Employee Benefit Plans Alert | Summer 2024

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

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

• Stock Repurchase Excise Tax
• Form 5500 Changes for 2023 Plan Year Reporting
• Guidance on New Exceptions to the 10% Additional Tax under Section 72(t)

Final Regulations on the Excise Tax on Repurchase of Corporate Stock

The Internal Revenue Service (IRS) has issued the final regulations for the new excise tax on stock repurchase imposed by the Inflation Reduction Act. These regulations took effect on June 28, 2024 and are applicable to certain publicly-traded domestic corporations that have repurchased their stock.

The stock repurchase excise tax is 1% of the repurchased stock’s fair market value (FMV). Any stock repurchase made after December 31, 2022 is subject to the 1% excise tax. The excise tax needs to be reported on Form 720, with Form 7208 as an attachment. The due date is the first full quarter following the end of the covered corporation’s taxable year.

October 31, 2024 is the due date to file Form 720 for the excise tax for the stock repurchases made after December 31, 2022. Form 7208 does not require a signature, but Form 720 must be signed under penalties of perjury. No extensions are permitted for the reporting or payment of excise tax. The filing of Form 720 for the payment of excise tax on stock repurchases is only needed for the years in which the repurchase of stock is made.

Form 5500 Changes for 2023 Plan Year Reporting

The 2023 Form 5500, Annual Return/Report of Employee Benefit Plan, contains significant reporting changes that were previously adopted in a regulatory package issued in February 2023. Additional questions and information required by the revision appear to warrant further material to be used for compliance and oversight.

The key provisions include:

• Improved reporting by multiple-employer plans (MEPs), including pooled employer plans (PEPs): This includes a new Schedule MEP intended to consolidate SECURE Act related and other multiple employer plan reporting into one schedule. The Schedule MEP also serves to satisfy the reporting requirements for pooled employer plans.
  
  
• A change in the participant-counting methodology for determining eligibility for simplified reporting alternatives available to small plans: Beginning with 2023 plan year filings, a defined contribution pension plan counts participants with account balances at the beginning of the plan year, except for new plans which use the number of participants with account balances at the end of the plan year.
  
  
• Schedule H has been expanded to report many other categories of administrative expenses paid by the plan: This change enhances the information of plan expenses related to recordkeeping, audit fees, investment advisory and management, trustee and custodial, legal and other expenses.
• Further improvements in financial and funding reporting by defined benefit plans covered by the Pension Benefit Guaranty Corporation (PBGC).
  
  
• Schedule R has added selected Internal Revenue Code (Code) compliance questions to improve tax oversight and compliance of tax-qualified retirement plans: These include identifying if the plan is relying on another plan to meet certain nondiscrimination testing requirements and methods used by a 401(k) to satisfy the nondiscrimination testing for that type of plan. The date and letter opinion number issued by the IRS for a pre-approved plan is also required.
  
  
• A plan characteristics code 3D is updated to include pre-approved 403(b) plans among the listed plans covered by that code. This appears on Form 5500, Part II, Line 8a.
  
  
• Certain groups of defined contribution retirement plans will have a new consolidated reporting option under Defined Contribution Group (DCG) reporting arrangements.

IRS Guidance on the Emergency Personal Expense Distribution and Domestic Abuse Victim Distribution Exceptions for the 10% Additional Tax

The IRS has issued Notice 2024-55 which offers guidance on the two new exceptions to the 10% additional tax under section 72(t)(1). Sections 115 (Emergency Personal Expense Distribution) and 314 (Domestic Abuse Victim Distribution) of the SECURE 2.0 Act amended section 72(t) of the Code by adding exceptions to the additional 10% tax. Both exceptions take effect on January 1, 2024. The distributions added by these sections are optional for plans to offer.

• Section 115 of the SECURE 2.0 Act added section 72(t)(2)(I) to the Code. This section provides an exception for distributions used for emergency personal expenses; the distribution would be included in gross income but is not subject to the 10% additional tax. The “emergency personal expense distribution” can be used to cover unforeseeable or immediate financial needs related to personal or family emergency expenses (e,g,, medical care, accident/loss of property due to casualty, foreclosure/eviction from primary residence, burial/funeral expenses, auto repairs, other emergency personal expenses). This distribution can be repaid at any point during the three-year period following the distribution date.
  
  This distribution has three limitations:
  
  1. It can only be taken once per calendar year.
  2. It cannot exceed the aggregated amount of $1,000 (not indexed for inflation).
  3. No additional emergency distributions are allowed during the three-year repayment period unless the emergency distribution was paid in full.

• Section 314 of the SECURE 2.0 Act added section 72(t)(2)(K) to the Code. This section provides an exception for distributions made by a victim of domestic abuse within a year the individual becomes a victim of domestic abuse. The distribution can be up to the aggregated amount of $10,000 (indexed for inflation). The distribution needs to be included in the gross income but is not subject to the additional 10% tax. Similar to the emergency personal expense, this distribution can be repaid at any time during the three-year period following the distribution date.

Plan administrators may rely on participants’ signed certification attesting to their eligibility for an emergency personal expense distribution or a domestic abuse victim distribution.

Contact Us

The Employee Benefit Services Group at PKF O’Connor Davies is available to assist plan sponsors in meeting the various compliance requirements applicable to their plans. We also provide a full spectrum of compliance services for qualified retirement plans, nonqualified deferred compensation plans and welfare plans. For more information, please contact your client services partner or any of the following:

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

Keely Portillo
Tax Professional
Employee Benefit Services Group
kportillo@pkfod.com | 551.571.9626