June 6, 2023
SECURE Act 2.0 “Clean-up”
Take-Away: Before the IRS gets around to publishing Temporary Regulations to implement the SECURE Act 2.0 this year, Congress already is preparing a bill to ‘fix’ ambiguities or mistake in the original Act.
Background: In late May Congress sent a letter to Treasury that indicated that it plans on introducing additional legislation in 2023 to ‘clean up’ some of the mistakes, aka ‘technical errors,’ or ambiguities that arise from the SECURE Act 2.0. Four sections of the SECURE Act 2.0 were highlighted in the letter, but the letter also suggested that the new legislative bill might also include ‘other items not identified in this letter.’ A quick summary of the four sections to which we can expect ‘technical corrections’ follow:
Tax Credits (Section 102): This section increased the tax credit that is available to start an employer-based qualified retirement plan. The concern is that the provision could be read to subject the additional credit for employer contributions to the dollar limit that otherwise applies to the existing start-up tax credit. Apparently, Congress intended this new tax credit for employer contributions to be in addition to the existing start-up credit that is otherwise available to the employer-sponsor.
Required Minimum Distributions (Section 107): This section deals with required minimum distributions (RMDs) and the increased age at which the required minimum distribution must be taken. Congress apparently intended to increase the RMD age from 72 to 72 for individuals who turn age 72 after December 31, 2022 and who turn age 73 before January 1, 2033. In addition, the intent is to increase the applicable RMD age from 73 to 75 for individuals who turn age 73 after December 31, 2032. With respect to the increase from age 73 to 75, the concern is that this section could be read to apply such an increase to individuals who turn age 74 (rather than age 73) after December 31, 2032 which is not what Congress intended.
Catch-Up Contributions (Section 603): The SECURE Act 2.0 created controversy when it stated that any catch-up contributions must be Roth contributions (after-tax), beginning after 2023 if the plan participant made more than $145,000 in the prior year. The concern is that this section might be interpreted to disallow catch-up contributions (whether pre-tax ‘traditional’ or Roth ‘after-tax’) beginning in 2024. Apparently Congress did not intend to disallow catch-up contributions nor to modify how the catch-up contribution rules apply to employees who participate in qualified plans of unrelated employers. Congress’s intent is to require catch-up Roth contributions for participants whose wages from the employer that sponsors the qualified plan exceeded $145,000 for the prior year, and to permit other participants to make catch-up contributions on either a pre-tax or on a Roth after-tax basis.
IRA Contribution Limit (Section 601:) This section permits SIMPLE IRA and SEP plans to include a Roth IRA. The concern is that this section might be interpreted to require SEP plan and SIMPLE IRA contributions to be included in the determination whether, or not, the individual has exceeded the contribution limit to a Roth IRA. Apparently Congress intended to retain the result under the law as it existed prior to the SECURE Act 2.0 with regard to SIMPLE IRA and SEP contributions. Congress intends that no contributions to a SIMPLE IRA or SEP plan (including Roth contributions) be taken into account for purposes of the otherwise applicable Roth IRA contribution limit.
Conclusion: The balance of 2023 could prove to be busy when it comes to finding out what the SECURE Act 2.0 requires and what it does not require. Once again we find legislation that was adopted in ‘hurry-up’ fashion at the bitter end of a Congressional session filled either with ‘technical’ mistakes, or ‘gee, we really didn’t mean that’ ambiguities. And so it goes…