SECURE 2.0 Adds New Distribution Options for Defined Contribution Plans

SECURE 2.0 introduced several new distribution options and tax reporting rules for defined contribution plan sponsors. Below is an overview of the new provisions and their potential implementation dates.  (For an overview of SECURE 2.0 for defined contribution plan sponsors, click here.)

Here is a quick summary of the new distribution changes in SECURE 2.0.

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SECURE Act 2.0: What Defined Contribution Plan Sponsors Need to Know

Congress included “SECURE 2.0 of 2022” in the Consolidated Appropriations Act, 2023, the $1.7-trillion omnibus spending bill, which was signed by President Biden on December 29, 2022 (the date of enactment). Secure 2.0 is a follow-up to the Setting Every Community Up for Retirement Enhancement Act passed in 2019, now known as “SECURE 1.0.”

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Holiday Rush Brings Health Plans Eagerly Awaited RxDC Reporting Guidance and Relief

In FAQs Part 56, issued on December 23, 2022, the Treasury Department and the Departments of Labor and Health and Human Services (collectively, Departments) issued important guidance on prescription drug benefit and cost reporting required of health plans and issuers (collectively, health plans). The FAQ guidance includes good faith relief for the 2020 and 2021 submissions. Under the good faith relief, the Departments will not take enforcement action with respect to any health plan that uses a good faith, reasonable interpretation of the applicable regulations and instructions in making its submission. The Departments also provide a submission grace period through January 31, 2023 and will not consider a health plan to be out of compliance provided that the health plan makes a good faith submission of 2020 and 2021 data on or before January 31, 2023.

The required data submission is called prescription drug data collection, or RxDC reporting. Through RxDC reporting, health plans report certain detailed information related to prescription drug and other health care spending. Health plans are required to complete RxDC reporting annually beginning with 2020 information. Reporting for 2020 and 2021, the first years for which reporting is required, was previously delayed until December 27, 2022 and is now subject to the submission grace period through January 31, 2023. Starting with 2022 information, annual reporting is due by June 1 of the following year. While the submission grace period may have come after many health plans have already substantially completed RxDC reporting, the good faith relief is particularly good news for health plan administrators who have struggled to interpret and apply some of the requirements for the first submissions.

In addition to the good faith relief and submission grace period, the FAQs include clarifications and flexibilities to facilitate the submission process for 2020 and 2021 data only[1]:

  1. Reporting entities reporting on behalf of multiple health plans may create more than one submission for a year without the submissions being considered duplicate submissions.
  2. Multiple reporting entities may submit the same type of data file on behalf of the same health plan, which relaxes the existing requirement to consolidate a health plan’s data into a single data file for each type of data.
  3. The requirement for multiple reporting entities submitting the required data on behalf of one or more health plans in a state and market segment to aggregate required data to at least the aggregation level used by the reporting entity that submits the total annual spending data for the health plan(s) is suspended for the filings for 2020 and 2021. For 2020 and 2021 data, a reporting entity submitting the required data may, within each state and market segment, aggregate at a less granular level.
  4. A health plan or its reporting entity that is submitting only the plan list, premium and life-years data, and narrative response, but not any other data may submit the file by email to RxDCsubmissions@cms.hhs.gov instead of submitting in the Health Insurance Oversight System reporting system. The emailed submission must include the plan list file, premium and life-years data (data file D1), and a narrative response, and may include optional supplemental documents. The name of each file should include the reference year of the submission, the plan list or data file type (g. P2, D1), and the name of the group health plan sponsor.
  5. Reporting on vaccines through the National Drug Codes for vaccines that were added to the CMS drug and therapeutic class crosswalk on October 3, 2022 is optional.
  6. Reporting entities are not required to report a value for “Amounts Not Applied to the Deductible or Out-of-Pocket Maximum” in data files D2 and D6 and may leave the data fields blank in the applicable columns.

If you have questions about RxDC reporting, please contact a member of the Faegre Drinker Benefits & Executive Compensation team.

[1] The Departments will monitor compliance to determine whether to extend these flexibilities for future reporting deadlines. The Departments will communicate any such extensions.

