In this Edition

December 2023

Proposed Regulation Changes on Timing and Use of Forfeitures

SECURE 2.0 Act – Changes Beginning in 2024

Employee Benefit Plan and IRA Quick Reference Table

Forfeitures can be cumbersome for plan administrators as they try to find the best way to apply them in their 401(k) retirement plans. Some plan administrators aren’t sure of what a forfeiture is, or even if they are using them in accordance with Treasury regulations. Forfeitures arise when a participant terminates a plan before they meet the full vesting requirements of the plan. Understanding forfeitures and knowing when and how to use them has never been clear. The good news is that the U.S. Treasury Department has issued proposed regulations that may provide more guidance on the timing and use of forfeitures.

Existing Regulations for Defined Contribution and Defined Benefit Plans

Currently, defined contribution plans do not have set regulations regarding forfeitures. The main sources of guidance are revenue rulings, various legislative history, and IRS newsletters. The most helpful guidance comes from a 2010 IRS newsletter mentioning that plan documents should specifically state when and how a plan will use and allocate forfeitures. Additionally, forfeitures are not allowed to be put into suspense accounts to accumulate earnings over time as some plan administrators are currently doing.

Forfeitures that are in suspense accounts should be used up by the end of the plan year in which they occurred, which coincides with other guidance stating forfeitures may be used to reduce plan expenses and employer contributions but cannot be carried over to any subsequent plan years. 

Treasury Regulation 1.401-7(a) provides the best guidance regarding defined benefit plans, which states that forfeitures are not allowed to be used to increase the benefits of other participants in the plan. Similar to defined contribution plans, these forfeitures must be used as soon as feasible to reduce employer contributions to the plan. Current regulations also state that defined benefit plans may anticipate the effect these forfeitures will have on the plan when determining costs under the plan. 

Proposed Regulations for Defined Contribution and Defined Benefit Plans

The U.S. Treasury Department has issued proposed regulations that should provide plan administrators with a clearer understanding of the timing and use of forfeitures. Keep in mind that if these proposed regulations are finalized, you may have to amend your plan for the changes. Below are the proposed regulations for defined contribution plans and defined benefit plans. 

Defined Contribution Plans: The plan must state that forfeitures must be used within 12 months of the plan year they were incurred. These forfeitures may be used for one or more of the following: 

• To pay plan expenses
• To reduce employer contributions
• To increase benefits of other eligible participant accounts in accordance with the plan

Defined Benefit Plans: The plan must state that forfeitures cannot be used to increase the benefits of other participant accounts, but the effect of forfeitures may be anticipated when determining the costs of the plan for minimum funding purposes.  

These proposed regulations, if finalized, would be effective for plan years beginning on and after January 1, 2024. There is a transition rule allowing forfeitures incurred in any plan year that begins before January 1, 2024, to be used by the end of the first plan year beginning on or after January 1, 2024. You may want to consider talking with your financial advisor and third-party administrator to make sure your retirement plan will comply with these new regulations once they take effect. 

The SECURE (Setting Every Community Up for Retirement Enhancement) Act 2.0 was signed into law at the end of 2022 and builds on the reforms included in the SECURE Act of 2019. There is a significant retirement crisis looming in the United States as Americans are generally saving less and living longer. Unfortunately, the problem has been put on the back burner for too long. The intent of this Act is threefold: to expand and increase retirement savings (especially for low-income and part-time employees), to simplify and improve retirement plan rules, and to lessen the cost to employers of setting up a retirement plan. The overall goal – help people prepare for retirement!

There are dozens of new provisions that have been included in this law. While some provisions went into effect in 2023; others will roll out in 2024 through 2027. In our June 2023 Employee Benefit Plan Resources Newsletter, we focused on a benefit for helping employees with student loan debt through an employer match feature. This article will focus on other changes beginning in 2024.

Withdrawals for Certain Emergency Expenses

There is generally a 10% withdrawal penalty for an early distribution from a tax-deferred retirement plan account if an individual is under 59 ½. This provision will provide an exception to the penalty if the distribution is used for an emergency expense, defined as “an unforeseeable or immediate financial need relating to personal or family emergency expenses”. The distribution can be up to $1,000 annually and can be repaid within a three-year period. The caveat, however, is that no additional emergency distributions are allowed during this three-year window until it has been repaid.

Withdrawals Related to Domestic Abuse

A participant in a retirement plan will be allowed to self-certify that they were a victim of domestic abuse and will be allowed to take an early distribution (penalty-free) of up to the lesser of $10,000 (indexed for inflation) or 50% of their account balance. Additionally, the participant would have the option of repaying the withdrawn amount over three years and would be refunded income taxes on the repaid amount.

Dollar Limit Increase for Mandatory Distributions

Under current law, a retirement plan sponsor is allowed to automatically cash out a former employee’s retirement plan account into an IRA, if the balance is between $1,000 and $5,000. This provision will increase the limit from $5,000 to $7,000.

Emergency Savings Accounts (ESA)

To address the issue that many individuals in the U.S. do not have even $1,000 in savings to handle a potential financial emergency, this provision of the Act provides an option for plan sponsors to provide an emergency short-term savings feature to non-highly compensated employees that is linked to their overall retirement plan account. Participants would be allowed to contribute up to a maximum of $2,500 (or a lesser amount as determined by the plan sponsor) in after-tax (Roth) dollars into this account. Employer matching contributions can be made on these contributions, but they will not be part of the emergency savings account. The maximum balance in an ESA at any time is $2,500. Participants are allowed to withdraw funds at least once per month and the first four withdrawals will not be subject to any fees or other charges.

It is important to remember that for any of the above provisions, an amendment to the retirement plan may be needed. Plan sponsors should work with their third-party administrators to determine which features work for their plan.

For any questions about Secure 2.0 please contact your Hawkins Ash representative and look to future newsletter articles for more guidance under the Act.

The Internal Revenue Service has announced the cost-of-living adjustments applicable to dollar limitations for various qualified retirement plans and other amounts for 2024. While the pension plan deferral and catch-up limits did not change, many of the annual plan limits and compensation thresholds did. Plan sponsors should verify that their administrative and payroll systems reflect the appropriate limits. Communications that specify benefit plan limits should be reviewed for accuracy before materials are given to participants.

Related Parties and Parties-In-Interest: A Guide for Employee Benefit Plan Sponsors

Every year during your annual audit, your auditor asks you to identify any related parties and parties-in-interest. This article describes these terms and when to disclose any companies or individuals in the annual questionnaire.

SECURE 2.0 Act: An Attractive Benefit for Helping Employees with Student Loan Debt

A new provision of the SECURE 2.0 Act of 2022 offers employers an attractive benefit and employees of these organizations a way to pay down student debt and participate in long-term retirement savings.