Anyone who has ever dealt with Internal Revenue Code section 457 and the deferred compensation plans authorized by it will understand the title to this article.   Code section 457 describes the tax consequences of two kinds of plans:  eligible deferred compensation plans (457(b) plans) and ineligible plans (457(f) plans). The two have very different tax consequences. Participants in an eligible plan generally do not recognize the benefits as income until they are received. Under an ineligible plan benefits are taxed when vested.

Additionally, Code section 457 addresses unfunded deferred compensation plans of both State and local governmental entities and tax exempt organizations. Section 457 plans have very different characteristics and personalities depending on whether they are sponsored by a governmental entity or a tax exempt organization.  Governmental 457(b) plans are much more like a qualified plan, including the requirement that the assets be held for the exclusive benefit of employees in a trust, custodial account, or annuity. On the other hand, a 457(b) plan sponsored by a tax exempt organization is much more similar to a nonqualifed deferred compensation plan. Further Code section 457 provides the polar opposite with respect to assets, providing that the plan assets must remain the employer’s subject to its creditors.

I will be discussing the different characteristics, similarities and differences between 457 plans in a webcast titled “The Bipolar 457 Plan” for the National Institute of Pension Administrators on June 14. I hope you will join me.

On May 4, the IRS issued Notice 2023-36 inviting the public to submit recommendations for its 2023-2024 Priority Guidance Plan. While the IRS has its hands full due to the over 90 changes to retirement plan law contained in the SECURE 2.0 legislation enacted last December, I believe one particular provision needs guidance as soon as possible, the new expansion of self-correction under the Employee Plans Compliance Resolution System (EPCRS) for eligible inadvertent failures.

Old Rules of Self-Correction.

EPCRS includes a Self-Correction Program (SCP) through which plan sponsors can self-correct certain types of errors without the need to make a submission to the IRS to obtain approval. It currently classifies operational failures as either insignificant or significant. An insignificant operational failure may be corrected at any time. A significant operational failure must be corrected by the end of the third plan year after the plan year in which the failure occurred.

Whether a failure is insignificant (or significant) is based on the relevant facts and circumstances. EPCRS identifies 7 factors to be applied in making the determination. These are: 1)  Whether other failures occurred during the plan year; 2) The percentage of plan assets and contributions involved in the failure; 3) The number of years the failure occurred; 4) The number of participants affected relative to the total number of participants; 5) The number of participants affected relative to the number of participants who could have been affected; 6) Whether the correction was made within a reasonable time after discovery of the failure; and 7) The reason for the failure (e.g., data transcription error or minor math error, etc.).

I have always been fairly critical of this regime for determining significance principally because the EPCRS Rev. Proc. doesn’t clearly show how one should apply the factors or how many factors a sponsor must meet to conclude the failure is insignificant. It does state the no single factor is determinative. The Rev. Proc. then only applies the factors through examples concluding whether the failure was significant or not. However, each example applies no more than 2 factors. Therefore, for close cases, the sponsor needs to decide whether to self-correct and risk the possibility that the IRS could disagree, that the failure qualified for self-correction. The alternative would be to file under the Voluntary Correction Program (VCP), pay a user fee to the IRS, and wait for a compliance statement from the IRS stating it would not disqualify the plan based on the identified failures, if corrected as proposed. Often, the more expensive VCP route would be chosen by the sponsor to get assurance.

SECURE 2.0 Expansion.

SECURE 2.0 generally states that unless otherwise provided in the Internal Revenue Code, regulations, or other Treasury guidance, any “eligible inadvertent failure” to comply with the rules for tax favored status by certain plans may be self-corrected under EPCRS as set forth in Rev. Proc. 2021–30, (or any successor guidance). Self-correction is not available if such failure was identified by the Secretary of the Treasury prior to any actions which demonstrate a specific commitment to implement a self-correction with respect to such failure; or the self-correction is not completed within a reasonable period after such failure is identified by the plan sponsor. Provided self-correction is available under the above criteria, an eligible inadvertent failure, may be corrected at any time. The plans whose inadvertent eligible failures may be so self-corrected are qualified retirement plans (401(k), profit sharing, pension), 403(b) plans, SEPs, SIMPLE IRA plans and IRAs.

