Employee Benefit Plans Alert | Winter 2024

By Louis F. LiBrandi, Partner; Joel Sowell, Tax Manager; and Keely Portillo, Senior Associate

This Winter 2024 edition of Employee Benefit Plans Alert focuses on the following topics:

• New Guidance on Long-Term, Part-Time Employees
• Secure 2.0 Act – Changes on W-2 Reporting
• Final Regulations on RMDs
• Retirement Plan Document Changes – Amendments Deadline Extended
• Retirement Plan Corrections: Distinguishing Between Excess Amounts and Excess Allocations
• Form 720 – PCORI Fees Updated for 2024

New Guidance on Long-Term, Part-Time Employees

The Internal Revenue Service (IRS) recently released Notice 2024-73 which discusses the treatment of long-term, part-time employees (LTPTEs) in 403(b) plans. The definition of LTPTEs was recently updated through the addition of Section 202(c) to the Employee Retirement Income Security Act (ERISA) as part of the SECURE 2.0 Act. The new definition includes employees who are at least 21 years of age and provide at least 500 hours of service during two consecutive 12-month periods. If an employee meets these qualifications, then the employee must be allowed to make deferrals in a 403(b) plan.

The new guidance covers several different aspects of LTPTEs and is presented in a question and answer format. The main points are:

• The eligibility rules for LTPTEs under Section 202(c) of ERISA do not apply to a non-ERISA 403(b) plan.
• A 403(b) plan that is subject to ERISA:
  • is required to provide the right to make elective deferrals to LTPTEs.
  • may continue to exclude part-time employees who do not qualify as LTPTEs.
  • is not required to provide the right to make elective deferrals to student employees, regardless of whether the student employee may qualify as an LTPTE.
• 403(b) plans can exclude LTPTEs from actual contribution percentage (ACP) testing.
• Employees who may have become eligible to participate in the plan solely by qualifying as an LTPTE can no longer be excluded from receiving nonelective or matching contributions or from nondiscrimination testing once they become eligible to participate under standard eligibility conditions.

The guidance above is effective for plan years beginning after December 31, 2024. Final regulations for LTPTEs of 401(k) plans have not been issued but the IRS has stated that any such guidance will apply no earlier than plan years that start on or after January 1, 2026.

SECURE 2.0 Act Changes to Form W-2 Reporting

The IRS published Notice 2024-2 to provide guidance for certain provisions of the SECURE 2.0 Act of 2022 (the SECURE Act), including provisions that impact W-2 reporting. These conditions became effective soon after the legislation was enacted. The provisions possibly affecting Form W-2 reporting are:

• Section 113 of the SECURE Act: De Minimis Financial Incentives
  
  The SECURE 2.0 Act allows employers to offer small financial incentives (e.g., gift cards) to employees to boost participation in retirement plans. The dollar amount is capped at $250.
  
  The offering of de minimis financial incentives is included in employees’ wages and they are subject to all applicable employment taxes and reporting requirements.
  
  
• Section 601 of the SECURE Act: Roth Simple and Roth Simplified Employee Pension (SEP) Individual Retirement Accounts (IRAs)
  
  The SECURE Act allows employers to offer employees the option to designate elective and non-elective contributions to a Roth IRA. Contributions made at the employee’s election to a Roth SEP or Roth SIMPLE IRA are subject to federal income tax withholding, the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA). These contributions should be included in boxes 1, 3 and 5 (or box 14 for railroad retirement taxes) of Form W-2. They’ll also be reported in box 12 with code “F” (for a SEP) or code “S” (for a SIMPLE IRA).
  
  Employer contributions are not subject to federal tax withholding, FICA or FUTA; the employer contribution amount, however, needs to be reported on Form 1099-R in boxes 1 and 2a for the year they are allocated to the participant’s account with code “2” or “7” in box 7 and a checked IRA/SEP/SIMPLE checkbox.
  
  
• Section 604 of the SECURE Act: Optional Treatment of Non-Elective or Roth Matching Contributions
  
  The Secure Act permits 401(k), 403(b), and governmental 457(b) retirement plans to allow participants to designate non-elective and matching contributions made to a retirement plan as Roth contributions. This change became effective December 30, 2022.
  
  These contributions are not considered wages and, therefore, are not subject to federal income tax or Social Security/Medicare tax, but they need to be reported on Form 1099-R in boxes 1 and 2a for the year they are allocated to the participant’s account with code “G” in box 7.

If you filed Form W-2 for the 2023 tax year without following these guidelines, it will need to be corrected by filing Form W-2c. 

Final Regulations on Required Minimum Distributions (RMDs)

The IRS and the U.S. Treasury Department issued final regulations for required minimum distributions (RMDs) on July 19, 2024. The regulations addressed changes made by the SECURE Act of 2019 and the SECURE Act of 2022. The regulations are effective September 17, 2024 and apply to RMDs for calendar years beginning on January 1, 2025.

