Ensuring Your Employee Benefit Plan Complies with Secure Act 2.0 in 2023 by Melissa Fleitas, CPA
The passage of the Secure Act 2.0 at the end of 2022 ushered in significant changes for employers and how they must administer and annually report information about their employee benefit plans. These new provisions apply to employers’ 401(k) and 403(b) plans for tax years beginning in 2023. Although plans have until the last day of the plan year beginning on or after January 1, 2025, to adopt the Secure Act 2.0 amendments, they must start operating in compliance with certain provisions as of the effective dates specified in the law. This is especially important in the current environment where the IRS is applying its expanded budget to hire more examiners and increase its enforcement of federal tax laws.
Lower Threshold to Qualify for Small Plan and Audit Exemptions
Under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974 (ERISA), businesses that sponsor employee retirement savings plans, such as 401(k)s, must file annual returns on IRS series Forms 5500 disclosing information about the plans’ total assets, liabilities, number of participants and other pertinent plan information. Plans with fewer than 100 participants at the beginning of the plan year may qualify to file a simplified Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Employers with calendar-year ends must file 5500 forms by July 31 of the year following a plan’s year-end unless they request a filing extension (Form 5558) to October 15. For all other plans, the filing deadline is the last day of the seventh month following the end of the plan year.
New for 2023 is a revised method for determining 401(k) and 403(b) sponsors’ eligibility to file streamlined Forms 5500-SF in 2024. Under the law, employers need only count the number of actual plan participants with account balances rather than the total number of employees eligible to participate in the plan at the beginning of the plan year to determine if they fall below the 100 participants threshold required to file Form 5500-SF. By allowing employers to exclude eligible employees who do not make elective deferrals or do not have account balances from their participant count, more plans may qualify to use the short form to file the 2023 Form 5500-SF and avoid the time and costs of an audit.
Expanded Tax Credits for Small Employers
In 2023, businesses with up to 50 employees that establish a 401(k) plan may qualify for a tax credit of 100 percent of their start-up costs up to a maximum of $5,000 per year for the first three years. Previously, the tax credit was 50 percent of startup costs for employers with 50 employees or fewer. Businesses with 51 to 100 employees are still eligible for the credit of 50% of qualified start-up costs. An additional credit of $500 per year for three years is available to employers with up to 100 employees who add an automatic enrollment feature to their plans.
Employee Incentives to Increase Plan Participation
Secure Act 2.0 allows employers to offer employees small financial incentives, such as gift cards of de minimis amounts, to help boost participation in their workplace 401(k) plans. These incentives must be paid for by employers from nonplan assets.
Self-Certification of Hardship Distributions
Employers may rely on plan participants’ self-certification that they have an immediate and heavy financial burden that constitutes a hardship for the purpose of an in-service hardship withdrawal.
Waiver of Early-Withdrawal Penalties Under Certain Circumstances
Employees who live in a federally declared disaster area may withdraw up to $22,000 from their plans in a year without incurring a 10 percent early distribution penalty. Penalties are also waived when plan participants are diagnosed with a terminal illness. In the coming years, penalty-free withdrawals will apply to an expanded list of circumstances.
Increased Age Requirement for Required Minimum Distributions
Owners of tax-advantaged retirement accounts, including 401(k)s, 403(b) and traditional IRAs, must begin taking annual required minimum distributions (RMDs) withdrawals from their plans when they reach age 73, rather than the previous threshold of 72 years old. If plan participants turn 72 in 2023, they can wait until April 1, 2025, to take their first withdrawal and apply it to the 2024 tax year.
Reduced Penalties for Failing to Take RMDs
Plan participants who fail to take an RMD at age 73 and later will incur a penalty of 25 percent of the undistributed amount, half of what it was in prior years. If beneficiaries correct their mistake within two years, the penalty decreases to 10 percent.
New Option for Employer Contributions to Roth Accounts
Employers may offer employees the option to designate all or a portion of the employers’ match or non-elective contributions as a matching contribution to a Roth account, provided the employers’ contributions are fully vested at that time. Plan participants making this election would be responsible for paying tax on the match in the year of the contribution.
About the Author: Melissa Fleitas, CPA, is an associate director of Assurance and Advisory Services with Berkowitz Pollack Brant, where she provides accounting, audit and consulting services to a wide range of companies in the healthcare, manufacturing and distribution sectors. She can be reached at the firm’s Miami office at (305) 379-7000 or firstname.lastname@example.org.