President Biden signed the 2023 Consolidated Appropriations Act (CAA) on January 3, 2023. Our goal below is to summarize some of the Act’s key provisions we feel are impacting employer-provided retirement plans.
Ten Key Changes
1. Catch-up contribution changes:
- Starting in 2024, catch-up contributions to retirement plans must be designated as Roth contributions for participants with compensation greater than or equal to $145,000.
- Commencing 2025, catch-up contributions for 60- to 63-year-old plan participants will increase to either $10,000 or 150% (whichever is greater) of the regular catch-up amount.
2. Changes have been made to Required Minimum Distribution (RMD) rules.
- In 2023, the required minimum distribution (RMD) age increases to 73 for someone becoming 72 after Dec. 31, 2022, and age 73 before Jan. 1, 2033. The RMD age requirement rises again to 75 in 2033 for anyone who reaches age 74 after Dec. 31, 2032.
- Starting in 2024, Roth accounts in employer-sponsored plans—such as 401(k) plans—will be exempt from the RMD rules while the participant is alive.
- Starting in 2024, the excise tax levied on retirement plan participants for failing to take their RMD will decrease from 50% to 25%. The tax will be further reduced to 10% if rectified within the two-year correction window.
- The CAA will allow an employer-provided plan participant’s spousal beneficiary to elect to be treated as would an employee for the RMD’s purposes.
3. Roth elections for matching contributions are allowed.
- Effective immediately, participants may make a Roth election to employer matching contributions.
4. New 401(k) and 403(b) plans must include automatic enrollment and escalation.
- Beginning in 2025, most new 401(k) and 403(b) plans must meet the requirements for an Eligible Automatic Contributions Arrangement (EACA), including automatic enrollment with a default rate of between 3% and 10%.
5. Student loan repayments are treated as elective deferral contributions.
- Beginning in 2024, employers can commence a matching contributions program based and make contributions toward their employee’s qualified student loan payments, including those under a safe-harbor 401(k) plan.
6. A new retirement savings lost-and-found database was created.
- To better locate lost plan participants, the CAA directs the Department of Labor, within two years from its effective date, to form an online searchable database to gather information to assist participants and beneficiaries with locating their retirement plan benefits.
7. The mandatory distributions for account balances for participants who are no longer employed is increased.
- For distributions after Dec. 31, 2023, the involuntary distribution threshold will increase from account balances of $5,000 to $7,000 or less.
8. The EPCRS program is expanded.
- The CAA expands the IRS self-correction EPCRS (Employee Plans Compliance Resolution System) program to allow inevitable inadvertent failures to be corrected at any time. Currently, plan sponsors can only correct so-called significant failures within three years from the date of the failure. This change will take effect upon the effective date of the CAA.
9. Accidental retirement plan overpayments will not disqualify a plan.
- Effective upon enactment, qualified retirement plans will not be disqualified if the plan fails to recover an accidental benefit overpayment or otherwise amends the plan to increase the benefit. There is also fiduciary relief for the employer’s failure to make the plan whole. Plans are limited in their ability to offset future benefits to recover the overpayment and to recover the overpayment directly from the participant.
10. The law allows small (“de minimis”) financial incentives for contributions to a 401(k) or 403(b) plan.
- For plan years beginning after enactment of the CAA, participants in a 401(k) or 403(b) plan may receive “de minimis” (small) financial incentives—as long as they’re not paid with plan assets—for contributing to the plan.
NOTE: Most of these changes won’t require retirement plans to be formally amended until the end of 2025. Additionally, the SECURE Act 2.0 has extended certain amendment deadlines for changes made under the SECURE Act.
*SOME BUT NOT ALL: These are summaries of key points. There are yet more items in the CAA relating to the SECURE Act 2.0. The devil is in the details, so in all cases, it’s best to keep checking for new laws and working with your plan’s coordinator, CPA, and other advisors to ensure you are in compliance.
Helping people save money is good for America. “Some 56% of Americans are unable to cover an unexpected $1,000 bill with savings,” according to a telephone survey of more than 1,000 adults conducted in early January 2022 by Bankrate.”
The SECURE Act 2.0 portion of the CAA will hopefully change that statistic.
Please, contact us if you have questions!