Employee benefits and executive compensation update

As we move into the final quarter of 2023, we are waiting for guidance relating to provisions of the retirement plan legislation, known as SECURE 2.0, that are effective in 2024 and 2025. Although the cost-of-living adjustments were issued for health plans, they have not yet been released for retirement plans and IRAs. In the meantime, the following topics of interest will be important for you to consider both for year-end tax planning and for tax planning in the coming year:

Employer-sponsored plans

1. Delayed – Roth catch-up contributions to employer sponsored plans

A recent IRS announcement delays the deadline until 2026 for requiring that catch-up contributions for employees making more than $145,000 in the prior year be designated as Roth after-tax catch-up contributions. The announcement also clarifies that catch-up contributions which had been inadvertently eliminated by SECURE 2.0 are reinstated. This means that employees will continue to have the choice of making pre-tax or after-tax Roth catch-up contributions in 2024 and 2025.

Employers and plan sponsors should consider the following action steps during the two-year transition period:

• Continue planning toward a timely Jan. 1, 2026, implementation date.
• Implementation and communication will take time and require coordination between plan sponsors, payroll teams and record keepers.
• Determine how and when affected participants will be identified.
• Determine how and when affected participants will be notified for each year.
• If a plan does not currently offer Roth contributions, consider whether to add a Roth provision.

2. Roth designation of employer contributions

Effective in 2023, 401(k) and 403(b) plans may be amended to give plan participants the choice to receive employer contributions on an after-tax Roth basis. Roth employer contributions are taxable to the employee when made. In addition, participants must be 100% vested at the time the contribution is made. If the plan also has non-Roth employer contributions that vest over a period of time, it could result in an employer maintaining multiple vesting schedules for each participant. Employers should consult with the plan’s record keeper and payroll provider to ensure the employer contributions are recorded correctly. Since the legislation does not address how a Roth designated employer contribution should be reported for tax purposes, (e.g., Form W-2, Form 1099-R), guidance from the IRS is anticipated. Until guidance is issued, employers may want to postpone offering this optional provision.

Executive Retirement Programs

10. FICA taxation rules for nonqualified deferred compensation

We are still seeing numerous instances where employers are not taking into account deferred compensation for FICA at the appropriate time. Pursuant to the Federal Insurance Contributions Act (FICA) “special timing rule”, deferred compensation is required to be considered at the later of the time of the performance of services or when there is no longer a “substantial risk of forfeiture” in entitlement to the benefit -- this is usually at such time as the benefit becomes vested. This, of course, contrasts with the Self-Employed Contribution Act (SECA) rules that generally require the deferred compensation to be taken into account upon actual or constructive receipt of the benefit. Employers should confirm that the deferred compensation, even if not distributed, is taken into account in accordance with the “special timing rule” so that required FICA taxes are correctly paid.

IRAs and required minimum distributions

11. Maximum age for IRA contributions

Since 2020, there is no longer an age limit prohibition for making contributions to a traditional IRA.

12. IRA catch-up contributions

Individuals who have reached age 50 are eligible to make catch-up contributions. Beginning in 2024, the $1,000 catch-up amount will be indexed for inflation on an annual basis. Catch-up contributions to traditional IRAs will continue to be pre-tax. The indexed amounts are released in the third quarter.

13. Required minimum distributions (RMD)

The required beginning age for an RMD is 73 for individuals who reach age 72 in 2023 or later. For example, an individual who attains age 72 in 2023 does not have an RMD requirement until the individual turns age 73 in 2024. In addition, the individual has until April 1, 2025 to take the first RMD. This RMD requirement applies to employer-sponsored retirement plans and IRAs, including SEP IRAs and SIMPLE IRAs. By prolonging the RMD age, individuals will have more time to increase their retirement savings to use during their lifetime.

14. RMD rules and Roth accounts

The RMD rules do not apply to Roth IRAs. Beginning in 2024, the RMD requirement will no longer apply to Roth 401(k) accounts.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.