• Required Beginning Date – Age Increased
  
  The required beginning date (RBD) is the date when RMDs must commence. RMDs must begin by April 1 of the calendar year following the year the participant/employee reaches the applicable RMD age. The final regulations determined that the RBD is based on the participant’s or IRA owner’s date of birth:
  
  • 70-½ if born before July 1, 1949
  • 72 if born on or after July 1, 1949 and before 1951
  • 73 if born on or after January 1, 1951 and before 1960
  • 75 if born on or after 1960
    
    
• RMD – New 10-Year Rule Payout
  
  The 10-year rule states that the beneficiary must have received the entire participant’s account balance by the end of the 10^th year following the year of the death of the participant. The RMDs requirement to be made on the 10-year period depends upon whether the participant died before or on/after their RBD. This rule is effective for deaths occurring after 2019. 
  
  • New Internal Revenue Code (IRC) Section 401(a)(9)(H) states that if the participant dies before their RBD, only an eligible designated beneficiary (EDB) of the participant – i.e., surviving spouse, minor children of the participant, disabled or chronically ill individual and/or a person not more than 10 years younger than the participant – can choose to receive RMD over their (beneficiary) life expectancy. The new 10-year rule applies to all other designated beneficiaries (ODB).
  • If the participant dies on or after their RBD, for EDB the RMD is calculated using the greater of 1) the beneficiary life expectancy or 2) the participant’s life expectancy. For ODB, on the other hand, the RMD must satisfy the greater of 1) the beneficiary life expectancy or 2) the participant’s life expectancy and the 10-year rule (the entire account balance must be distributed on the 10th year following the year of the death of the participant).

• New Spousal Election for RMD Calculations
  
  SECURE 2.0 Act has added a new selection for the surviving spouse – only – for the calculation of RMDs. Starting in 2024 and going forward, the surviving spouse has the option to choose RMDs to be calculated using the uniform lifetime table if the participant died before RBD.

Deadline Extended for Retirement Plan Amendments

On September 12, 2024, the IRS issued a reminder that the extended deadline to amend certain retirement plans is required by the:

• Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019,
• Coronavirus Aid, Relief and Economic Security (CARES) Act,
• Taxpayer Certainty and Disaster Tax Relief Act of 2021 and
• SECURE Act 2.0 of 2022.

The plans must be retroactively amended to ensure they cover the affected periods. The IRS also emphasizes that the plans must operate in compliance with the mandated provisions of the legislation listed above by their effective dates.

Notice 2024-2 issued by the IRS provides guidance on the implementation of several provisions under the SECURE Act 2.0 and also includes the extended amendment deadlines.

The table below summarizes the statutory deadlines for plan amendments to be adopted:

Retirement Plan Corrections: Distinguishing Between Excess Amounts and Excess Allocations

Despite the best efforts of plan administrators, errors still occur in retirement plans that require corrective action. The IRS has provided guidance through the Employee Plans Compliance Resolution System (EPCRS) of ways that plan administrators can self-correct or seek correction approval from the IRS. This guidance has been updated recently by the SECURE 2.0 Act and Notice 2024-77 to clarify certain aspects of plan correction.

Before making corrections, plan administrators should first identify the root cause of the issue – as that cause can determine the corrective treatment needed. Two closely related but distinct potential causes needing correction are excess amounts and excess allocations:

• Excess amounts are defined as qualification failures that are due to contributions, allocations or other additions on behalf of a plan participant under terms of a plan that exceed statutory contributions under regulations. Examples of excess amounts are excess elective deferrals under Section 402(g) and excess annual account additions under Section 415. Excess amounts must be corrected according to the appropriate statute or the tax-favored status of a qualified plan could be threatened.
• Excess allocations are excess amounts that do not have statutory corrective measures as described above. Examples include the misapplication of a contribution formula or an incorrect amount of compensation used in a benefit calculation.

EPCRS established a $250 de minimis threshold for certain plan corrections but plan administrators should exercise caution in this area, as the de minimis rules apply to excess amounts but NOT to excess allocations.

Form 720 – PCORI Fees Updated for 2024

On December 2, 2024, the IRS released Bulletin No. 2024-49 which announced the adjusted applicable dollar amount for plan years ending before October 1, 2025. For a policy year or plan year ending on or after October 1, 2024 and before October 1, 2025, the applicable fee is $3.47 per covered life.

The Patient-Centered Outcomes Research Institute (PCORI) Fee needs to be paid by the plan sponsor of self-insured health plans (e.g., health reimbursement account [HRA]) using Form 720. Form 720 needs to be paper filed to the IRS Center in Ogden, Utah no later than July 31 of the calendar year following the last day of the plan year to which the fee applies. We have assisted several clients with this annual filing requirement and evaluated the optional methods available for reporting.

If you are a plan administrator who has discovered potential errors or issues with your plan and you’re not sure how to proceed – please consider contacting the Employee Benefit Services Group at PKF O’Connor Davies. Our team of benefit plan professionals can guide you through the intricacies of plan correction processes. Please feel free to reach out to one of the specialists listed below.

Contact Us

Our Employee Benefit Services team is available to assist plan sponsors in helping meet the various compliance requirements applicable to their plans. We provide comprehensive compliance services for qualified retirement plans, nonqualified deferred compensation plans and welfare plans. For more information, please contact your Client Services Partner or:

Timothy J. Desmond, CPA
Partner
Director of Employee Benefit Services
tdesmond@pkfod.com | 551.249.1728

Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Partner
Employee Benefit Services Group
llibrandi@pkfod.com | 646.449.6327

Joel Sowell, CPA
Manager
Employee Benefit Services Group
jsowell@pkfod.com | 212.286.2600