Updates on SECURE 2.0, the Employee Retention Credit and the Preventive Services Mandate
The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) was enacted in December 2022 as part of the year-end omnibus spending bill. Even though several provisions were effective in 2023, the Internal Revenue Service (IRS) has yet to issue substantial guidance on many of the technical changes. Also, 2024 is fast approaching, and more provisions will be effective then.
SAVE THE DATE! October 10, 2023, Noon-1:00 CST: The Quarles employee benefits attorneys will host a webinar to discuss the SECURE 2.0 changes effective now and coming in 2024. An invite and additional information will follow.
As we wait for additional guidance from the IRS, here’s what you should be considering now and as we move towards 2024.
- Recovery of Overpayments – Prior to the enactment of SECURE 2.0, plan sponsors were required to try to recover overpayments and, in some circumstances, make the plan whole if those efforts were not fruitful. SECURE 2.0 overhauls the rules applicable to the recovery of overpayments. Most notably, a plan sponsor may not attempt to recoup an overpayment if the first overpayment occurred more than 3 years before the participant or beneficiary is notified of the error in writing. The 3-year bar to recoupment may not apply if the participant or beneficiary is “culpable”, which requires misrepresentations or omissions that led to the overpayment or knowledge that the benefit payment was materially in excess of the correct amount. However, an individual is not culpable if they question the benefit amount, and a plan representative confirms it is correct. If a plan sponsor can seek repayment, there are limits on the amount that may be recouped. No interest may be applied to increase the repayment responsibility. In addition, annuity payments may not be reduced by more than 10% of the amount otherwise payable, and the total amount recouped in a calendar year may not exceed 10% of the overpayment amount.
- Required Beginning Date Increases – Under the original SECURE Act, the required beginning date for distributions from IRAs and employer-sponsored retirement plans increased to age 72 for participants who attained age 72 in 2022. Under SECURE 2.0, for individuals who attain age 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033, their required beginning date is the April 1 following the calendar year in which they turn age 73. After Dec. 31, 2032, the required beginning date is the April 1 following the calendar year in which they turn age 75.
- Designation of Matching Contributions and Nonelective Contributions as Roth Contributions – SECURE 2.0 allows, but does not require, an employer to amend a defined contribution plan to allow participants to elect to have fully vested matching and employer nonelective contributions treated as Roth contributions. It is not clear which defined contribution plans can allow this type of contribution, and the IRS has not issued any guidance on how the contributions should be reported as taxable to the participant – on an IRS Form W-2 with associated payroll withholding requirements applied against other wage payments or on an IRS Form 1099-R with the tax burden falling to the participant. Until these issues are resolved, implementing this change will be challenging.
- Small Financial Incentives to Encourage Participation – Effective January 1, 2023, a plan sponsor may offer “de minimis” financial incentives to employees to encourage them to participate in a 401(k) or 403(b) plan. The incentive may not be paid for with plan assets. The IRS has not issued guidance on what types of financial incentives will be considered “de minimis” and whether the incentives will be considered taxable income.
- Self-Correcting Retirement Plan Errors – SECURE 2.0 mandates expanded access to self-correction for retirement plan errors under the Employee Plans Compliance Resolution System (EPCRS). Any “eligible inadvertent failure” may be self-corrected if the failure is corrected before the IRS identifies the issue, and the failure is corrected within a reasonable time after discovery. The IRS issued interim guidance in Notice 2023-43 which provides that a reasonable time means the last day of the 18th month following discovery of the failure. Most notably, the changes clarify that correction of plan loan failures is now available under the self-correction procedures without a requirement that a voluntary correction program application be filed with the IRS, and correction by adoption of a retroactive plan amendment may be available without IRS approval.
- Notice Requirements for Unenrolled Participants – SECURE 2.0 allows several annual notice requirements to unenrolled participants in defined contribution plans to be avoided, provided the unenrolled participants receive a summary plan description and an annual reminder that they may enroll. An “unenrolled participant” is an employee who is eligible for the plan but is not currently making or receiving any contributions; provided such employee received the summary plan description and other required notices when they first became eligible.