What Is An “Eligible Inadvertent Failure?

An eligible inadvertent failure is defined as a failure that occurs despite the existence of practices and procedures which: 1) satisfy the standards set forth in EPCRS, or 2) satisfy similar standards in the case of an individual retirement plan. EPCRS requires that the plan have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements and these established procedures must be in place and routinely followed. Additionally, the failure is not eligible if it is egregious, relates to the diversion or misuse of plan assets, or is directly or indirectly related to an abusive tax avoidance transaction.

Guidance Needed.

Just reading the above demonstrates that the language of the statute uses many terms that need to be better defined through guidance. What action is sufficient to show a specific commitment to implement self-correction? For example, if a sponsor discovers that a number of employees weren’t automatically enrolled when they should have been and is in the process of calculating the correction amounts when audited by the IRS, is that sufficient? How specific do practices and procedures need to be? Can a sponsor have practices and procedures in place to amend the plan for any required changes in the law so that a failure to timely amend can be self-corrected as an eligible inadvertent failure? What practices and procedures do IRAs need? What is a reasonable period to complete the correction? Currently, if an operational failure is insignificant, there is no time period, will that standard go away? If an operational failure is significant, is completing correction after 3 years unreasonable? Will the significant/insignificant dichotomy go away? What is an egregious inadvertent failure?

Conclusion.

The new self-correction provision of SECURE 2.0 is effective upon enactment. While Congress directed the IRS to revise the EPCRS Rev. Proc. within 2 years of enactment, guidance is needed well before then. Hopefully, such guidance will “fill in the blanks” that the statute created to give plan sponsors and practitioners clearer parameters of the new program. Additionally, hopefully it will have brighter lines than the 7 factors of significance under the current SCP.

You may have noticed that The Benefit of Benefits Blog looks different. That is because it has been re-designed to match the branding of my new law firm.  I am very pleased to have joined the ERISA and Employee Benefits Attorneys at Trucker Huss effective March 21, 2023. With more than 30 legal professionals, Trucker Huss is one of the largest employee benefits specialty law firms in the country with offices in San Francisco, Los Angeles and Portland. 

I will be leading the Equity and Executive Compensation practice as well as working on qualified retirement plans and correction work that I have always done.  While the firm is headquartered in San Francisco, I will remain in the Sacramento area working remotely and servicing my Sacramento clients as well as other firm clients. 

I feel so fortunate to join such a well-respected firm of employee benefit professionals. Trucker Huss now has eight attorneys that have been inducted as Fellows into the prestigious American College of Employee Benefits Counsel for their contribution to the employee benefits field. We also have attorneys who concentrate their practices in all aspects of employee benefits law. There is really no issue in the ERISA and employee benefits area that Trucker Huss cannot handle. 

Several studies continue to show the importance of nonqualified deferred compensation (NQDC) plans to attract and retain executive level talent for employers. See Study Shows The Need For Nonqualified Plans To Attract And Retain Talent. SECURE 2.0 also contains a provision that may encourage the use of NQDC plans. It provides that after 2023, catch-up contributions under 401(k), 403(b) or governmental 457(b) plans by employees (over the age of 50) whose wages exceed $145,000 must be made on an after-tax Roth basis. The earnings on such catch-up contributions are then tax-free when paid.

This “Rothification” of catch-up contributions was a revenue raiser to help balance other provisions within the budget bill containing SECURE 2.0. What this means is that older highly-paid executives who desire to save more for retirement would have to do so with after-tax contributions under the above plans. However, an NQDC plan can allow some or all of those executives to defer salary on a tax-deferred basis instead of through catch-up contributions under the 401(k), 403(b) or 457(b) plan. Additionally, the NQDC plan does not have to limit deferrals to the catch-up amount ($7,500 in 2023). Of course, the contributions and earnings on the NQDC plan contributions will be taxed as ordinary income upon distribution. Additionally, the employer does not get a tax deduction until the employee recognizes the income.

$145,000 May Not Be Enough.

