Secure 2.0 Finally Arrives
IRS will release more details at a later date that will provide more clarity.
Congress passed their year-end budget late in December. This Bill included provisions that we commonly refer to as Secure 2.0. This post will review some of the key details from this bill that may affect farmers. IRS will release more details at a later date that will provide more clarity. However, unlike Secure 1.0 that had some surprises, I expect there to be less surprises from the IRS.
Farmers who set up new pension plans will need to automatically enroll their new employees into the plan. These employees will automatically enroll at the 3% rate in the first year and then increase by 1% each year until it hits 10%. They can elect to not participate. However, these requirements do not apply if you have less than 11 employees so most farmers will not be affected by this rule but may elect to apply it. These provisions begin in 2025.
Farmers who set up a pension plan are entitled to a credit on their income tax return related to the costs of setting up the plan. First, the employer can get a credit equal to 100% of the administrative costs for setting up the plan for the first three years. Second, the employer can receive a credit of up to $1,000 per employee for the contributions that are made by the employer each year. For example, assume you have three full-time employees, and you contribute $1,500 for each employee per year. You will now qualify for a $3,000 credit to help offset your income taxes by that amount. This is a good deal. This applies if you have less than 50 employees and will phase-out as you go over 50 employees. However, the credit will be reduced by 25% each year after the first year. This is an incentive for you to set up a plan. This credit will reduce your deduction related to administrative costs and employee contribution amounts. This starts in 2023.
The Savings Credit for a taxpayer is now increased and will be automatically put into an IRA or eligible retirement account. The credit is 50% of the amount the taxpayer individually contributes to their qualified retirement account. The maximum credit will be $2,000 and will be phased-out if your adjusted gross income (AGI) exceeds $41,000 (for married couples) and will be fully phased-out at $71,000. Head of household filers will be 75% of these ranges and singles will be at 50%. Farmers may be over the threshold, but many of their employees will be under these limits and this will help increase the amount that will go toward their retirement. These provisions start in 2027.
The required beginning date for taking distributions from IRAs and pension plans will be gradually increased. It will be age 73 starting in 2023 and will continue for 10 years. Beginning in 2033, the age will jump to age 75. The Secure Act 1.0 changes on distributions will continue to apply.
The $1,000 IRA catchup for taxpayers 50 or over is currently stuck at $1,000. Beginning in 2024, this will now be indexed to inflation with a minimum $100 increase.
If a taxpayer is age 60-63, they will now be allowed to make larger catch-up contributions beginning in 2025 will be increased to at least $10,000 and then indexed for inflation. Simple plan catch-up amounts will be at least $5,000.
If an employee is making student loan payments, the employer make be allowed to treat those payments as elective “deferrals” by the employee and make a match payment. For example, assume the employee’s wage for the month is $3,000 and the plan calls for a 3% match and the employee pays $750 in student loan payments, the employer will then contribute $90 for the benefit of the employee. If the employee had not contributed anything to the plan or make a student loan payment, then nothing would be credited to their account. This starts in 2024.
A special up to $1,000 emergency distribution can be made to an employee each calendar year. There are special rules disallowing making an emergency distribution each year. Normally, it would be allowed once every four years, but if the employee repays the distribution or continues to make contributions to the plan, then distributions may be allowed sooner. These rules start in 2024.
SIMPLE plans will have increased limits.
A Starter 401(k) plan can be set up by the farmer. It only allows for elective contributions by employees and owners. The maximum that can be contributed is limited to $6,000 per employee indexed.
Part-time employees working 500 hours will now be required to be covered by the plan if meet that requirement in two consecutive years down from the old three-year requirement.
A once-in-a-lifetime ability to transfer up to $50,000 to a split-interest charitable entity such as a charitable remainder trust. I am not sure how well this will work with compliance costs, etc.
Farmers can now terminate a SIMPLE plan and replace it with a 401(k) plan at any time.
There are lots of other provisions that appear to not apply to most farmers. If I find some new ones, I will do another post.
All-in-all, the changes were very favorable for almost all taxpayers.
Thanks for reading Farm CPA Report! Subscribe for free to receive new posts and support my work.