Tax Alert - Secure Act 2.0 – Changes to Retirement Planning Provisions

tax alert

On Thursday, December 29, 2022, President Biden signed into law H.R. 2617, the “Consolidated Appropriations Act of 2023” (“CAA”) making consolidated appropriations for the fiscal year ending September 30, 2023, providing emergency assistance for Ukraine, and enacting other legislative changes.

The CAA includes the “Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022” (referred to as SECURE Act 2.0) that is designed to enhance retirement savings. The original SECURE Act, signed into law on January 1, 2020, made various significant changes to the rules regarding retirement savings, including significant cut-back of the stretch IRA for most non-spousal taxpayers and extension of the mandatory retirement age to 72. SECURE 2.0 makes several changes to the retirement laws.

Required minimum distributions (RMDs).

The new law increases the mandatory retirement age from 72 to 73, starting January 1, 2023, and raises it to 75 on January 1, 2033, for individuals turning 74 after 12/31/2032. This change allows individuals to further delay taking RMDs and defer paying ordinary income tax on the distributions.

Under prior law, if you failed to take the full RMD, you would have been subject to a 50% penalty tax. Now, under SECURE Act 2.0, the penalty tax is reduced to 25%, and further reduced to 10% if the failure is corrected on a “timely” basis.

Additional catch-up contributions.

Beginning January 1, 2025, individuals aged 60 to 63 can make catch-up contributions to 401(k) plans and SIMPLE plans up to the greater of $10,000 ($5,000 for SIMPLE plans) or 150% of the regular catch-up amount. The increased amounts are indexed for inflation after 2025. In 2023, the annual dollar limit on catch-up contributions is $7,500 for 2023, increased from $6,500 for 2022 due to inflation. Further, starting in 2024, all catch-up contributions to non-SIMPLE plans must be Roth contributions for participants with compensation equal to or greater than $145,000 (indexed for inflation).

Qualified charitable distributions (QCDs).

Under prior and current law, you can distribute up to $100,000 per year from your IRA directly to a §501(c)(3) charity after you reach age 70½. Although you can’t claim a charitable contribution deduction on the distribution, you don’t have to report it as taxable income. The new law expands this provision by indexing the $100,000 threshold for inflation. SECURE Act 2.0 also allows you to make a one-time QCD transfer of up to $50,000 through a charitable gift annuity or charitable remainder trust (as opposed to making the gift directly to the charity).

Automatic enrollment.

Beginning in 2025, new 401(k) plans must automatically enroll participants when they become eligible. However, the employees may opt out. If the employee does not opt out, the initial contribution amount is at least 3% but no more than 10% of their compensation. Then, the amount is automatically increased by 1% every year until it reaches at least 10% but no more than 15%. Existing plans are exempt, and the law provides exceptions for new and small businesses.

Student Loan Repayments Treated as Elective Deferral Contributions.

Beginning in 2024, employers can make matching contributions based on an employee’s qualified student loan payments, including under a safe-harbor 401(k) plan.

Emergency Withdrawals.

Beginning in 2024, a participant may make a withdrawal of up to $1,000 per year from their retirement account for certain emergencies. The withdrawal will be taxable and may be repaid within three years, but it will not be subject to the 10% penalty for early withdrawals. Only one withdrawal is permitted per the three-year repayment period if the first withdrawal has not been repaid.

Annuities.

SECURE Act 2.0 overturns IRS regulations that would have prohibited your retirement plan from purchasing annuities in the plan with guaranteed annual increases of only 1% to 2%, return of premium death benefits, and period-certain guarantees.

In addition, the new law relaxes restrictions on qualified longevity annuity contracts (QLACs) — inexpensive deferred annuities that don’t begin payment until the end of the individual’s life expectancy – that are owned by retirement plans. Among other things, SECURE Act 2.0 repeals the 25% limit on the maximum annuity purchase in a qualified retirement plan or IRA and allows up to $200,000 (indexed for inflation) from a retirement plan account balance to be used to purchase a QLAC.

Part-time employee eligibility.

Beginning in 2025, SECURE Act 2.0 makes it easier for long-term, part-time employees to participate in 401(k) plans. They’ll still need to work at least 500 hours before becoming eligible, but they’ll have to work for only two consecutive years, rather than the three years required by the original SECURE Act.

Small business tax credits.

SECURE 2.0 increases the startup credit from 50% to 100% of administrative costs for employers with up to 50 employees. An additional credit is available for some non-defined benefit plans, based on a percentage of the amount the employer contributes, up to $1,000 per employee.

Expansion of 1042 Elections.

Beginning in 2028, owners of an S corporation may defer recognizing taxable income on the sale of their company to an ESOP that owns at least 30% of the corporation’s stock if the sales proceeds are reinvested into qualified replacement property. However, unlike with C corporations, only 10% of the sale proceeds of the sale to an S corporation ESOP may be deferred.

Curtailing Conservation Easement Abuses.

The cost of the new retirement provisions is partially offset by new restrictions on the use of conservation easements. Current law generally allows taxpayers to claim a charitable deduction for qualified donations of real property to charity. The IRS has been increasing enforcement against promoters that develop abusive “syndicated” conservation easements using inflated appraisals and partnership arrangements to reap “grossly inflated” deductions.

As part of the CAA, the Conservation Easement Program Integrity Act disallows charitable deductions for qualified conservation contributions in excess of 2.5 times the sum of each partner’s basis in the partnership making the contribution. An exception is granted if the contribution meets a three-year holding period test, substantially all of the partnership is owned by family members, or the contribution relates to the preservation of a certified historic structure.

Please contact us at www.zelllaw.com or by calling us at 571-203-9355 (-ZELL) if you need more information on this topic or any other estate, business, or tax planning matter.