Of course, an NQDC plan must be a top hat plan designed for a select group of management or highly compensated employees to avoid Title I of ERISA. The fact that an employee earns more than $145,000 annually will not necessarily make her or him a member of the top hat group. In this context “highly compensated employee” does not have the same meaning as under Code section 414(q) for qualified plans. A legal analysis comparing each proposed employee’s compensation to others in the organization as well as the duties of such employees should be undertaken to ensure they are considered to be in the top hat group.

Disadvantages.

A 401(k), 403(b), or governmental 457(b) plan has a definite advantage over an NQDC plan. The assets are set aside from the employer to be used for the exclusive benefit of the participants. On the other hand, assets in an NQDC plan must remain subject to the employer’s creditors to avoid the employees being subject to current income taxation. However, a “rabbi” trust could be used to hold the deferrals and earnings. Under such a trust the trustee can only use the assets to: pay benefits when due under the NQDC plan; or to pay the employer’s creditors when the employer is insolvent. Thus, as long as the employer is solvent, the employee-participants will be paid their benefits.

Another disadvantage would be that the NQDC plan is subject to Code section 409A and running afoul of its provisions would cause the executive to be subject to income tax to the extent vested (and elective deferrals are always 100% vested) and also subject to an additional 20% federal tax. California residents would also be subject to an additional 5% state tax. However, properly drafted and operated, an NQDC plan shouldn’t violated Code section 409A.

Conclusion.

With Congress mandating catch-up contributions for higher paid employees to be Roth contributions beginning next year, employers should consider whether such employees would use an NQDC plan as a reasonable substitute for pre-tax catch-up contributions. Of course, if the employer already has an NQDC plan allowing elective deferrals, the executive may just want to increase her or his deferrals under that plan.

Among the many changes in the SECURE 2.0 legislation are a number of provisions allowing participants to access their retirement funds without incurring a penalty excise tax. These provisions are discussed below.

Withdrawals for Terminal Illness or Domestic Abuse. Effective on the date of enactment (December 29, 2022), SECURE 2.0 authorizes a plan to permit a participant diagnosed with a terminal illness to withdraw money from his or her retirement account regardless of age. The distribution will not cause the Participant to incur the 10% excise tax for withdrawals prior to age 59 1/2. However, it is still income.

Likewise, beginning in 2024, a plan can permit a domestic abuse survivor to withdraw the lesser of $10,000 or 50% of the participant’s account. While taxable income, the distribution is not subject to the 10% early withdrawal penalty. The Participant can self-certify that he or she has experienced domestic abuse. The general idea is that the participant may need the money to escape an unsafe situation. However, no reason for needing the money needs to be stated.

Additionally, the participant can repay the withdrawn amounts over a 3-year period. The repayments may be made to a different plan or an IRA and are treated as roll over contributions which allows for a refund of the income taxes paid on the withdrawn amount once they are repaid.

Qualified Disaster Recovery Distributions. Similarly, effective for disasters occurring on or after January 26, 2021, plans can allow withdrawals of up to $22,000 for participants living in a federally declared disaster area that have sustained an economic loss due to the disaster. This is a permanent rule for any federally declared disaster as opposed to prior rules on a case by case basis. Unlike the terminal illness or domestic abuse withdrawals, these can be taken into income over a three-year period. They too escape the early withdrawal excise tax and can be repaid as rollovers to a plan or IRA over a three-year period. The distributions must be made within 179 days after the later of (i) the first day of the disaster incident period or (ii) the date of the disaster declaration. For federal disasters occurring on or after Jan. 26, 2021, and before enactment of SECURE 2.0 (Dec. 29, 2022), eligible individuals can take a qualified disaster recovery distribution until June 27, 2023, if that date is later.

Additionally, during the applicable period for taking a disaster distribution, plans can allow participant loans to affected employees of the lesser of $100,000 or the present value of the benefit. This is twice the amount of a normal participant loan.

Also, loan payments that fall due during the applicable period for a disaster distribution may be suspended for a year and remaining payments adjusted. Finally, a participant who took a hardship distribution from the plan to purchase or construct a home within 180 days of the disaster, that will not be so used due to the disaster, may recontribute that distribution back to the plan.

$1,000 Emergency Withdrawals. Also beginning in 2024, a plan can permit a penalty-free withdrawal of up to $1,000 by a Participant for certain emergency expenses. Only one such emergency withdrawal can be made each year. The emergency expenses must be unforeseeable or an immediate financial need relating to personal or family emergencies.

