The SECURE 2.0 Act made sweeping changes to Internal Revenue Code (Code) and ERISA provisions governing employee benefit plans. In a recent letter to the Department of the Treasury and the Internal Revenue Service, the Chairmen and Ranking Members of the House Ways and Means Committee and the Senate Finance Committee addressed a number of ambiguities and technical errors in the SECURE 2.0 Act and signaled their intent to introduce technical correction legislation. (Exactly which errors will be fixed in such legislation remain to be seen.)
The letter pinpointed the following four provisions of the SECURE 2.0 Act and asked the IRS to implement the legislative provisions in a way that would “ensure that Congressional intent is carried out:”
- The availability of catch-up contributions;
- The age at which required minimum distributions must begin;
- Tax credits for contributions to small employer startup retirement plans; and
- The impact on Roth IRA contribution limits of the availability of Roth contributions to SIMPLE IRAs and simplified employee pension (SEP) plans.
The first two errors are among the most prominent and problematic technical glitches in the law, with widespread application to employers sponsoring tax-qualified retirement plans.
Catch-Up Contributions
The SECURE 2.0 Act imposes a new requirement, effective for plan years beginning in 2024, that catch-up contributions must be made on a Roth, rather than pre-tax, basis if a participant’s prior-year wages exceeded $145,000. In enacting this change, Congress inadvertently deleted a crucial provision of the law stating that catch-up contributions are not includible in gross income, which effectively eliminated catch-up contributions altogether. The Congressional letter clarifies that this change was simply intended to address the taxable status of Roth catch-up contributions (no intent to eliminate catch-up contributions).
Required Minimum Distribution Age
The required minimum distribution rules of Section 401(a)(9) of the Code require tax-qualified retirement plans and IRAs to commence the payment of benefits upon the accountholder reaching their “required beginning date.” For most employees, the required beginning date is determined by reference to when they attain a certain age (RMD age). Prior to 2020, the RMD age was 70½. The first SECURE Act changed the RMD age to 72 for individuals who turned age 70½ after December 31, 2019. The SECURE 2.0 Act has now pushed the RMD age out to 73 (for individuals who turn age 72 after December 31, 2022 and age 73 before January 1, 2033) or 75 (for “an individual who attains age 74 after December 31, 2032.”)
The SECURE 2.0 Act was ambiguous as to whether the RMD age was age 73 or age 75 for individuals who will turn age 73 after December 31, 2032. The Congressional letter confirms that the intent of the law matches what most understood to be the meaning of this rule; namely, that the RMD age will be age 75 if an individual turns age 73 or 74 after December 31, 2032.
Small Employer Pension Plan Startup Credit
The Code provides small employers having 100 or fewer employees that earned $5,000 in compensation in the prior year with tax credits of up to $5,000 for “qualified startup costs” relating to the establishment and administration of, and employee education about, a new qualified plan. The credit is available to small employers that currently do not, and in the past three years have not, maintained a tax-qualified retirement plan.
The SECURE 2.0 Act expanded this tax credit to provide up to $1,000 per non-highly compensated employee for employer contributions to a defined contribution plan. Due to drafting ambiguity, legislative provisions expanding this credit could be read as limiting the new employer contribution credit to the existing cap on the credit. According to the Congressional letter, this new credit was intended to be available on top of the existing startup credit, not within the existing limit.
Roth IRA Contributions Limits vs. SIMPLE IRA/SEP Plan Roth Contributions
Prior to the SECURE 2.0 Act, the Code contained a specific rule stating that contributions to SIMPLE IRAs or SEP plans would not count against the annual limit on contributions to a Roth IRA. In deleting a neighboring provision in the law that previously prohibited SIMPLE IRAs or SEP plans from having Roth accounts, the law could be interpreted such that contributions to a SIMPLE IRA or SEP count against the Roth IRA contribution limit. The Congressional letter clarifies that this was not the intent of the SECURE 2.0 Act, and Roth IRA contribution limits should not be reduced by amounts contributed to SIMPLE IRAs or SEP plans (whether Roth or non-Roth).
Key Takeaways
This letter is helpful for plan sponsors and service providers because it confirms that these legislative drafting flaws were unintentional and clarifies them. That said, the letter does not have the force of law, and until technical correction legislation is enacted and agencies release official guidance on these and other SECURE 2.0 Act provisions, the identified issues are not definitively resolved from a legal perspective. Plan sponsors and administrators should consult with employee benefits counsel regarding compliance with the SECURE 2.0 Act.
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