- Repayment of QBAD Distributions – SECURE 1.0 allows plans to offer Qualified Birth and Adoption Distributions but did not impose a time limit for repayment. SECURE 2.0 limits repayment to 3 years beginning the day after the distribution is received.
Some SECURE 2.0 changes are effective in 2024. Below is a brief outline of some issues that plan sponsors should consider as we move closer to 2024.
- Roth-Treatment for Catch-Up Contributions – Catch-up contributions for individuals whose wages exceed $145,000 are subject to mandatory Roth tax treatment. Due to the complexities of implementing and administering this provision, many employers have stalled efforts to comply with this provision while awaiting guidance from the IRS. Some employer groups have advocated for a delay in the effective date of this provision.
- Increase in Cash Out Limit – With respect to distributions which occur after 2023, the threshold for cashing out a participant’s account without consent may be increased from $5,000 to $7,000. While this change is not mandatory, we expect that most plan sponsors will take advantage of the increased limit.
- Required Minimum Distributions to Surviving Spouses – Prior to the enactment of SECURE 2.0, a surviving spouse could only delay receiving RMDs until the date the deceased participant would have otherwise been required to take RMDs, unless the spouse took a plan distribution and rolled it over to an IRA. Starting in 2024, surviving spouses can elect to commence RMDs based on the date they would attain the applicable age for RMDs from the retirement plan without an IRA rollover.
- Roth Accounts – No Required Minimum Distributions – After 2023, RMDs from Roth accounts will no longer be required. This would appear to be a significant planning opportunity for those in higher tax brackets who don’t expect to need all their retirement savings during their lifetimes.
- Matching Contributions on Student Loan Repayments – Starting in 2024, employers may treat qualified student loan repayments as elective deferrals for purposes of calculating matching contributions.
- $1,000 Penalty-Free Early Distribution for Emergency Expenses – A plan may add a distribution of up to $1,000 for unforeseeable or immediate financial needs relating to personal or family emergency expenses. Only one distribution is permissible per year of up to $1,000, with the option to repay the distribution within three years. No further emergency distributions under this provision are permissible during the three-year repayment period unless repayment occurs.
- Emergency Savings Accounts – SECURE 2.0 allows plans to include a separate side-car savings account option where employees can save up to $2,500 in after-tax dollars under the plan. Contributions to the emergency savings account (ESA) are treated as elective deferrals for matching contributions but participants can make withdrawals from the ESA for any reason (up to 4 withdrawals per year at no cost). Most recordkeepers are still in the process of building infrastructure to offer ESAs and more IRS guidance will be needed to implement ESAs.
- Revised Eligibility Rules for Part-Time Workers – SECURE 2.0 expanded the 401(k) plan eligibility provisions added under the original SECURE Act for part-time employees. An employee who works at least 500 hours per year for two consecutive years and who has met the minimum age requirements under the plan must be permitted to make elective deferrals but are not required to receive employer matching contributions. For a plan with a plan year that follows the calendar year, a part-time employee who meets the requirements in 2023 and 2024 will be eligible to enter the plan on Jan. 1, 2025.
The Employee Retention Credit – Additional Guidance from the IRS on How to Detect Scams
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) included a tax credit, referred to as the employee retention credit (ERC), available to eligible employers that paid qualified wages to employees after March 12, 2020, the start of the COVID-19 pandemic, and before October 1, 2021. In general, a business (including a tax-exempt organization) is an eligible employer if (1) the business was shut down by a government order due to the COVID-19 pandemic during 2020 or any of the first three quarters in 2021, or (2) the business experienced a significant decline in gross receipts during the same period. A tax credit, up to certain limits per employee, may be available on qualified wages paid to an employee during the period affected by the shutdown or during which the decline in gross receipts occurred. The tax credit may be claimed on an adjusted employment tax return for the affected period.