The Participant can repay the distribution within 3 years.

Emergency Savings Accounts. Effective on the date of enactment (December 29, 2022) employers maintaining individual account plans may provide for a separate emergency savings account under the plan for nonhighly compensated employees. Contributions to such accounts must be on an after-tax Roth basis and cannot exceed $2,500 annually. Once the annual limit is reached, the contributions must stop or be re-directed to the Participants other Roth account under the plan. The employer can auto-enroll its nonhighly compensated employees at no more than 3% of salary.

Such emergency account contributions are considered elective deferrals subject to matching if the plan provides for matching contributions. At separation from service the account balance may be rolled over to any Roth account in a defined contribution plan or Roth-IRA.

Conclusion. SECURE 2.0 authorizes many ways a plan can allow participants access to their retirement savings for other reasons. The repayment features are meant to avoid retirement savings leakage that could otherwise occur if the amounts could not be repaid to the plan. It remains to be seen if amounts that can be repaid are repaid in practice. Of course, these provisions are all optional, making the decision whether to include them in the discretion of the sponsoring employer as a matter of plan design.

Among the many provisions of the SECURE 2.0 legislation are a number of provisions designed to encourage employees to participate in and contribute to their employer provided retirement plan. Still other provisions provide more access to money in such plans under certain circumstances. This article will address provisions that encourage participation. A subsequent article will cover accessing retirement plan money.

Financial Incentives For Contributing. Effective for plan years after December 29, 2022, employers sponsoring 401(k) and 403(b) plans can offer de minimis financial incentives such as low-dollar gift cards for participating in the plan. The incentives cannot be paid for by plan assets. Guidance will be needed as to what constitutes a “de minimis” financial incentive.

Auto-Enrollment and Auto-Escalation For New Plans. I’ve already addressed the required automatic enrollment and automatic escalation provisions of SECURE 2.0 for new 401(k) or 403(b) plans beginning in 2025 in a prior post. See, SECURE 2.0 Requires Auto-Enrollment, Auto-Escalation For Most New Plans.

Permitting Long Term Part-Time Employees To Contribute. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. SECURE 2.0 expands this requirement to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans.

Student Loan Payments As Elective Deferrals. To encourage employees saddled with student loan debt from college that may otherwise not be able to save for retirement and share in corresponding employer matching contributions, SECURE 2.0 permits 401(k), 403(b), SIMPLE IRA, and governmental 457(b) plans to be designed to allow employer matching contributions to be made for “qualified student loan payments.” Essentially, the plan can treat the loan payments as elective deferrals under the plan. This provision is effective for plan years beginning after 2023.

Higher Catch-Up Contributions For Older Participants. For tax years after 2024 the limits on catch-up contributions are increased for participants age 60-63. The current catch-up limit is $6,500 for participants age 50 or older ($3,000 for SIMPLE IRAs). The increased limit is the greater of $10,000 or 1.5 times the regular catch-up limit for 2025. The amount is indexed for inflation after 2025. However, it must also be noted that after 2023, catch-up contributions by employees whose wages exceed $145,000 under 401(k), 403(b) or governmental 457(b) plans must be made on an after-tax Roth basis.

Saver’s Match Replacing Saver’s Credit. Tor tax years beginning after 2026, the current Saver’s credit for certain lower-earning participants is replaced by a Saver’s matching contribution from the Federal government to the retirement plan. The match is 50% of the employee’s contribution to an IRA or retirement plan up to a maximum of $2,000 per individual. The match phases out at certain income levels and becomes unavailable when the individual earns too much ($35,500 for single taxpayers, $71,000 for married filing joint). The match replaces the current non-refundable credit which is not valuable to many eligible employees because they have little or no tax liability for the credit to reduce to zero and the excess credit amount cannot be refunded.

Conclusion. These provisions all attempt to encourage employees to participate in, or to contribute more to, their employer’s retirement plan. Of course, some of these provisions are up to the discretion of the employer, such as whether to offer de minimis financial incentives or permitting student loan payments to be matched. Others are mandatory such as the automatic enrollment and escalation for new plans or permitting long term part-time employees to contribute.

