Client Alert: Employee Benefits/Executive Compensation and Tax

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For the second time in recent years, Congress passed broad legislation with far-reaching impact

on retirement savings programs. The SECURE 2.0 Act of 2022 (SECURE 2.0) was included as

part of the Consolidated Appropriation Act, 2023, which was passed by Congress on December

23, 2022, and signed into law by President Biden on December 29, 2022. SECURE 2.0 builds

on the changes made to the retirement system by the Setting Every Community Up for

Retirement Enhancement (SECURE) Act enacted in 2019.

SECURE 2.0 is largely designed to enhance access to retirement savings vehicles and make it

easier for individuals to save. It is also aimed at streamlining administration and reporting

requirements and preserving retirement income. Many of the changes do not take effect until

2024 or 2025, but some provisions will impact plans in 2023. Most plans will be impacted by

SECURE 2.0 provisions. It is notable that SECURE 2.0 does not include major tax provisions or

extenders.

The following is a high-level summary of some of the more consequential provisions of

SECURE 2.0.

Automatic Enrollment Required . Requiring certain new 401(k) and 403(b) plans to include an automatic enrollment feature with a default rate between three percent and 10% of compensation and an automatic escalation feature of 1% per year up to a maximum between 10 and 20%. This requirement is effective for plan years beginning after December 31, 2024. Employees have the option to opt out of automatic enrollment. Note that certain exceptions to the automatic enrollment requirement are provided to entities with ten or fewer employees, entities that have existed for less than three years, church plans, and governmental plans.
Saver’s Credit . The Saver’s Credit is modified from a credit that is paid in cash as part of a tax refund to a federal matching contribution that must be deposited into the saver’s retirement account. The match is 50% of retirement contributions, up to $2,000 per individual, subject to phasing out at certain income levels. The law also directs the Treasury Department to develop a strategy to educate the public about the match. These sections are effective for taxable years beginning after December 31, 2026.
Business Startup Credit . Effective for taxable years beginning after December 31, 2022. the small business startup credit for employers with up to 50 employees is increased from 50% to 100% and creates a new credit for plans other than defined benefit plans that is based on the amount of money contributed to participant accounts.
De Minimis Financial Incentives . Employers may offer de minimis financial incentives, such as low-dollar gift cards, to encourage employee participation in retirement plans. The financial incentives cannot be paid for with plan assets. This section is effective for plan years beginning after December 31, 2022.
Catch-Up Contribution Limits . Effective for tax years after 2024, the catch-up contribution limit will be further increased for plan participants ages 60 through 63. For most plans, the increased catch-up contribution limit will be $10,000 ($5,000 for SIMPLE plans), subject to adjustment for inflation. The annual contribution limit for individual retirement accounts (IRAs) is also increased for participants ages 50 and older. Notably, for tax years beginning after 2023, SECURE 2.0 requires the IRA catch-up contribution be adjusted annually for inflation, which was not the case prior to its enactment. In addition, for tax years beginning after 2023, all catch-up contributions will be subject to Roth rules, as opposed to only being subject to such after-tax rules when allowed by the particular plan. Notably, the mandatory Roth treatment for qualified plan catch-up contributions for those who earn more than $145,000 annually could be an unseen tax for high-income earners.
Required Minimum Distributions . Increasing the required minimum distribution (“RMD”) age from 72 to 73 in 2023 and to 75 in 2033. Beginning in 2023, the penalty for failing to take a required minimum distribution will decrease from 50% to 25%, and it will decrease to 10% if the individual corrects the shortfall within a two-year correction window. Roth accounts in employer-sponsored retirement plans will be exempt from the required minimum distribution requirements starting in 2024.
Roth Provisions . For taxable years beginning after the date of enactment, plan participants may choose whether matching contributions to a defined contribution plan are considered Roth (after-tax basis). The employee would have to be 100% vested in the matching or non-elective contribution. For taxable years after December 31, 2023, SEP and SIMPLE IRA plans may be designated as Roth IRAs. Contributions would be made on an after-tax basis with distributions excludable from income. The employee would be allowed to make this election.
Also, for taxable years after December 31, 2023, catch-up contributions to qualified plans, 403(b) or 457(b) plans would be required to be considered Roth (after-tax). This mandate only applies to employees with wages over $145,000. For those earning under $145,000, they may elect to treat catch-up contributions as Roth.
For taxable years beginning after December 31, 2023, 401(k) and 403(b) owners of Roth amounts within these plans are no longer required to take an annual RMD for the Roth amounts.