IRS Announces 2023 Retirement Plan Limits

 The IRS recently announced the 2023 cost-of-living adjustments to various benefit and contribution limits applicable to retirement plans. The IRS significantly increased the applicable limits for 2023 due to the high rate of inflation in 2022. The following limits apply to retirement plans in 2023:

  • The limit on elective deferrals under 401(k), 403(b), and eligible 457(b) plans increased to $22,500.
  • The limit on additional catch-up contributions by participants age 50 or older increased to $7,500. This means that the maximum amount of elective deferral contributions for those participants in 2023 is $30,000.
  • The Internal Revenue Code (“Code”) Section 415 annual addition limit is increased to $66,000 for 401(k) and other defined contribution plans, and the annual benefit limit is increased to $265,000 for defined benefit plans.
  • The limit on the annual compensation that can be taken into account by qualified plans under Code Section 417 is increased to $330,000.
  • The dollar- level threshold for becoming a highly compensated employee under Code Section 414(q) increased to $150,000 (which, based on the look-back rule, is applicable for HCE determinations in 2024 based on compensation in 2023).
  • The dollar- level threshold for becoming a “key employee” in a top-heavy plan under Code Section 416(i)(1) is increased to $215,000.

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ERISA Litigation Roundup: Legislation Update — House Passes ERISA Bill to End Arbitration and Firestone

Earlier this year we reported on the “Employee and Retiree Access to Justice Act,” which sought to render arbitration and class action waiver provisions, and discretionary authority for plan administrators, in ERISA plans unenforceable. On September 29, 2022, the U.S. House of Representatives passed the Mental Health Matters Act (the Act) — which encompasses the Employee and Retiree Access to Justice Act.

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Student Loan Assistance From Employers

As recently announced, President Biden has authorized forgiveness of up to $10,000 for federal student loan borrowers and $20,000 to individuals who received Pell Grants.

Employers are also able to provide student loan repayment benefits to their employees on a tax-free basis by expanding the type of permitted expenses under a Code § 127 “educational assistance program” to include student loan repayments made by the employer on behalf of an employee. If an employer has or adopts an educational assistance program, the employer may make student loan payments on behalf of an employee in an amount up to $5,250 annually, and such payments would be excluded from the employee’s taxable income.

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ERISA Litigation Roundup: The End of Firestone?

The Employee and Retiree Access to Justice Act is — yes — another employee benefits bill recently introduced in both the House and Senate (see our other blog post on SECURE 2.0, already passed by the House and which now has a draft bill under review in the Senate Health, Education, Labor and Pensions Committee). In addition to seeking to eliminate individual arbitration as a method for resolving benefit denial and breach of fiduciary duty disputes under ERISA, the Employee and Retiree Access to Justice Act also seeks to invalidate discretionary clauses in ERISA-governed benefit plans. The prohibition of such clauses would eliminate deferential judicial review of benefit claim denials in court.

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New Stats on Employer Retirement Plans

On June 8, 2022, the Congressional Research Service published “Private-Sector Defined Contribution Pension Plans: An Introduction.” We reviewed the report and wanted to highlight a few key data points. Defined contribution plans include 401(k), 403(b), and profit-sharing plans. The report does not include government employer plans.

Takeaways

Congress continues to introduce bills related to retirement security (see our Blog Post on Secure Act 2.0 and the Employee and Retiree Access to Justice Act). These new bills continue to focus on increasing access to part-time workers, easing the implementation of retirement plans for smaller employers, and encouraging plans to implement automatic enrollment features. Based on the results in this Congressional Research Service report, we can expect continued emphasis on those features. If you’d like to discuss design changes to your defined contribution plan, please contact a Faegre Drinker benefits attorney for assistance.

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IRS Proposes Updates to the RMD Rules

On February 24, 2022, the IRS issued proposed regulations incorporating the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”) into the required minimum distributions (“RMDs”) regulations. The IRS is accepting comments until May 25, 2022, and then holding a public hearing on June 15, 2022. The proposed regulations, if finalized as currently drafted, generally would be effective for required minimum distributions that occur on and after January 1, 2022.

SECURE Act RMD Reminder

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Selling an LLC? Don’t Forget About 280G!

Internal Revenue Code Section 280G (280G) (commonly referred to as the golden parachute provision) is intended to discourage the payment of excessive compensation to certain shareholders, officers and highly compensated service providers of companies undergoing a change in control. In general, when transaction-related payments or benefits to a covered individual equal or exceed three times the individual’s average compensation for the previous five years, the individual may be subject to a 20% excise tax, and the company’s deduction for such payments or benefits may be disallowed (in each case, with respect to amounts in excess of the average compensation).

280G commonly applies when a C-corporation undergoes a corporate transaction. However, in certain circumstances, 280G can also apply when the only entity being sold is an LLC. Note: Although this post focuses on the applicability of 280G to LLCs, 280G can also apply to the sale of a partnership in the circumstance described in #2 below.

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