On July 27 and July 28, the Internal Revenue Service (IRS) posted additional FAQs regarding the ERC, confirming that for 2020 tax periods, the deadline for filing an amended Form 941 to claim the ERC is April 15, 2024. For 2021 tax periods, the deadline is April 15, 2025. The FAQs contain other helpful clarifications on other issues affecting an employer’s eligibility for claiming the tax credit.
Perhaps most notably, the FAQs warn taxpayers about scams involving their eligibility for the ERC, stating that “[s]cam promoters use several different tactics to mislead people who have no chance of meeting the requirements for the Employee Retention Credit while charging them excessive fees – often thousands of dollars,” continuing later to say that “[t]he IRS also sees wildly aggressive suggestions from marketers urging businesses to submit the claim because there is nothing to lose. In reality, those improperly receiving the credit could have to repay the credit – along with substantial interest and penalties.”
The IRS suggests that a business that believes it may be eligible for the ERC should work with a trusted tax professional to review the requirements and establish the records sufficient to justify the filing of the adjusted employment tax return. Members of the Quarles Tax and Employee Benefits groups have experience with the ERC and can assist with the type of analysis recommended by the IRS.
Preventive Services Coverage Mandate: Stay the Course
On April 13, 2023, the Departments of Labor, Health and Human Services (HHS), and the Treasury (collectively, Departments) issued Frequently Asked Questions (FAQs) concerning the recent federal court decision, Braidwood Management Inc. v. Becerra, that vacated a significant part of the preventive services coverage mandate (Preventive Care Mandate) passed as part of the Affordable Care Act (ACA).
Following Braidwood, non-grandfathered group health plans and issuers offering non-grandfathered group or individual coverage are no longer required to provide first-dollar coverage of care that has in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force, unless that care is also required by another provision of the Preventive Care Mandate.
The FAQs provided initial guidance on the impact of the Braidwood decision on the Preventive Care Mandate. After issuance of the FAQs, the parties to the litigation reached an agreement regarding enforcement of the Preventive Care Mandate pending an outcome to the litigation. Under this agreement, which was approved by the 5th Circuit Court of Appeals on June 13, 2023, the Preventive Care Mandate shall remain intact while the litigation proceeds, but the Departments will not enforce it against the plaintiffs to the litigation with respect to any time period preceding final resolution of the litigation.
Section 2713 of the Public Health Services Act (PHSA), passed as part of the ACA, has long required non-grandfathered group health plans and health insurance issuers offering non-grandfathered group or individual coverage to provide coverage, without any cost sharing, for a variety of specified preventive care, including all evidence-based items or services that have in effect a rating of “A” or “B” in the current recommendations of the United States Preventive Services Task Force (collectively, PSTF Recommendations).
On March 30, 2023, the United States District Court for the Northern District of Texas issued a final judgment vacating the Preventive Care Mandate with respect to the PSTF Recommendations (PSTF Mandate). The court held that the PSTF Mandate violated the Appointments Clause of Article II of the U.S. Constitution and was therefore unlawful.
The court vacated all agency actions taken to implement the PSTF Mandate since March 23, 2010, and enjoined the Department of HHS from enforcing the PSTF Mandate in the future.
The U.S. Department of Justice filed a notice of appeal on March 31, 2023, and a motion for a stay on April 12, 2023, which was granted on May 15, 2023. On June 12, 2023, the parties to the litigation filed a joint agreement agreeing that the stay should remain in place during the litigation, but that the plaintiffs would not be held liable for failures to follow the Preventive Care Mandate until final resolution of the litigation. The 5th Circuit Court of Appeals approved the agreement on June 13, 2023.
As this litigation moves forward, employers should continue to comply with the Preventive Services Mandate to avoid being caught in any period of noncompliance.
For any questions regarding these employee benefit updates, please contact your local Quarles attorney or: