Significant Tax-Focused Changes Arising From the SECURE 2.0 Act of 2022

On December 29, 2022, President Biden signed the Consolidated Appropriations Act of 2023, which contained the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act of 2022 (“SECURE 2.0”). Included in SECURE 2.0 are dozens of retirement-related provisions that are intended to enhance provisions from the original SECURE Act of 2019. Many of the changes do not take effect until 2024 or 2025, but some provisions will impact plans in 2023. In this article, I will highlight some of the more impactful tax-focused provisions.

 

Modification of Credit for Small Employer Pension Plan Start-up Costs

SECURE 2.0 modified the following items to encourage small employers to establish retirement savings plans.

Increased Credit for Start-up Costs

SECURE 2.0 increases the small employer pension plan start-up cost credit from 50% to 100% of qualified start-up costs for employers with 50 or fewer employees. In concurrence with existing law, employers with 51 to 100 employees will continue to be eligible for a credit equal to 50% of qualified start-up costs. The maximum attainable credit is $5,000 per year for the first three (3) tax years (potential of $15,000) of the plan’s existence. The increased credit would apply for tax years beginning after December 31, 2022.

Credit for Employer Contributions

SECURE 2.0 provides an increase to the Internal Revenue Code Section 45E credit for all or a portion of employer contributions to small employer pensions for the first five employer tax years beginning with the tax year that includes the plan’s start date. The amount of the credit would be increased by the applicable percentage of employer contributions on behalf of the employees, with a maximum credit equal to $1,000 per employee. The applicable percentage which is based on the date the plan was established (not when employees begin to participate in the plan),  is 100% for tax years one and two, 75% in the third tax year, 50% in the fourth tax year and 25% in the fifth tax year.

Employers with 50 or fewer employees are eligible for 100% of the credit, which then phases out for employers with 51 to 100 employees at a rate of 2% multiplied by the number of employees in excess of 50. No credit is allowed for employer contributions on behalf of an employee who earns more than $100,000 (adjusted for inflation in tax years beginning after 2023) or employers with more than 100 employees. The credit applies for tax years beginning after December 31, 2022.

New Credit for Military Spouses Participating in Defined Contribution Plans

SECURE 2.0 creates a tax credit for each military spouse that starts participating in a small employer’s defined contribution plan. A small employer is defined as one with 100 or fewer employees who earned at least $5,000 in the preceding year.

The annual credit amount is $200 for each military spouse who participates in the employer’s plan, plus the number of related employer contributions to the plan (capped at $300 of contributions for any individual). A military spouse is counted for the credit for a maximum of three tax years, beginning in the tax year which includes the date they begin to participate in the plan. It is important to note that highly compensated employees are excluded from the definition of “military spouse.”  The credit is available for tax years beginning after the date of enactment of SECURE 2.0 (after December 29, 2022).

Tax-free Rollovers From 529 College Saving Plans to Roth IRAs Permitted

SECURE 2.0 allows beneficiaries of Section 529 college savings plans to make tax-free and penalty-free direct trustee-to-trustee rollovers from a Section 529 savings plan to a Roth IRA. This provision affords a tax savings opportunity to those that have a balance remaining in their Section 529 savings plan after education has been completed.

The Section 529 savings plan must have been open for more than 15 years at the time of the rollover, and the rollover may not exceed the aggregate amount contributed to the account, including earnings, more than five years before the rollover.

Aggregate rollovers cannot exceed $35,000 over the beneficiary’s lifetime and are subject to the Roth IRA annual contribution limits. However, the provision waives the contribution limit that is based on the taxpayer’s adjusted gross income. This provision is effective for distributions taken after December 31, 2023.

Elimination of Additional Tax on Corrective Distributions of Excess Contributions

SECURE 2.0 provides that earnings attributable to excess contributions to an IRA that are returned by the due date of the taxpayer’s return for the year, including extensions, are exempt from the 10% early withdrawal tax that is otherwise assessed under Internal Revenue Code Section 72(t). This provision applies to any determination of taxes, interest, or penalties made on or after the date of enactment of SECURE 2.0 (December 29, 2022).

 

Contributing Author: Shawn T. Layo, CPA, is a tax partner at Dannible & McKee, LLP with over 20 years of experience in taxation and planning for individuals and closely-held companies. He is responsible for overseeing tax engagements for a variety of clientele with a focus on manufacturing, construction, retail automotive, multi-state corporations and high-net-worth individuals. For more information on this topic, you may contact Shawn at slayo@dmcpas.com or (315) 472-9127.