Retirement plans often apply (and in some cases are required to use) multiple definitions of wages or compensation for various plan purposes. Given this complexity, failures to follow a plan’s definition of compensation are one of the most common issues experienced by retirement plan sponsors. Unfortunately, as drafted, the SECURE 2.0 Act only adds to that complexity.
Beginning after December 31, 2023, the SECURE 2.0 Act indicates that any plan that permits catch-up contributions must require certain employees to make their catch-up contributions on a Roth basis. Employers have expressed significant concerns regarding their ability to implement the necessary system changes—specifically to payroll and recordkeeping systems—by year-end.
In response, employers have begun to explore alternatives that might simplify implementation (or avoid the need to do it altogether). This has produced several questions about what employers can and cannot do.
Beginning after December 31, 2023, the SECURE 2.0 Act indicates that any plan that permits catch-up contributions must require certain employees—i.e., those whose wages from their employer exceed $145,000 in the prior calendar year—to make their catch-up contributions on a Roth basis. This change raises a host of questions about how the rule is intended to apply in practice and even more concerns about the operational obstacles employers will face in attempting to implement the change by year-end.
In this series of articles, we will explore the implications of SECURE 2.0’s changes to catch-up contributions and how employers should respond.
A new bill introduced in Congress would allow 403(b) plans maintained by tax-exempt organizations to make use of collective investment trust (CIT) investments. CITs are an alternative to mutual funds that may provide significant cost savings for 403(b) plans and their participants. The SECURE 2.0 Act took the first steps along this path by making amendments to the Internal Revenue Code to permit 403(b) plans to invest in these vehicles; however, that legislation failed to include the necessary changes to securities laws. The Retirement Fairness for Charities and Educational Institutions Act of 2023 aims to take the next steps by amending the Securities Act and the Investment Company Act to allow 403(b) plans to make use of CITs.
A Massachusetts federal judge recently gave a major win to Schneider Electric in an employee benefits lawsuit brought by former workers. According to this Law360 article, seven former Schneider Electric employees accused the company and its investment manager of running afoul of the Employee Retirement Income Security Act of 1974 when they replaced well-performing funds with those of the investment manager. McDermott Partners Sarah E. Walters, Jennifer B. Routh and Margaret H. Warner represented Schneider Electric.
What do retirement plan professionals and participants need to know about the recently passed SECURE 2.0 Act of 2022? In this webinar replay, McDermott’s Employee Benefits team discusses the many changes to retirement plans and individual retirement accounts, including the key changes for 401(k), 403(b) and defined benefit plans as well as other changes impacting health and welfare plans. Discussion topics include the following:
Join partners from McDermott’s Employee Benefits team on Wednesday, January 25, 2023, as they discuss the impact of the recently passed SECURE 2.0 Act of 2022. With over 90 changes to retirement plans and individual retirement accounts (IRAs), this webinar will highlight the key changes for 401(k) and 403(b) plans and defined benefit plans, as well as changes in the Consolidated Appropriations Act, 2023 impacting health and welfare plans.
Topics Include:
To learn more, read the full On the Subject here.
We recently reported on an FAQ issued December 23, 2022 (FAQ About Affordable Care Act and Consolidated Appropriations Act, 2021 Implementation Part 56) by the US Departments of Labor, Health and Human Services and the Treasury (collectively, the Departments). The FAQ provides limited, albeit welcome, relief by extending the time for reporting information under the prescription drug data collection (RxDC) rules, which were enacted by Section 204 of Title II of Division BB of the Consolidated Appropriations Act, 2021.
Under the statute, the first RxDC reports for the 2020 calendar (or reference) year, were due to be filed by December 27, 2021. However, in response to concerns expressed by stakeholders, enforcement was pushed back a full year to December 27, 2022, at which time the reports for both the 2020 and 2021 reference years were due. The RxDC reporting process required the submission of one or more “plan lists,” a series of eight data files (files D1 through D8) and an accompanying narrative response. (The contents of the plan lists, data files and narrative responses are comprehensively explained here (the Instructions).)
On November 21, 2022, the US Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) released a proposed amendment and restatement of the Voluntary Fiduciary Correction Program (VFCP), along with a proposed amendment to the Prohibited Transaction Exemption (PTE) 2002-51.
The VFCP allows plan sponsors to voluntarily correct certain fiduciary breaches to avoid civil enforcement actions and civil penalties imposed under the Employee Retirement Income Security Act of 1974 (ERISA) and its accompanying regulations. The most relevant components of the proposed changes for plan sponsors relate to delinquent contributions of participant deferrals and loan repayments as these tend to occur more frequently than other issues corrected through the VFCP. Importantly, the proposed amended and restated VFCP would add a new self-correction feature, clarify existing transactions currently eligible for correction and simplify certain administrative or procedural requirements for participation in and correction of transactions under the VFCP. This would be the first time the DOL has allowed self-correction under VFCP. The proposed changes are intended to encourage greater VFCP participation by providing for more efficient and less costly corrections.
Retirement plan sponsors need to utilize updated Form W-4P (for periodic pension and annuity payments) and new Form W-4R (for nonperiodic payments and eligible rollover distributions) for income tax withholding elections beginning January 1, 2023. As we near the end of 2022, plan sponsors should ensure that their retirement plan systems and vendors are on track to implement the new federal tax withholding election forms no later than January 1, 2023.
As background, in 2017, changes made by the Tax Cuts and Jobs Act (TCJA) required the Internal Revenue Service (IRS) to revise the withholding tables and develop new forms to use to withhold taxes from periodic payments. These forms are used by qualified and non-qualified retirement plans for participants to request withholding on benefit payments that commence in 2023 or later. In 2021, the IRS revised the Form W-4P into the two forms noted above: revised Form W-4P, which is now used only to request withholding on periodic pension and annuity payments, and new Form W-4R, which is used to request additional withholding on nonperiodic payments and eligible rollover distributions. The US Department of the Treasury and the IRS received numerous questions on the new forms, which caused the IRS to delay the implementation until January 1, 2023.
Recipients of periodic retirement payments can give payers a Form W-4P to make or change a withholding election or to elect not to have withholding apply. A Form W-4P stays in effect until the payment recipient changes or revokes it. Form W-4R is required for all nonperiodic retirement payments, such as a lump sum payment, if the recipient wants to increase or decrease withholding from the applicable default withholding percentage.
The revised Form W-4P has a few changes. The significant changes include updates to the marital category, modifications to the reporting of other sources of income, replacement of allowances with dependent credits and addition of a calculation to report a new withholding amount. The new Form W-4R allows a payee to choose a different rate of withholding by entering a rate between 0% and 100%. However, if no amount is selected, plan sponsors must withhold at a flat 10% rate (or 20% if eligible) from nonperiodic payments.
For more information on these tax and employment benefits issues, please contact your McDermott lawyer or the authors listed below.
Marchan Clark, a law clerk in the Washington, DC, office, also contributed to this article.
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