My next blog will address some provisions of SECURE 2.0 that allow participants access to their money in the plan. These too can be seen as incentives to participate as they allow access to retirement money before retirement.

Among the many changes to retirement plans made by the SECURE 2.0 legislation are changes meant to encourage more employers to adopt retirement plans for their employees. Additionally there are provisions simplifying many rules of operating plans and provisions encouraging employees to participate and save for retirement. This article will discuss a couple of provisions encouraging employers to adopt plans.

Changes to Credit for Startup Expenses of Small Employers. The original SECURE Act of 2019 drastically increased the employer credit for employers with 100 or fewer employees adopting a new retirement plan. It increased the amount of credit for startup costs and provided the credit could be taken in the first 3 years of the plan. Beginning in 2019 the credit was 50% of the startup expenses up to the lesser of $5,000 or $250 for each eligible nonhighly compensated employee.

SECURE 2.0 changes the credit for employers with up to 50 employees for taxable years beginning after 2022. It increases the percentage to 100% of the startup costs. In addition, SECURE 2.0 creates an additional credit based on the amount of employer contributions to plans other than defined benefit plans. The credit is a percentage of the amount contributed for employees who make less than $100,000, up to $1,000 per employee. The percentage of contributions is 100% for the first two years of the plan but drops by 25% for the next three years with no credit available after the fifth year of the plan. The full credit is available to employers with 50 or fewer employees but is phased out for employers with 51 to 100 employees.

The Act clarifies that the credit is available for employers who join an existing Multiple Employer Plan including Pooled Employer Plans.

Starter Plans. Effective after 2023, Employers who don’t offer a retirement plan can adopt a “Starter” 401(k) or safe harbor 403(b) plan that only permits employee elective deferrals. The plan must auto-enroll all employees with a 3% to 15% deferral rate. The elective deferrals would be limited to the IRA limits (currently $6,500 with a $1,000 age 50 catch-up). Such plans would not be subject to nondiscrimination or top heavy testing which many employers see as deterrents to adopting a plan.

Conclusion. Millions of Americans do not have access to a retirement plan at work. The credits and starter plans are both aimed at increasing the ability of Americans to save for retirement at work by providing incentives for employers to adopt retirement plans. Whether it works remains to be seen.

A provision of the SECURE 2.0 legislation will affect an employer’s decision as to whether to adopt a 401(k) plan or 403(b) plan. The provision requires most 401(k) plans and 403(b) plans (Plans) adopted after the date of enactment of SECURE 2.0 (December 29, 2022) to automatically enroll eligible employees with an automatic contribution that will automatically escalate each year for plan years beginning after 2024.

Exceptions. The legislation gets to being only applicable to new Plans in a round about way. It provides that all Plans must provide the automatic enrollment and escalation as of the effective date. However, all Plans existing on the date of enactment are grandfathered from the requirement as an exception. Additionally, new employers, in existence for less than 3 years, are excepted from the requirement, until their fourth year. There is also an exception for Plans of employers who normally employ 10 or fewer employees until the year after the employer normally employs more than 10 employees. Governmental and church plans are also excepted, as are SIMPLE plans. Interestingly, if an employer with an existing plan on the date of enactment joins a multiple employer plan (MEP), the grandfathering disappears. Each Plan of an employer in the MEP is treated as a separate plan.

Automatic Deferral and Escalation. For plan years beginning after 2024, affected Plans must automatically enroll all eligible employees at a salary deferral rate of at least 3% of compensation but no more than 10%. The participant can elect to opt out or to change the Plan’s stated percentage. The automatic rate is increased 1% annually until reaching at least 10%, but no more than 15%. It is unclear how this works. It appears that this means if the Plan is drafted with an initial automatic deferral of 10%, it would continue the annual automatic escalation until it reached 15%. However, what if the initial deferral rate is only 9%, can it stop at 10%? Regulatory guidance is needed in this regard. Like with the automatic deferral, the participant can change or eliminate the automatic escalation.

Sound Familiar? If this auto-enrollment-auto-escalation sounds familiar to readers in California, it is probably because the state mandated payroll deduction IRA program for employers not maintaining a retirement plan, CalSavers, uses a similar approach.

