proc. 2021-30 includes a safe harbor, which expires December 31, 2023, that permits correction if notice is given to the affected employee, correct deferrals commence within certain specified time periods, and the employer provides the employee with any matching contributions that would have been made if the failure had not occurred. Employers are concerned about the lapse of the safe harbor at the end of 2023.
Section 350 of Title III of CAA 2023 eases these concerns by amending Code Sec. 414 to provide a grace period to correct, without penalty, reasonable errors in administering these automatic enrollment and automatic escalation features. Errors must be corrected prior to 9 1/2 months after the end of the plan year in which the mistakes were made.
This provision applies with respect to errors after December 31, 2023.
Plan Amendments
Section 501 of Title V of CAA 2023 allows plan amendments made pursuant to CAA 2023 to be made on or before the last day of the first plan year beginning on or after January 1, 2024 (2026, in the case of governmental plans) as long as the plan operates in accordance with such amendments as of the effective date of a bill requirement or amendment.
Section 501 also conforms the plan amendment dates under the SECURE Act, the Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 to these new dates (instead of 2022 and 2024).
SIMPLE and SEP Roth IRAs
Generally, all plans that allow pre-tax employee contributions are permitted to accept Roth contributions with one exception - SIMPLE IRAs. 401(k), 403(b), and governmental 457(b) plans are allowed to accept Roth employee contributions. In addition, aside from grandfathered salaried reduction simplified employee pension plans, simplified employee pension plans (SEPs) can only accept employer money and not on a Roth basis
Section 601 of Title VI of CAA 2023 amends Code Sec. 408A to allow SIMPLE IRAs to accept Roth contributions as well. Section 601 also allows employers to offer employees the ability to treat employee and employer SEP contributions as Roth (in whole or in part).
This provision is effective for tax years beginning after December 31, 2022.
Hardship Rules for 403(b) Plans
The distribution rules for 401(k) and 403(b) plans are different in certain ways that are historical anomalies for varied reasons. For example, for 401(k) plans, all amounts are available for a hardship distribution. For 403(b) plans, in some cases, only employee contributions (without earnings) are available for hardship distributions.
Section 602 of Title VI of CAA 2023 amends Code Sec. 403(b) to conform the 403(b) rules to the 401(k) rules, effective for plan years beginning after December 31, 2022.
Elective Deferrals Generally Limited to Regular Contribution Limit
Catch-up contributions to a qualified retirement plan can be made on a pre-tax or Roth basis (if permitted by the plan sponsor).
Section 603 of Title VI of CAA 2023 amends Code Sec. 403(b)(17) and provides all catch-up contributions to qualified retirement plans are subject to Roth tax treatment, effective for tax years beginning after December 31, 2022.
Optional Treatment of Employer Matching Contributions as Roth Contributions
Plan sponsors are not permitted to provide employer matching contributions in their 401(k), 403(b) and governmental 457(b) plans on a Roth basis. Matching contributions must be on a pre-tax basis only.
Section 604 of Title VI of CAA 2023 amends Code Sec. 402(a) to allow defined contribution plans to provide participants with the option of receiving matching contributions on a Roth basis.
This provision is effective on December 29, 2022.
Other Changes to Retirement Plan Tax Rules
CAA 2023 also amends the rules with respect to the following (all cites are to relevant sections of CAA 2023):
(1) Application of Section 415 limit for certain employees of rural electric cooperatives (Title I, Section 119),
(2) Assistance to states in locating owners of applicable savings bonds (Title I, Section 122),
(3) Performance benchmarks for asset allocation funds (Title III, Section 318),
(4) Elimination of unnecessary plan requirements related to unenrolled participants (Title III, Section 320),
(5) Requirement to provide paper statements in certain cases (Title III, Section 338),
(6) Recognition of tribal government domestic relations orders (Title III, Section 339),
(7) Defined contribution plan fee disclosure improvements (Title III, Section 340),
(8) Consolidation of defined contribution plan notices (Title III, Section 341),
(9) Information needed for Financial Options Risk Mitigation Act (Title III, Section 342),
(10) Defined benefit annual funding notices (Title III, Section 343),
(11) Report on pooled employer plans (Title III, Section 344),
(12) Annual audits for group of plans (Title III, Section 345),
(13) Worker Ownership, Readiness, and Knowledge (WORK) Act (Title III, Section 346),
(14) Backloading of benefit accruals in hybrid plans (Title III, Section 348),
(15) Termination of variable rate premium indexing (Title III, Section 349),
(16) Enhancing retiree health benefits in pension plans (Title VI, Section 606).
In addition, Sections 701 and 702 Title VII of CAA 2023 amend the rules for contributions to the Thrift Savings Plan (TSP) by Tax Court judges and special trial judges.
II. Limitation on Deduction for Charitable Conservation Easements
The tax deduction for charitable contributions of conservation easements is aimed at incentivizing the preservation of critical habitat, open spaces, and historically important areas and structures. However, since 2016, the IRS has identified certain syndicated conservation easement transactions involving pass-through entities as "listed transactions" carrying a high potential for abusive tax avoidance.
Section 605 of Title VI of CAA 2023 disallows a charitable deduction for a qualified conservation contribution if the deduction claimed exceeds two and one half times the sum of each partner's relevant basis in the contributing partnership, unless (1) the contribution meets a three-year holding period test, (2) substantially all of the contributing partnership is owned by members of a family, or (3) the contribution relates to the preservation of a certified historic structure. In the case of a contribution for the preservation of a certified historic structure, a new reporting requirement applies. Section 605 also provides taxpayers the opportunity to correct certain defects in an easement deed (excluding easements involved in abusive transactions) and makes certain changes to statute of limitations and penalty provisions.
This provision is generally effective for contributions made after December 29, 2022.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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