The Consolidated Appropriations Act, 2023 , which was signed into law on December 29, 2022, made a number of changes impacting qualified retirement plans and IRAs. Some of these changes are in effect now, while others don’t kick in until next year or even much later. The year in which a particular change becomes effective is noted below in bold. Most of the changes are designed to help employees save for retirement, while some can be viewed as helpful to small businesses. All of these changes require you to look at your plan now and take action as required or desired.
A roundup of the changes to consider
Setting up retirement plans
Currently, there is a credit to encourage small businesses to adopt a retirement plan. Under the new law, the credit for small employer pension plan startup costs is doubled from the current 50% of administrative costs, up to a cap of $5,000, to 100% of costs. And there’s a new credit for employers with up to 50 employees based on a percentage of employer contributions up to $1,000 per employee). A phased-out credit applies for employers with between 51 and 100 employees. The credit limit for these employers is 100% for the first 2 years, 75% for the third year, 50% in the fourth year, and 25% in the fifth year. Another current credit—for adopting automatic enrollment—also applies and is unchanged.
The credit can be claimed by a business that joins a multiple employer plan (MEP). Until now this was unclear. This change is retroactive for tax years beginning after December 31, 2019 (i.e., 2020).
There is a new credit for a small employer that enrolls a military spouse of an employee in the company’s retirement plan. The credit is the sum of $200 for such employee who participates in an employer plan, plus the amount of employer contributions not exceeding $300. Military spouses may be enrolled within 2 months of the employee’s hiring and is treated as having 2 years of service for purposes of matching or nonelective contributions. The new credit is part of the general business credit. It is effective now.
The new law introduces a “starter 401(k) plan” for employers that don’t have any qualified retirement plan. This plan is funded entirely with employees’ elective deferrals of not less than 3% or more than 15%; there are no employer contributions. Elective deferrals are automatic for those eligible to participate; employees can opt out. Elective deferrals are limited to annual IRA contribution limits. This applies for tax years beginning after December 31, 2023 (i.e., 2024).
Automatic enrollment and contribution changes
If you have a 401(k) plan, starting in 2025, you must enroll employees who are eligible to participate. Then you must apply automatic deferrals of their compensation, starting with an amount between 3% and 10%. The amount will increase by 1% each year, up to a maximum of at least 10%, but not more than 15%.
If you have a SIMPLE IRA, it can allow for nonelective contributions by employees. But the overall contribution limit—between employers and employees—is unchanged, so contributions need to be coordinated. This change applies after 2023 (i.e., effective in 2024).
If you have a SEP or SIMPLE IRA, it can offer a designated Roth account. In other words, if the plan permits it, employees can make after-tax contributions to a designated Roth account under the plan. This change is effective starting in 2023. However, as a practical matter, it may be too soon for businesses with SEPs and SIMPLE IRAs to begin offering a designated Roth account option.
You can give employees a small incentive to make elective salary deferrals, such as a low-cost gift card (what is “low-cost” remains to be defined). This can’t be paid for with plan assets; you have to use company funds for this purpose. This option is available now.
The plan may allow for an emergency savings account for non-highly compensated employees. This lets eligible employees defer up to the lesser of 3% of compensation or $2,500 to the emergency savings account. This is an after-tax contribution like amounts put into designated Roth accounts. Amounts can be rolled over to a designated Roth account or Roth IRA. This change is effective in 2024.
A sole proprietor with no employees can treat elective deferrals made to a 401(k) plan before the time for filing the return of such individual for the taxable year (without extension) ending after or with the end of the plan’s first plan year, is treated as having been made before the end of such first plan year. This applies to plan years beginning after December 29, 2022.
Distributions and withdrawals
Required minimum distributions do not have to begin until age 73 for those who attain age 72 on or after January 1, 2023. The starting age will jump to 75 beginning on January 1, 2033, for those who attain age 74 on or after this date. The new law does not change the rule allowing participants other than more-than-5% owners to defer distributions until retirement.
The plan may permit withdrawals up to $1,000 per year for “unforeseeable or immediate financial needs related to necessary personal or family emergency expenses.” Only one such distribution can be taken every 3 years. Employees who take such distributions won’t be penalized. And they should be permitted to replace the withdrawal within 3 years. This rule applies to distributions after 2023 (i.e., effective in 2024).
You no longer have to send certain notices to employees who have elected not to participate in your plan. However, you must continue to send them the annual notice of eligibility to participate. This applies to plan years beginning after December 31, 2022 (i.e., 2023).
And if you’re holding accounts for former employees, you can roll them over to default IRA so you don’t have the attendant administrative chores. The new law rates the limit from $5,000 to $7,000, effective for distributions after December 31, 2023 (i.e., in 2024). In other words, if the account is $6,000, you can’t do this rollover and have to keep the funds in your plan.
Tax deferral applies for the sales of corporate stock to an employee stock ownership plan (ESOP). Until now, this was restricted to C corporations. For sales after 2027 (i.e., 2028), it applies to sales of S corporation stock as well.
The Employee Plans Compliance Resolution System (EPCRS) is expanded in a number of ways. The IRS is directed to issue guidance on this no later than 2 years after December 29, 2022.
Be sure to meet with your CPA or other benefits adviser to review all of the changes that may impact your current or prospective retirement plan. Understand which changes are a must or a maybe, at your discretion. In this way, you can be prepared to complete forms presented to you by the financial institution with which you maintain your current plan or the one you intend to start a plan, assuming you use a prototype plan and not one that’s designed especially for you.