Author: Kristen Moss, CPA, Manager

On December 29, 2022, the Consolidated Appropriations Act was enacted. Known as the Secure 2.0 Act there are several retirement and tax provisions with a focus on expanding coverage, increasing retirement savings, and the simplification and clarification of retirement plan rules.  We would like to highlight the major provisions of the bill.

Required Minimum Distributions (RMDs)

The Act increases the applicable age requirement for taking Required Minimum Distributions (RMD’s).  The new age for RMD’s is 73, and this became effective January 1, 2023. The age will increase again for 2033. For individuals who reach age 74 after December 31, 2032, the applicable age then becomes 75.

Increased Dollar Threshold for Mandatory Distributions

The involuntary distribution threshold will increase from $5,000 to $7,000 for distributions taken after December 31, 2023.

Catch Up Contribution Increase

Individuals age 50 and older can now make catch-up contributions  to their workplace plan of $7,500 in 2023. Starting in 2025, individuals between the ages of 60-63 will be able to increase their catch up contribution to the greater of $10,000 or 50% more than the regular catch-up amount. Starting in 2024, earners of $145,000 a year or more, will have to make their catch-up contributions to a Roth IRA.

Changes to Long Term, Part Time Employees

Previously, 401(k) plans had to permit long-term, part-time employees to make elective deferrals if the employee had worked at least 500 hours per year for at least three consecutive years and had met the minimum age requirement (age 21) by the end of the three consecutive year period.  The Act changes the measuring period for long-term, part-time employees from three years to two years and also extends the long-term, part-time employee provision to 403(b) plans that are subject to ERISA.

Automatic Enrollment of Eligible Participants

Beginning in 2025, the Act requires new 401(k) and 403(b) plans to automatically enroll eligible employees. Such plans must also meet three requirements:

-They must allow permissible withdrawals within 90 days after the first elective contribution.

-They must provide for automatic contributions, starting with a minimum contribution percentage of between 3% and 10% in the participant’s first year of participation (employees can elect to opt out.) At the end of each year of participation, the contribution percentage must automatically increase by 1 percentage point (unless the participant elects otherwise), to at least 10%, but not more than 15%. For plan years ending before Jan. 1, 2025, the maximum percentage is 10% for any arrangement that is not a safe-harbor plan.

-Automatically contributed amounts are required to be invested in accordance with Labor Department regulation 29 C.F.R. Section 2550.404c-5, if the participant makes no investment decision.

Note that plans formed before the Act’s enactment date are exempt from the automatic enrollment provision along with SIMPLE 401(k) plans, Sec. 414(d) governmental plans, and Sec. 414(e) church plans. Any plan in existence for less than three years and any plan maintained by an employer with 10 or fewer employees is also exempt.

Tax-Free Rollovers From Sec. 529 Accounts to Roth IRAs

Beneficiaries of Sec. 529 college savings accounts can make direct trustee-to-trustee rollovers (for distributions made after December 31, 2023) from a Sec. 529 account to a Roth IRA without tax or penalty. The Sec. 529 account has to have been in existence for more than 15 years at the time of the rollover, and aggregate rollovers cannot exceed $35,000. Rollovers are also subject to the Roth IRA annual contribution limits.

Student Loan Payments

Starting in 2024, the Act allows employers to match student loan debt payoff via employer contributions to an employee’s retirement account.  Employees who receive such matching contributions are required to certify annually to the employer that payment has been made on the student loan.

Penalty Free Emergency Withdrawals

Effective for distributions made after December 31, 2023, participants can avoid the 10% tax on early distributions from retirement accounts. These are applicable for certain distributions used for emergency personal or family expenses. One distribution is allowed per year up of up to $1,000.

The Act also includes provisions to allow survivors of domestic violence and victims of a natural disaster to qualify for penalty fee withdrawals.

Beginning in 2024, the Act allows employers the option to offer their non-highly compensated employees to contribute to emergency savings accounts.  Eligible participants can contribute a max of $2,500 each year.  The participant can make up to four withdrawals from the emergency savings account each plan year without penalty.

403(b) Plans

The Act conforms the current hardship distribution rules for 401(k) plans to 403(b) plans and the long-term, part-time employee provision is extended to 403(b) plans that are subject to ERISA. In addition, 403(b) plans are now allowed to invest in collective investment trusts (CITs). Beginning in 2023, 403(b) plans can join a multiple employer plan (MEP) or pooled employer plan (PEP).

Audit Requirements for Groups of Plans

Each plan filing under a group of plans (added by the SECURE Act) is now required to submit audited financial statements if it has 100 participants or more. Plans with fewer than 100 participants that are included in a group of plans are not required to submit audited financial statements.

 

 

 

 

 

 

Kristen E. Moss, CPA
Manager

The Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA), which establishes audit standards for CPAs, issued Statement on Auditing Standards (SAS) No. 136, “Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA”. This statement is directed to auditors who perform audits of financial statements of employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The new standard prescribes certain new performance requirements for ERISA plan financial statement audits and changes the form and content of the related auditor’s report.

The new standard is effective for audits of ERISA plan financial statements for periods ending on or after December 15, 2021 and includes new requirements in all phases of an audit of ERISA plan financial statements including:

• engagement acceptance and obtaining additional management representations,
• performing risk assessment procedures related to the plan instrument, plan tax status, and prohibited transactions, and responding to identified risks,
• communicating additional matters (reportable findings) to those charged with governance,
• performing certain additional procedures unique to auditing ERISA plans, and
• Issuing a new form of the auditor’s report.

Another significant change is that an audit performed pursuant to ERISA section 103(a)(3)(C) will no longer be referred to as a “limited scope audit” but rather going forward will be referred to as an “ERISA section 103(a)(3)(C) audit.” The ERISA Section 103(a)(3)(C) audit is unique to employee benefit plans and is not considered a scope limitation.  Accordingly, the auditor will no longer issue a disclaimer of opinion, but instead would issue an ERISA section 103(a)(3)(c) auditor’s report that contains a two-pronged opinion that is based on the audit and on the procedures performed relating to the certified investment information.

As part of the auditor’s acceptance of the audit engagement, your auditor will request plan management sponsor/administrator to acknowledge in the engagement letter management’s responsibilities for maintaining a current plan instrument, administering the plan, and providing the auditor with a draft Form 5500 prior to the dating of the auditor’s report. In addition, the new standard requires that your auditor obtain certain written management representations at the conclusion of the engagement regarding those responsibilities. It also includes new acknowledgements related to management’s responsibilities with respect to the investment certification when management elects to have an ERISA Section 103(a)(3)(C) audit [previously called a “limited scope” audit as noted above] and requires auditors to inquire of management about management’s processes for determining that the certification meets DOL requirements and that the certifying entity is a qualified institution under DOL rules and regulations. Management will be asked to acknowledge their responsibility for determining whether:

• an ERISA Section 103(a)(3)(c) audit is permissible
• the investment information is prepared and certified by a qualified institution
• the certification meets DOL requirements
• the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.

In addition, your auditor may request additional information from you in order to perform the plan audit under the new standard. Management should become familiar with the provisions of this standard as its impact on employee benefit plan audits and financial reporting requirements is significant and may result in an additional level of effort in preparing for the audit.  For additional information, please review the AICPA plan advisory document.