In our ongoing series on the Annual Regulatory Update, we’ve already explored legislative changes and key insights from the Department of Labor. Now, in this blog, we turn our attention to the latest updates from the Internal Revenue Service.
IRS Pre-examination Pilot Program Enters Phase TwoIn February, the Internal Revenue Service (IRS) announced that it is extending its 2022 pilot program that provides retirement plan sponsors with 90-day notices that their plan has been selected for examination.
Upon notification, the plan sponsor can avoid a fullaudit by reviewing their plan, correcting certain errors, and demonstrating compliance with the applicable Internal Revenue Code rules by the end of the 90-day period. The corrections could be made by selfcorrection
using the correction principles under the Employee Plans Compliance Resolution System (EPCRS) voluntary compliance program described in Revenue Procedure 2021-30.
Due to the success of Phase One in 2022, the IRS has started a second phase that will extend the opportunity for plan sponsors to continue the reexamination compliance program. The IRS will evaluate the effectiveness at the end of the pilot to determine if should continue to be part of the overall compliance strategy.
Long-term Part-time Employees in 401(k) Plans
In May, The IRS released a newsletter that provided actions to assist plan sponsors in avoiding errors regarding the changes to long-term part-time employees’ eligibility to make deferrals in 401(k) plans.
IRS Releases Final RMD Regulation Contained in SECURE Act
In July, the IRS published the final regulation in the Federal Registrar for required minimum distributions (RMDs) contained in the SECURE Act and SECURE 2.0. The final regulation confirms that when an individual of a defined contribution plan dies after RMDs have begun, yearly distributions must continue to be made to non-spousal beneficiaries with the account, and the account must be completely depleted within 10 years. Previously, the IRS had provided relief from the rule through 2024 (the most recent extension in Notice 2024-35). With the final rules, it is unlikely there will be relief from the rule after 2024.
IRS Notice 2024-02
On Dec. 30, 2023, the IRS provided guidance in Notice 2024-02 for various provisions regarding SECURE 2.0. Some of the guidance confirmed expected administrative components of the Act, but a few notable clarifications are below.
De minimis financial incentives
SECURE 2.0 allows de minimis financial incentives funded from sources other than the plan to encourage employees to enter the plan.
The Notice clarifies:
- Amount: Incentives can't exceed $250.
- Type: Gift cards are allowed, but matching contributions are not. The Notice does not define
other acceptable incentives. - Eligibility: Incentives can only be offered to employees without current deferral elections.
- Form: Incentives can be paid in installments based on continued deferrals.
- Tax Treatment: De minimis incentives are taxable and subject to withholding, unlike de minimis fringe benefits. For example, a $200 gift card is taxable as it is a cash equivalent and not exempt.
Employers should consider structuring incentives to comply with other fringe benefit exceptions or inform employees about potential impacts on their wages.
Exception to 10% Tax for Distributions to Terminally Ill Participants
Starting Dec. 29, 2022, SECURE 2.0 waives the 10% early distribution penalty for terminally ill participants, provided they are otherwise eligible for a distribution under their plan. Participants can recontribute these distributions to a qualified retirement plan over a three-year period.
The notice clarifies the following:
- Eligible Plans: The exception applies to 401(a) plans, 403(b) plans, and IRAs, but not 457(b) plans.
- Plan Participation: Plans are not required to offer this feature, but participants can claim the exception on their tax return regardless. Offering the feature may simplify contributions.
- Eligibility: Participants must obtain a certification from a licensed physician stating their illness is terminal and expected to result in death within 84 months. The certification must include specific details and cannot be made retroactively.
- Amount Limits: No limit on the amount of distributions that can qualify.
- Recontribution: Participants can recontribute amounts to a qualified plan that accepts rollovers or to an IRA if the plan does not accept them.
Roth (after-tax) Employer Matching Contributions and Non-Elective Contributions
SECURE 2.0 allows plan sponsors to offer fully vested employer contributions in Roth accounts instead of pre-tax. Despite its availability since Dec. 29, 2022, adoption has been slow due to taxation and administrative issues.
The Notice clarifies:
- Election Procedures: The Roth election must be made before contributions are allocated and is irrevocable. Participants can change their Roth designation for future contributions annually.
- Vesting: Roth matching and non-elective contributions are required to be fully vested. Plans with a vesting schedule may not want to offer these contributions.
- Tax and Reporting: Roth contributions are taxable in the year allocated but not subject to income tax withholding or FICA/FUTA for 401(a) and 403(b) plans (FICA may apply to some governmental 457(b) plans). These contributions are reported on Form 1099-R, not Form W-2.
Amendment Deadline Extension
The Notice extends deadlines for plan amendments related to SECURE 1.0, CARES Act, Bipartisan American Miners Act, Disaster Tax Relief Act, and SECURE 2.0: Although this extension is helpful, plan sponsors should document changes as they occur to avoid delays in amendment adoption.
- 401(k) and 403(b) Plans: Dec. 31, 2026
- Governmental Plans & Public School 403(b) Plans: Dec. 31, 2029
- Governmental 457(b) Plans: First day of the plan year more than 180 days after notification of non-compliance
The Notice clarifies that plan sponsors need to understand and adopt SECURE 2.0 provisions, yet some uncertainty and administrative challenges persist. Plan sponsors should consult with recordkeepers and providers before moving forward with implementation.
SECURE 2.0 Optional Provisions
SECURE 2.0 includes many optional provisions for plan sponsors to consider that will allow participants to make penalty-free withdrawals from their retirement savings.
The withdrawals are still taxable to the participant but will enable them to avoid the 10% early withdrawal penalty. Optional provisions apply to different life circumstances that a participant may experience, such as birth or adoption of a child, declared federal disasters, victims of domestic violence, terminal illness, and other emergencies. The amount available differs depending on the provision currently being utilized to allow the withdrawal.
Plan sponsors have asked whether they should add these optional withdrawal provisions. When making these decisions, plan sponsors should recognize that these withdrawals that are not repaid can have significant long-term impacts on an individual’s retirement nest egg. Additionally, withdrawal need is self-certified by the participant, therefore increasing
the potential for abuse.
As a result, we recommend that clients carefully consider the need for these options versus the longterm impact on retirement savings and the ability of participants to retire.
Our next blog in our series featuring this year's Regulatory Update will focus on updates on retirement plan lawsuits.
You can download a copy of our complete 2024 Regulatory Update here.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.