On December 29, 2022, President Joe Biden signed into law the Consolidated Appropriations Act of 2023 (CAA). Included in the CAA legislation is the SECURE 2.0 Act of 2022 (SECURE 2.0), which continues the goal of setting employees up for retirement that the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 started. For highlights related to new employee stock ownership plan (ESOP) formations, see our previous FORsights™ article, “The Consolidated Appropriations Act of 2023 Brings Good News for ESOPs.” Additional highlights of SECURE 2.0 and their impact on existing ESOPs are included below.
Increased Age for Beginning Date of Required Minimum Distributions (RMDs)
The SECURE Act of 2019 originally increased the mandatory age to begin receiving RMDs from age 70½ to 72. SECURE 2.0 further increased the age requirement from 72 to 73 for those who attain age 72 after December 31, 2022 and age 73 before January 1, 2033. The age increases to 75 for those who attain age 74 after December 31, 2032.
In general, when ESOP participants terminate with a vested account balance between $1,000 and $5,000, the company can cash out participants without their consent as long as the distribution is rolled over to an IRA on behalf of the participant. The limit for involuntary distributions to a participant prior to attaining normal retirement age is increased from $5,000 to $7,000 for distributions after 2023.
Increased Catch-Up Limit
Under current rules, employees over age 50 can make additional “catch-up” contributions to eligible plans such as 401(k)s. The catch-up amount for 2022 was $6,500, and for 2023 it’s $7,500. SECURE 2.0 increases the catch-up limit, for taxable years beginning after December 31, 2024, to the greater of $10,000 or 150% of the standard catch-up amount for that year (but only for employees who attain the age of 60, 61, 62, or 63 during the taxable year).
Retirement Plan Overpayments
Prior to SECURE 2.0, plan sponsors faced uncertainty with the treatment of participant overpayments stemming from an administrative error. When the company pays the overpayment, has the overpayment harmed existing participants? Should the company try to recoup the money? SECURE 2.0 now provides flexibility and no longer requires the overpayments to be recouped.
Withdrawals for Emergency Expenses
SECURE 2.0 allows participants to make one emergency withdrawal of up to $1,000 per year from a retirement account. This distribution is exempt from the IRS 10% early withdrawal penalty and can be repaid over the following three years. During this three-year repayment period, the participant may not receive any further emergency withdrawals unless the distribution has been fully repaid or subsequent deferrals and contributions are at least equal to the distribution. This provision applies to distributions made after December 31, 2023. Although this provision applies to ESOPs as well as other retirement plans, in practicality most ESOPs do not allow distributions like these.
Expansion of Employee Plans Compliance Resolution System (EPCRS)
SECURE 2.0 now allows self-correction of any inadvertent compliance failure under the EPCRS, regardless of when it occurred and its degree unless (1) the IRS identified the failure before actions were taken to correct it, or (2) the self-correction is not completed within a reasonable period.
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