Guidance Needed. Like many provisions of SECURE 2.0 this provision will need regulatory guidance to be completely understood. I already mentioned the automatic escalation provision above. Another example is, how do you measure how many employees a business “normally” employs?

Conclusion. SECURE 2.0 contains the automatic enrollment provisions because studies consistently show that most employees do not change an automatic enrollment. Therefore, it promotes retirement savings. This is also why many state mandated IRA programs, like CalSavers, also require automatic enrollment and escalation. While choosing the initial deferral rate (between 3% and 10%) is up to employer discretion as a matter of plan design, having to administer automatic enrollment and automatic escalation will be a consideration as to whether an employer desires to adopt a new 401(k) plan or 403(b) plan. Of course, in California, any employer not excepted from this provision of SECURE 2.0, that does not maintain a retirement plan, would have to implement the automatic enrollment-automatic escalation payroll deduction for any employees that do not opt out, under CalSavers. Adopting a profit sharing plan with only employer contributions would be one way to avoid automatic enrollment and escalation. Of course, this means the benefits are funded by employer contributions only.

Stay tuned for more articles on provisions of the massive SECURE 2.0 legislation including provisions encouraging employers to adopt retirement plans and provisions encouraging employees to participate in plans.

Of the over 90 provisions contained in the SECURE 2.0 legislation is a handful that only apply to retirement plans of nonprofit, tax exempt organizations (EOs). One is specific to EOs sponsoring 457(b) plans and others involve 403(b) plans. These provisions are discussed below.

457 RMD Amendment Deadline Extended. Late last year, I wrote on how, unlike 401(k) or 403(b) plans whose deadline was generally extended to the end of the plan year beginning in 2025, calendar year 457(b) plans of non-governmental EOs had to be amended by the end of 2022. Specifically an amendment was needed for the raising of the age for required minimum distributions (RMDs) from age 70 1/2 to age 72, unless legislation were enacted postponing the deadline. See Tax Exempt Organizations Must Amend 457(b) Plans By December 31 For Increased RMD Age. Well, SECURE 2.0 was enacted on December 29 and contains a provision extending the deadline to conform to the 2025 deadline of other plans.

For EO sponsors who amended their plans by year-end there is no harm in doing so. Those who bore the risk, won the bet. However, SECURE 2.0 also raises the age for participants turning age 72 after December 31, 2022, to age 73. It further raises the age to 75 for participants turning age 74 after 2032. Thus, additional amendments will have to be made by 2025. And, of course, the plan will have to be operated in accordance with the new law before being amended.

403(b) Changes. The following provisions specifically address EOs that sponsor 403(b) plans.

MEPs and PEPs. SECURE 2.0 allows multiple employer plan (MEPs) and pooled employer plan (PEPs) to be made up of sponsors of 403(b) plans beginning in 2023. These are plans allowing multiple employers to join together to get economies of scale when it comes to plan expenses such as recordkeeping and investment charges..

Collective Investment Trusts. Effective immediately, the tax code allows 403(b) plans to invest in collective investment trusts. Previously such plans could only offer annuities or mutual funds as investments. However, before an EO can actually implement such a change the federal Securities laws also need to be changed.

Hardship Withdrawals. For plan years beginning after 2023 a 403(b) plan may allow hardship withdrawals to be made from employer contributions instead of only employee elective contributions. Specifically hardship withdrawals can be made from qualified nonelective contributions (QNECs) and qualified matching contributions (QMACs) and earnings from such contributions.

Long Term Part-Time Employees. In 2019, the original SECURE Act required 401(k) plans to begin permitting any part-time employee that worked more than 500 hours for three consecutive years to be able to make elective deferrals to the plan beginning in 2024. This provision did not apply to 403(b) plans. SECURE 2.0 expands it to 403(b) plans effective for plan years beginning after 2024. It also reduces the number of consecutive years of 500 or more hours to two for both types of plans. This is a significant change to the universal availability rule for 403(b) plans which allowed the exclusion of employees who normally work less than 20 hours per week and who did not accumulate 1,000 total hours in the eligibility period.

