The Consolidated Appropriations Act, 2023, P.L. 117-328, enacted on Dec. 29 included (as its Division T) the Secure 2.0 Act, which contains several retirement and tax provisions. The Secure 2.0 provisions mostly focus on expanding coverage, increasing retirement savings, and simplifying and clarifying retirement plan rules, but there are other changes included as well.

Elimination of 10% additional tax on corrective distributions of excess contributions

The act provides that earnings attributable to excess contributions to an IRA that are returned by the due date for the taxpayer’s return for the year (including extensions) are exempt from the Sec. 72(t) 10% additional tax.

QLAC premium limit

The act repeals the 25% premium limit for qualifying longevity annuity contracts (QLACs). It also increases the dollar limitation on premiums from $125,000 to $200,000.

The act makes changes to facilitate joint and survivor QLAC benefits, and it creates a “free look” period, allowing rescission of the QLAC contract by the employee within 90 days.

Accidental overpayment of plan benefits

Under the act, inadvertent overpayment of retirement plan benefits will not result in noncompliance with plan requirements merely because the fiduciary, in the exercise of its discretion, does not seek recovery of the overpayment from participants or beneficiaries.

Reduction in excise tax on retirement plan accumulations

The act reduces the Sec. 4974(a) penalty for failure to take RMDs from 50% to 25%. If the failure to take the RMD is corrected in a timely manner (i.e., during the “correction window”), the penalty is reduced from 25% to 10%. The correction window is the period beginning on the date on which the Sec. 4974(a) excise tax is imposed and ending on the earliest of: (1) the date of mailing of a notice of deficiency with respect to the excise tax; (2) the date on which the excise tax is assessed; or (3) the last day of the second tax year that begins after the end of the tax year in which the excise tax is imposed.

Retirement savings lost-and-found database

The act mandates the creation of a retirement savings lost-and-found online searchable database to be managed by the Department of Labor. The database must be established within two years of the date of enactment of the act. The database will allow individuals to search for plans and the contact information of the administrator of any plan in which they are a participant or beneficiary.

Exclusion of disability-related first-responder retirement payments from income

The act creates a new Sec. 139B that allows certain first responders (law enforcement officers, firefighters, paramedics, and emergency medical technicians) to exclude from gross income certain service-related disability pension or annuity payments after they reach retirement age. The exclusion is effective for eligible amounts received after Dec. 31, 2026.

Retroactive first-year elective deferrals for sole proprietors

The act allows sole proprietors (i.e., an individual who owns the entire interest in an unincorporated trade or business and who is the only employee of that trade or business) to make an elective deferral under a 401(k) plan during the period before the time for filing the individual’s return for the tax year (determined without regard to any extensions) ending after or with the end of the 401(k) plan’s first plan year, and the deferral will be treated as having been made before the end of the plan’s first plan year.

Surviving spouse’s election to be treated as an employee

In the case of an employee who dies before RMDs have begun under an employer-provided qualified retirement plan, and who has designated a spouse as sole beneficiary, the act allows the designated beneficiary surviving spouse to elect to be treated as if the surviving spouse were the employee for purposes of the RMD rules of Sec. 401(a)(9). The IRS will prescribe the time and manner for making the election. This provision is effective for calendar years after 2023.

Long-term-care contracts purchased with retirement plan distributions

The act amends Sec. 401(a) to allow retirement plans to make “qualified long-term care distributions.” Under this provision, up to $2,500 can be distributed to purchase long-term-care insurance.

SIMPLE and SEP Roth IRAs

The act repealed Sec. 408A(f), so now SIMPLE IRAs and SEPs can allow employees to treat contributions as nondeductible Roth contributions. This change is effective for tax years beginning after Dec. 31, 2022.

Roth treatment of catch-up contributions

The act makes catch-up contributions under Sec. 401(k), Sec. 403(b), or Sec. 457(b) plans subject to mandatory Roth tax treatment, except those made by participants whose wages for the preceding calendar year do not exceed $145,000, as annually indexed for inflation. That means these contributions will be made on an after-tax basis and qualified distributions will generally be excluded from income when made.

Roth treatment of matching or nonelective contributions

Under the act, Sec. 401(k), Sec. 403(b), and Sec. 457(b) plans can allow a participant to designate some or all matching contributions and nonelective contributions as designated Roth contributions. This applies only to the extent that a participant is fully vested in these contributions.