Year-End Spending Bill Includes Retirement Plan, Conservation Easement Changes

(Parker Tax Publishing December 2022)

On December 19, the text of a year-end omnibus spending bill (Bill) was released. The Bill includes the SECURE 2.0 Act of 2022, which is aimed at expanding enrollment in retirement plans and increasing retirement savings. The Bill also includes changes to charitable conservation easement contribution deductions made by pass-through entities. The change generally limits the amount of a partnership's deduction to 2.5 times the sum of each partner's basis in the partnership. H.R. 2617.

Retirement Plan Provisions

The following are some of the more important changes to the retirement-related provisions included in the SECURE 2.0 Act:

Expanded Automatic Enrollment in Retirement Plans: Code Sec. 401(k) plans and Code Sec. 403(b) annuity contracts would be subject to new automatic enrollment requirements, including a minimum contribution percentage of between 3 and 10 percent for contributions by a participant during the first year of participation. Certain businesses, such as new businesses that have been in existence for less than 3 years and small businesses that employ 10 or fewer employees, would be exempt from the automatic enrollment requirements.

Expanded Credit for Small Employer Pension Plan Startup Costs: The Bill provides for an increased credit percentage under Code Sec. 45E for startup costs paid by small employers to establish or administer an eligible employer plan. The provision increases the credit percentage from 50 percent to 100 percent of qualified startup costs for employers of up to 50 employees. The bill also enacts new Code Sec. 45E(f) to provide an additional credit for contributions by certain eligible employers.

Saver's Match: New Code Sec. 6433 provides a matching contribution paid by the government to certain individuals who make qualified retirement savings contributions. The amount of the matching contribution is generally 50 percent of up to $2,000 of the contributions made by the individual for the tax year and would be subject to phaseouts based on the taxpayer's modified adjusted gross income. For joint filers the phaseout range would be $41,000 to $71,000; for heads of household, $30,750 to $53,250; and for single filers and married filing separately, $20,500 to $35,500.

Increase in Age for Mandatory Required Minimum Distributions: The Bill would amend Code Sec. 401(a)(9) to increase the age for mandatory annual required minimum distributions from age 72 to age 73, in the case of an individual who attains age 72 after December 31, 2022, and age 73 before January 1, 2033. The age would be increased to age 75 in the case of an individual who attains age 74 after December 31, 2032. This provision would apply to distributions required to be made after December 31, 2022, with respect to individuals who attain age 72 after that date.

Higher Catch-up Limits to Apply at Age 62, 63, and 64: The current annual $1,000 limit for additional catchup contributions to a retirement plan other than a SIMPLE plan for individuals age 50 or over would be increased to $10,000 for individuals age 62-64. In addition, for tax years beginning after 2023, the annual catchup contribution limit would be subject to adjustment for inflation.

Starter 401(k) Plans for Employers with No Retirement Plan: Under new Code Sec. 401(k)(16), employers could offer "starter" plans with simplified requirements. Starter plans generally would be required to offer automatic deferral of at least 3 percent and not more than 15 percent of an employee's compensation and limit employee contributions to $6,000.

Changes to Qualified Conservation Contribution Rules

The Bill also includes provisions on conservation easement deductions by pass-through entities. Under new Code Sec. 170(h)(7), a contribution by a partnership generally would not be treated as a qualified conservation contribution if the amount of the contribution exceeds 2.5 times the sum of each partner's basis in the partnership. However, exceptions would apply for contributions of property with a holding period of at least 3 years and for family partnerships.

The Bill would also amend Code Sec. 6662(b) to apply an accuracy-related penalty to the portion of an underpayment which is attributable to the disallowance of a deduction under new Code Sec. 170(h)(7). In addition, a disallowance of a deduction would also be subject to the gross valuation misstatement penalty under Code Sec. 6662(h). Moreover, the reasonable cause exception under Code Sec. 6664(c)(2) would not apply, and the IRS would not be required to obtain written supervisory approval for applying penalties.

In addition, the Bill would amend Code Sec. 170(f) to codify certain reporting requirements for qualified conservation contributions made by partnerships that exceed 2.5 times the sum of each partner's basis in the partnership. Further, the Secretary of the Treasury is instructed to publish safe harbor deed language for extinguishment clauses within 120 days of the enactment of the Bill. A 90-day period for donors to amend easement deeds in order to substitute safe harbor language is also provided.

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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