Conclusion. EOs that sponsor such plans have time to make amendments to the plans. However, plans must be operated in accordance with applicable changes upon becoming effective. The RMD rules changes and Long Term Part-Time Employee changes are required amendments. The collective investment trusts and hardship withdrawals are in the discretion of the employer as a matter of plan design.

By now you probably know that the $1.7 billion Budget Reconciliation Act of 2023 (Act) that kept the Federal government funded was enacted on December 29, 2022. You are probably also aware that the legislation known as SECURE 2.0 was part of the legislation. However, you might not know that there are close to a hundred provisions affecting retirement plans contained in over 400 pages of the 4,000+ page Act. That is far too many to try to summarize in a single blog article. Therefore, I will be summarizing key provisions over several articles in the coming weeks.

The goal of the legislation is to improve the private retirement system by providing incentives for employers to adopt plans, making it easier to administer plans and correct errors, and providing incentives for increased participation by employees. It is important to note that while some provisions are effective immediately, and affected plans must be operated accordingly, plan documents generally need not be amended before 2025. While the effective dates vary by provision, this article will address some of the provisions that are effective now.

Changes to EPCRS. The Act legislatively expands the types of plan errors that can be corrected under the IRS’s Employee Plans Compliance Resolution System (EPCRS), including creating a new type of error, the “eligible inadvertent failure” (EIF). An EIF is a failure that occurs despite the existence of practices and procedures that satisfy the EPCRS principles or similar principles for IRAs. However, an EIF cannot be an egregious failure or one relating to misuse of plan assets or an abusive tax avoidance transaction. EIFs may be self-corrected at any time.

The Act specifically includes EIFs dealing with plan loans and provides that if self-corrected under EPCRS, it shall be treated as being self-corrected under the DOL’s Voluntary Fiduciary Correction Program. The Act also directs the Treasury to expand EPCRS to allow EIFs of IRAs, including waiving the draconian excise tax for failure to take required minimum distributions and correcting erroneous rollovers by nonspouse beneficiaries of inheritied IRAs.

The Treasury Department is to issue guidance on these provisions within 2 years of the date of enactment. These are welcome changes although the IRS now has to incorporate them into EPCRS by issuing a new Revenue Procedure outlining the program. Currently, insubstantial operational failures may be self-corrected at any time and I have been a critic of how those rules are written. See IRS Revamps EPCRS: Expands SCP; Eliminates Anonymous VCP Submissions; Expands Overpayment Safe Harbor to DB Plans; and A More In Depth Look At The Expansion Of Self-Correction Under EPCRS. Hopefully, this time we will get clearer rules that reduce the risk of self-correction.

Required Minimum Distributions. The Act contains many provisions regarding required minimum distributions (RMDs). For participants turning age 72 after December 31, 2022, the age for taking RMDs is raised to age 73. It further raises the age to 75 for participants turning age 74 after 2032. The SECURE Act of 2019 had raised the age from 70 1/2 to 72.

The Act also reduces the excise tax for failing to take RMDs from 50% to 25%. If the failure to take RMDs is from an IRA it can be further reduced to 10% if corrected in a timely manner (generally the earlier of 2 years of when it should have been taken or when a notice of deficiency is received or the the tax is assessed).

Self-Certification of Hardship Event or Unforseeable Emergency. Administrators of 401(k) or 403(b) plans can now rely on an employee’s written self-certification that he or she has experienced a safe harbor hardship event described under the regulations (e.g., medical bills; home repairs, funeral expenses) when applying for a hardship distribution. Likewise, administrators of governmental 457(b) plans may rely on such self-certification that the participant is faced with an unforeseeable emergency described in regulations. Previously administrators could only rely on self-certification that the amount requested was not in excess of the amount required to satisfy the need, and the participant still had to provide evidence that the event occurred.

Election Of Roth Employer Contributions. 401(k) plans, 403(b) plans, and governmental 457(b) plans may now allow participants to elect to have matching contributions or nonelective employer contributions made on a Roth (after-tax) basis. Whether the plan so provides is up to the discretion of the plan sponsor as a matter of plan design.

Conclusion. As mentioned, there are too many provisions to try to summarize in a single blog article. These are some of the major changes made by the Act that are currently effective. Stay tuned as later posts will summarize other provisions becoming effective in later years.