Changes for ESOPs . For sales of shares after December 31, 2027, S corporation shareholders may defer taxation on sales of 10% of the amount realized on sales to an ESOP for purposes of determining the amount of gain not recognized and the extent to which the amount realized on such sales exceeds the cost of qualified replacement property under Section 1042. This used to only apply to C corporations. Also effective after December 31, 2027, certain non-exchange traded securities may qualify as “publicly traded employer securities” if certain requirements are met.
SIMPLE Plans . SECURE 2.0 allows employers to make additional nonelective contributions under a SIMPLE plan, beyond the standard 2% of compensation or 3% of employee deferrals, up to the lesser of 10% of compensation or $5,000 (indexed). Also, contribution limits for SIMPLE IRA plans and SIMPLE 401(k) plans are increased. Both changes are effective for taxable years beginning after December 31, 2023.
Expanded Coverage for Part-Time Workers . SECURE 2.0 reduces from three to two consecutive years of service before long-term, part-time workers (i.e. employees who work at least 500 hours per year) are eligible to contribute to a plan. This also applies to 403(b) plans that are subject to ERISA. This section is effective for plan years beginning after December 31, 2024.
Student Loan Repayments as Elective Deferrals-Matching Contributions . For plan years beginning after December 31, 2023, an employer can make matching contributions under a 401 (k) plan or 403 (b) plan, or SIMPLE IRA plan for student loan payments up to the maximum deferral amounts. These matching contributions must have the same vesting schedule as any other matching contributions.
Emergency Withdrawals . Permitting one penalty-free withdrawal of up to $1,000 per year for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” The individual has 3 years to repay the distribution should they choose to do so. If they do not repay the distribution, they may not take another distribution for 3 years. This change is effective for distributions made after December 31, 2023.
Plan Withdrawals . SECURE 2.0 permanently confirms the ability of a plan participant to make an early withdrawal without incurring a ten percent penalty in the event of a federally declared disaster. This type of disaster withdrawal is permissible if made within 180 days of the disaster, if the participant’s principal place of abode is within the declared disaster area and if the participant/taxpayer has incurred economic loss resulting from the disaster.
After 2023, the Act also permits penalty-free withdrawals by a victim of domestic abuse, up to the lesser of $10,000 or 50 percent of the present value of the account.
Following the enactment date, a penalty-free early withdrawal may also be taken by an individual diagnosed with a terminal illness, within a period of 84 months after a physician certifies such diagnosis.
Starter Plan Designs . Creating “starter 401(k) deferral-only arrangement” and “safe harbor 403(b) plan” designs for employers who do not sponsor a retirement plan, effective for plan years beginning after December 31, 2023. There are also increased tax credits for small employers who are implementing new plans (up to $5,000 annually for the first three years).
Increase in Mandatory Distribution Amount . Increasing the mandatory cash-out amount from $5,000 to $7,000, effective for distributions made after December 31, 2023.
Retirement “Lost and Found” Created . Directs the Department of Labor to create, within two years after SECURE 2.0’s enactment, an online searchable database that will allow individuals with money in a retirement plan to search for the contact information of plan administrators to assist with locating missing participants and beneficiaries. The goal is to reduce the amount of retirement benefits that go unclaimed each year due to company changes (like mergers) or difficulty in locating employees.
Special Rules for Certain Distributions from Long-Term Qualified Tuition Programs to Roth IRAs (529 to Roth) . For distributions after December 31, 2023, taxpayers who had a 529 plan in place for a beneficiary for at least 15 years prior to the distribution, no tax or penalty shall apply on a direct transfer to a Roth IRA. The amounts that may be rolled over are subject to the annual Roth IRA contribution limit and the maximum that may be converted over a taxpayer’s lifetime is $35,000. No income limitation applies to these rollovers.
Charitable Distributions to Charitable Remainder Trust . For distributions in taxable years beginning after the date of enactment, a taxpayer may make a one-time $50,000 distribution to charities through charitable gift annuities, charitable remainder unitrusts, and charitable remainder annuity trusts.
Plan Amendments . Plans have until the last day of the plan year beginning on or after January 1, 2025 (or January 1, 2027, for governmental plans) to adopt amendments made pursuant to SECURE 2.0, as long as the plan operates in compliance with the requirements of SECURE 2.0 or the amendment as of SECURE 2.0’s or the amendment’s effective date.
Additionally, plan amendment deadlines under the 2019 SECURE Act, the CARES Act and the Taxpayer Certainty and Disaster Relief Act of 2020 are updated to the SECURE 2.0 dates.

This is a brief summary of some of the provisions in SECURE 2.0. These changes will likely

impact most retirement plans, so plan sponsors and administrators will need to monitor future

developments from the Department of Treasury and the IRS and be ready to implement the

various changes on the various compliance dates. If you have any questions about SECURE

2.0 or its requirements, please contact the author of this Client Alert Jeffrey Rambach, at (DD)

312-929-4425; (O) 385-355-4826 jeffrey.rambach@freemanlovell.com or your Freeman Lovell

attorney.

