Presented by: EWM Tax Solutions
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Effective Upon Enactment
Sect. 202 – Qualifying Longevity Annuity Contracts.
Section 202 expands the amount that can be excluded from RMD rules when used to purchase qualified longevity annuity contracts. The 25% limit is repealed, now allowing up to $200,000 (indexed) to be used from an account balance to purchase a QLAC.
Sect. 302 – Reduction in The Failure-To-Take RMD Penalty.
Section 302 reduced the individual tax penalty for failure to take the RMD from an IRA from 50% to 25%. Further, given a timely correction for failing to take an RMD, the excise tax is further reduced from 25% to 10%.
Sect. 303 – Retirement Savings Lost and Found.
Section 303 authorized the creation of a national online searchable ‘lost and found’ database for Americans’ retirement plans. The database will enable retirement savers who might have lost track of their pension or 401(k) plan to search for the contact information of their plan administrator. Mandated completion date: by December 29, 2024.
Sect. 333 – Elimination of Additional Tax on Corrective Distributions.
Section 333 exempts the excess contribution and earnings allocable to the excess contribution from the 10% additional tax.
Effective In Tax Year 2023
Sect. 102 – Support for Small Business Pension Plan Start-Up Costs.
Section 102 increases the start-up credit for establishing a retirement plan from 50% to 100% for employers with up to 50 employees. The credit will be increased for eligible employer plans other than a defined benefit plan. The applicable percentage is 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year, and no credit for tax years thereafter.
Sect. 107 – Increase in Required Beginning Date for RMDs.
Section 107 increases the required minimum distribution age from age 72 to age 73, effective on and after January 1, 2023.
Sect. 604 – Optional Treatment for Employers Making Matching Contributions.
Section 604 allows matching contributions to be made into the Roth 401(k).
Effective In Tax Year 2024
Sect. 110 – Student Loan Payments treated as Elective Deferrals for Purposes of Matching Contributions.
Section 110 allows 401(k) plan, 403(b) plan, or SIMPLE IRA matching contributions based on “qualified student loan payments.” Governmental employers are also permitted to make matching contributions in a section 457(b) plan or another tax-qualified plan with respect to these repayments.
Sect. 115 – Penalty-Free Withdrawals for Certain Emergency Expenses.
Section 115 provides an exception for certain distributions used for emergency expenses, which are unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, and a taxpayer has the option to repay the distribution within 3 years.
Sect. 116 – Allows for Increased Employer Match to SIMPLE Plan Contributions.
Section 116 permits an employer to make additional contributions to each employee of a SIMPLE plan in a uniform manner, provided that the contribution may not exceed the lesser of 10% of compensation or $5,000 (indexed).
Sect. 117 – Allows for Increased Employee Contributions to SIMPLE Plans.
Section 117 increases the SIMPLE IRA annual deferral limit and the catch-up contribution at age 50 by 10%, for employers with under 26 employees. An employer with 26 to 100 employees is permitted to provide higher deferral limits if it either provides a 4% matching contribution or a 3% employer contribution.
Sect. 120 – Exemption for Certain Automatic Portability Transactions.
Section 120 allows plan providers to automatically deposit a participant’s default IRA into a new employer’s qualified plan.
Sect. 121 – Starter 401(k) Plans for Employers with No Retirement Plan.
Section 121 permits an employer that does not sponsor a retirement plan to offer a starter 401(k) plan. A starter 401(k) plan would generally require that all employees be default enrolled in the plan at a 3% to 15% of compensation deferral rate. The limit on annual deferrals would be the same as the IRA contribution limit, which for 2022 is $6,000 (for those under age 50).
Sect. 126 – Section 529 Rollovers to Roth IRAs.
Section 126 permits section 529 college savings account beneficiaries to roll over up to $35,000 over the course of their lifetime from any 529 account in their name to their Roth IRA, subject to the Roth IRA annual contribution limits. The 529 account must have been open for more than 15 years; no amounts from the previous 5 years are eligible for rollover.
Sect. 127 – Emergency Savings Accounts Linked to Retirement Plans.
Employers may offer pension-linked emergency savings accounts to non-highly compensated employees. Employees can be automatically enrolled into these accounts at up to 3% of their salary. Employee cumulative contributions may not exceed $2,500.
Sect. 325 – Changes to Roth 401(k) Plan Distribution Rules.
Section 325 eliminates the RMD requirements on Roth 401(k) accounts.
Sect. 327 – Surviving Spouse Election to Be Treated as Employees.
Section 327 allows a surviving spouse to elect to be treated as the deceased employee for purposes of the required minimum distribution rules (this option is beneficial to older survivors).
Sect. 603 – High Wage Earners Required to Use Roth Option for Catch-Up Contributions.
Section 603 requires that all catch-up contributions to qualified retirement plans by highly paid participants be made on a Roth (after-tax) basis. This includes employees with annual compensation that is greater than $145,000 (adjusted for cost of living). This forces the creation of a Roth 401k plan, in the absence of which no catch-ups are allowed for anyone.
Effective In Tax Year 2025
Sect. 101 – Automatic Enrollment in Retirement Plans.
Section 101 requires newly established 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (the employees may opt out of coverage). The initial automatic enrollment amount must be at least 3% but not more than 10%. Each year after that, that amount is increased by 1%. There is an exception for businesses less than three years old, small businesses with ten or fewer employees, church plans, and governmental plans.
Sect. 109 – Higher Catch-Up Limit to Apply at Ages 60 – 63.
Section 109 increases the retirement plan catch-up contribution limits to the greater of $10,000, or 50% more than the regular catch-up amount for individuals ages 60 – 63. The increased amounts are indexed for inflation after 2025.
Sect. 125 – Improving Retirement Plan Coverage for Part-Time Workers.
Section 125 requires employers to allow long-term (over two consecutive years of service), part-time workers who work at least 500 hours a year to participate in the employers’ 401(k) plans.
EWM does not offer tax or legal advice. EWM Tax Solutions and Executive Wealth Management are separate but affiliated entities. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.
