Retirement Updates

On January 3, 2023, the IRS released Revenue Procedure (Rev. Proc.) 2023-4, which outlines the procedures for requesting determination letters and private letter rulings from the IRS for qualified retirement plans. Rev. Proc. 2023-4, which is published in Internal Revenue Bulletin 2023-01, is a general update to the information previously provided in Rev. Proc. 2022-4. Determination letters indicate whether the IRS finds the form of an employer’s employee benefit plan document meets the necessary qualification requirements. Private letter rulings interpret and apply the Internal Revenue Code to a set of facts presented by a taxpayer.

In addition to minor non-substantive changes, the updates include the following:

• Sections 6, 8, 9, 10, 11, 19, and 20 and Appendix B were revised to provide the procedures for obtaining a determination letter with respect to a Section 403(b) individually designed plan, beginning June 1, 2023. Appendix A adds user fees for these submissions. (As reported in our December 6, 2022, article, the determination letter program has expanded availability to individually designed Section 403(b) plans.)
• Sections 6.02 and 16 are revised to provide that Form 5307, Application for Determination for Adopters of Modified Nonstandardized Pre-Approved Plans, and Form 5316, Application for Group or Pooled Trust Ruling, may be submitted electronically beginning June 1, 2023, and must be submitted electronically beginning July 1, 2023, including payment of the user fee.
• Sections 3 and 31 and Appendix A reflect the temporary suspension of the opinion letter program for prototype IRAs (traditional, Roth and SIMPLE IRAs), SEPs (including salary reduction SEPs (SARSEPs)), and SIMPLE IRA plans.
• Section 9.02 reflects changes to the scope of determination letters.
• Appendix A has been modified to increase certain user fees.
• A new Appendix G has been added, which provides a checklist for applications for nonbank trustee approval letters.

Retirement plan sponsors who may apply for a determination letter or request a private letter ruling should familiarize themselves with this updated guidance.

Internal Revenue Bulletin: 2023-01 »

On January 12, 2023, the Pension Benefit Guaranty Corporation (PBGC) published revised civil penalty amounts for failure to provide certain notices or other material information, as required by ERISA. The amounts apply to penalties assessed on or after the publication date. The adjusted maximum amounts are $2,586 (up from $2,400) for Section 4071 penalties and $345 (up from $320) for Section 4302 penalties, which are related to multiemployer plan notices.

PBGC Revised Penalties »

The IRS recently released the new Form W-4R, Withholding Certificate for Nonperiodic Payments and Eligible Rollover Distributions, to replace Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments, in certain instances. Form W-4P, and now Form W-4R as well, are used to address federal income tax withholding for taxable IRA distributions.

Form W-4R was optional in 2022 but is now required in 2023 for IRA distributions considered nonperiodic, which are those paid on demand as opposed to a specific schedule. Form W-4R will be updated annually to incorporate current marginal tax rate tables, which are used as part of the withholding calculation. Individuals receiving IRA distributions should familiarize themselves with the new form and consult with their tax advisor on applying each form to their situation.

Form W-4R »
Form W-4P »

On December 29, 2022, President Biden signed the Consolidated Appropriations Act, 2023 (HR 2617) into law. The main purpose of this legislation is to continue funding certain government operations. However, the bill also adopts the SECURE 2.0 Act of 2022 (SECURE 2.0) relating to retirement plans.

SECURE 2.0 follows the Setting Every Community Up for Retirement Enhancement Act (SECURE Act), which was passed as part of the 2020 appropriations bill. (You can read about the SECURE Act in the January 7, 2020, edition of Compliance Corner.) SECURE Act 2.0 introduces new provisions affecting how retirement plans are offered, and it amends some of the provisions found in the SECURE Act.

As background, SECURE 2.0 comes after multiple follow-ups to the SECURE Act that were introduced in the House and Senate. First, the Securing a Strong Retirement Act was passed in the House in March 2022. Next, the Senate Health, Education, Labor and Pensions Committee approved a version known as the Retirement Improvement and Savings Enhancement to Supplement Healthy Investments for the Nest Egg (RISE & SHINE) Act in June 2022. Finally, the Senate Finance Committee approved the Enhancing American Retirement Now (EARN) Act in September 2022. SECURE 2.0 includes provisions from each of those bills.

SECURE 2.0 is broken up into seven titles, and some of the major provisions affecting employer-sponsored retirement plans are summarized as such:

• Title I: Expanding Coverage and Increasing Retirement Savings
  • Requires new 401(k) and 403(b) plans to institute automatic enrollment and escalation. (Sec. 101)
  • Increases start-up credit for small employers who begin to offer retirement plans to their employees. (Sec. 102)
  • Changes the federal Saver’s Credit to a Saver’s Match that will be deposited into taxpayers’ retirement plan or IRA and provides that the Treasury will publicize the match. (Secs. 103 and 104)
  • Allows 403(b) plans to participate in open multiple employer plans (MEPs) and pooled employer plans (PEPs). (Sec. 106)
  • Increases the age for required minimum distributions from age 72 (as provided in the SECURE Act) to age 73 beginning in 2023 and age 75 beginning in 2033. (Sec. 107)
  • Indexes the IRA catch-up limit and allows for additional catch-up contributions at ages 60, 61, 62 and 63. (Secs. 108 and 109)
  • Allows student loan repayments to be treated as elective deferrals for retirement plan matching purposes. (Sec. 110)
  • Allows an annual tax-free distribution for emergency expenses. (Sec. 115)
  • Permits automatic portability transfers from a terminating employee’s IRA to their new employer’s retirement plan. (Sec. 120)
  • Changes SECURE Act provision requiring eligibility for long-term part-time workers to require that participation be offered to employees working part-time for two years (down from the three years required in the SECURE Act). (Sec. 125)
  • Allows for transfers from 529 plans to Roth IRAs, provided certain conditions are met. (Sec. 126)
  • Permits the creation of emergency savings accounts for non-highly compensated employees to use in conjunction with their defined contribution plans. (Sec. 127)
  • Enhances 403(b) plans by allowing them to utilize collective investment trusts. (Sec. 128)
• Title II: Preservation of Income
  • Amends the requirements imposed on qualifying longevity annuity contracts (QLACs). (Sec. 202)
  • Creates insurance-dedicated exchange-traded funds. (Sec. 203)
• Title III: Simplification and Clarification of Retirement Plan Rules
  • Allows plan sponsors to choose not to recoup overpayments made to retirees. (Sec. 301)
  • Reduces the tax penalty for failure to take required minimum distributions from 50% to 25% (and to 10% if the distribution is from an IRA and the failure is corrected in a timely manner). (Sec. 302)
  • Instructs DOL to create online database retirement savers can use to locate any pension or 401(k) they’ve lost track of. (Sec. 303)
  • Increases the limit for employers to automatically distribute out terminated employees to $7,000 (up from $5,000). (Sec. 304)
  • Expands the Employee Plans Compliance Resolution System (EPCRS). (Sec. 305)
  • Limits repayment of qualified birth or adoption distributions to three years. (Sec. 311)
  • Allows employers to accept employee self-certification of the need for hardship withdrawals. (Sec. 312)
  • Provides opportunity to amend plan to increase benefits through the employer’s tax return due date. (Sec. 316)
  • Limits the notices employers must provide to unenrolled but eligible participants of the retirement plan. (Sec. 320)
  • Requires paper statements be provided once annually for defined contribution plans and once every three years for defined benefit plans. (Sec. 338)
• Title IV: Technical Amendments
  • Makes certain technical and clerical changes to the SECURE Act. (Sec. 401)
• Title V: Administrative Provisions
  • Allows for plan amendments reflecting SECURE 2.0 changes to be made on or before the last day of the first plan year beginning on or after January 1, 2025 (or 2027 for governmental plans). (Sec. 501)
• Title VI: Revenue Provisions
• Title VII: Tax Court Retirement Provisions

Like the SECURE Act, this legislation will overhaul of many of the retirement regulations that have been in place for decades. Some provisions of the bill are effective upon enactment; others are effective for plan years beginning January 1, 2023, while others will become effective at later dates. Retirement plan sponsors should work with their plan advisers, recordkeepers and other service providers to amend their plan as necessary.

Consolidated Appropriations Act, 2023 (SECURE Act begins on page 817) »

On December 30, 2022, the IRS proposed regulations to permanently change retirement plan rules that require certain participant elections and spousal consents to be witnessed in the physical presence of a notary or plan representative. If specified conditions are met, the proposed regulations will allow affected qualified retirement plans to also accept remote notarization or witnessing by a plan representative.

IRS regulations have historically required that certain participant elections and spousal consents (e.g., a defined benefit plan lump sum distribution) be physically witnessed by a notary public or plan representative. However, in Notice 2020-42, the IRS provided temporary COVID-19 relief from the physical presence requirement and allowed the use of an electronic medium for participant elections and spousal consents. This relief was extended several times but was set to expire at the end of 2022. (For further details on IRS Notices 2020-42 and the subsequent relief extensions, please see our June 9, 2020, January 5, 2021, and July 7, 2021, Compliance Corner editions.) The proposed regulations make this relief permanent, with modifications.

Under the proposed regulations, a participant election or spousal consent witnessed remotely by a notary public or plan representative must satisfy the general requirements for participant electronic elections. Under these requirements, the electronic system must be one that the individual making the election can effectively access and that is reasonably designed to prevent anyone else from making the election. The system must also give the individual a reasonable opportunity to review, confirm, modify or rescind the election before it becomes effective and provide a compliant paper or electronic election confirmation within a reasonable time.

Additionally, for a plan to accept remote witnessing by a notary public, the notary public must witness the signature of the individual (e.g., spouse) signing the consent using live audio-video technology and adhere to applicable state laws.

If a plan representative performs the remote witnessing, the process must also meet the following requirements:

• The individual signing must present a valid photo ID during the live audio-video conference.
• The live audio-video conference must allow for direct interaction between the individual and plan representative.
• The individual must transmit (via fax or electronic means) a copy of the signed document directly to the plan representative on the same date it was executed.
• The plan representative must acknowledge the signature has been witnessed by the plan representative in accordance with these requirements and must send the executed document (and acknowledgment) back to the individual using a compliant notice system.
• The plan representative must record the live audio-video conference and retain the recording in accordance with plan document retention requirements. (This is an additional requirement that was not reflected in the temporary relief.)

Retirement plan sponsors should be aware of the proposed regulations and may welcome the flexibility to allow remote witnessing on a permanent basis. However, sponsors are not required to permit remote witnessing. If the sponsor chooses to do so, remote witnessing cannot be the sole option. (Sponsors must still accept notarizations witnessed in the physical presence of a notary.)

Comments on the proposed regulations are being accepted through March 30, 2023, and a telephonic public hearing has been scheduled for April 11, 2023, at 10:00 a.m. Final regulations, once issued, are proposed to apply six months after publication in the Federal Register. Sponsors are permitted to rely upon the proposed regulations in the interim.

IRS Proposed Rule – December 30, 2022 »