Disclaimer: This alert is provided for information purposes. It does not contain legal advice or create an attorney-client relationship and is not intended or written to be used and may not be used by any person for the purpose of avoiding penalties that may be imposed under federal or state tax laws. The information and explanations stated in this alert are based on initial consideration of the law after its enactment and may be subject to different interpretation of the law and its meaning and effect in the future.

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Beneficial Ownership Rules

28 Dec, 2023

In a couple of months, a new rule will take effect, requiring all registered legal entities to report their beneficial owners to the Financial Crimes Enforcement Network (FinCEN). We wanted to give you a heads up about the rule and give you as much information about what it means to you. What is the rule? The rule, which is called the Beneficial Ownership Information Reporting Requirements (BOI Rule), comes from the Corporate Transparency Act, which was passed by Congress in 2021. This law created the BOI Rule with FinCEN as part of the U.S. government’s efforts to make it harder for bad actors to hide or benefit from their ill-gotten gains through shell companies or other deceitful ownership structures. Under this new law, FinCEN will permit Federal, State, and local officials to obtain ownership information for authorized activities related to national security, law enforcement, and intelligence. When does the rule take effect? And when do I have to submit a report? The BOI Rule takes effect on January 1, 2024 . If your company existed before January 1, 2024, you must file its initial beneficial ownership information report by January 1, 2025. If your company is formed or registered after January 1, 2024, you must file its initial beneficial ownership information report within 30 days after receiving actual or public notice that its creation or registration is effective. If any beneficial ownership information changes, you will have 30 days from the day of the change to file an updated or corrected report with FinCEN. What do I need to include in the report? The BOI Rule requires that all entities report information about the company, each individual with substantial control over the entity, and each beneficial owner. What information is required to report about the entity? Full legal name of your company and any DBAs names; Complete current street address for your company's principal place of business (P.O. boxes will not be accepted); The jurisdiction of formation or registration; and Tax identification: IRS tax identification number (TIN) and employer identification number (EIN). What information is required to report about the controlling individuals and beneficial owners? The individual's legal name; Individual's date of birth; Individual's residential address; and A unique identifying number from an acceptable identification document (such as an unexpired driver's license, passport, identification document issued by a State or local government or Indian tribe.) and the name of the issuing state or jurisdiction. Who is considered to have substantial control of the entity? Examples of an individual that exercises substantial control over the entity are: An individual is a senior officer (President, CEO, CFO, COO, Manager, or other office who performs a similar function); An individual has the authority to appoint or remove certain officers or a majority of directors of the reporting company; An individual is an important decision-maker for the company; or An individual has any other form of substantial control over the company. Who is considered a beneficial owner? A beneficial owner is an individual that owns or controls at least 25% of the entity’s ownership interests. This includes individuals that indirectly own or control 25% of the ownership interest. For example, if Joe is a 50% owner of Parent LLC, which in turn owns 50% of Subsidiary Corp, then Joe beneficially owns 25% of Subsidiary Corp (50% of 50% = 25%). What type of entities will be required to file a report with FinCEN? All domestically formed entities and foreign registered entities in the USA are required to file a report. Types of entities include corporations, limited liability companies, limited partnerships, general partnerships, and any other entity registered with a state Secretary of State or Division of Corporations or other similar office. There are some types of companies that are exempt from the reporting rule, and in general they are companies that already have to report beneficial ownership to another federal agency. The 23 exemptions listed by FinCEN are: Securities reporting issuer, Governmental authority, Bank, Credit union, Depository institution holding company, Money services business, Broker or dealer in securities, Securities exchange or clearing agency, Securities exchange or clearing agency, Other Exchange Act registered entity, Investment company or investment adviser, Venture capital fund adviser, Insurance company, State-licensed insurance producer, Commodity Exchange Act registered entity, Accounting firm, Public utility, Financial market utility, Pooled investment vehicle, Tax-exempt entity, Entity assisting a tax-exempt entity, Large operating company, Subsidiary of certain exempt entities, and Inactive entity. Now what do I do to comply with the BOI Rule? While you are not able to submit the beneficial ownership information report until January 1, 2024, you should use this time to gather information about your company, owners, and other entities now, so you can timely file your report. We added a small BOI Rule cheat sheet for you to keep and reference. Also, you can read FinCEN’s FAQ page about the BOI Rule https://www.fincen.gov/boi-faqs . Can you help me with my company’s report? Yes! We are happy to help prepare and file your company’s BOI Rule report with FinCEN. We can begin to gather and prepare the information for your filing right away and be ready once the BOI Rule takes effect January 1, 2024. To get started, please reach out to us. We also know that some situations can be complicated, so please feel free to ask us any questions regarding compliance with the beneficial ownership interest reporting requirements for your company.