It has been a busy end of 2023 and first quarter of 2024 for the Internal Revenue Service and Department of Labor when it comes to implementing qualified plan regulatory guidance. You may have heard of some or more of these changes, many of which come from the SECURE Act and more recent SECURE 2.0. Although none of these items require plan document amendments this year, many administrative changes have become effective. ESOP plan sponsors should consult with their third-party administrators and legal counsel to make sure that their plans are being administered properly and to consider whether plan amendments are appropriate now to conform documents to administration. The key changes that may require action are summarized below.

Increased required minimum distribution age

Historically, participants were required to begin taking minimum distributions from qualified plans by April 1st of the calendar year after the calendar year in which the participant attained age 70 ½. Now, however, the required beginning date is April 1st of the calendar year after the year that the participant attains:

  • Age 70 ½ if born before July 1, 1949
  • Age 72 if born before Jan. 1, 1951
  • Age 73 if born on or after Jan. 1, 1951

Further, in 2033, the required minimum distribution age is scheduled to increase to age 75. A draft technical correction bill would require those born in 1959 to be subject to RMD at age 73.

Forfeitures

Forfeitures represent amounts that did not vest, and so are not distributed to participants. The IRS recently issued proposed regulations that would require a plan to use forfeitures no later than 12 months after the end of the plan year in which they are incurred. A transition rule provides that any forfeiture incurred before Jan. 1, 2024, will be treated as if it were first incurred in the first plan year that begins on or after Jan. 1, 2024.

Plan sponsors need to consider the priority of uses for forfeitures. The preamble to the IRS regulations suggests that if the plan allows only a single use for forfeitures could create an operational failure if that single use does not use all forfeitures by the 12-month deadline. Additionally, recent litigation alleges that forfeitures should be used first to reduce plan expenses before reducing employer contributions. Although many commentators do not consider plan design regarding forfeitures to be a fiduciary function, the outcomes of these cases are yet to be determined.

Lost participants

The DOL will require employers to annually identify and report lost or missing participants who are entitled to a distribution. Much of the reportable information is what must already be reported on Form 8955-SSA. However, additional information regarding mandatory rollovers and purchases of deferred annuity contracts will also be required. The DOL has not yet released information yet on how to make these reports or when they will be due.
The reported information will be used to maintain a lost and found database for retirement benefits that participants will be able to search to determine if they have unclaimed retirement plan distributions. This reporting requirement does not relieve plan sponsors of having to locate missing participants. So plan sponsors will need to continue to make reasonable efforts to locate missing participants.

Long-term part-time employees (401(k) plans)

This item affects 401(k) plans, but we wanted to call attention to this item because most ESOP-sponsors also sponsor 401(k) plans. If you sponsor a 401(k) plan, remember that employees who have performed at least 500 hours of service for three consecutive years must be eligible to make elective deferrals. This three-year period is reduced to two years effective Jan. 1, 2025. Such an employee could receive a year of service for vesting by completing only 500 hours of service under this rule. That would represent a change in how vesting service typically is calculated.

Amendment deadlines

The changes described above represent significant changes. Amendments for these items generally will not be required in 2024. Deadlines for some items generally will be Dec. 31, 2025, and for others, Dec. 31, 2026. Because some of these changes are effective now, plan sponsors should consider whether to amend their plans now to conform the document to administration. We recommend that you work closely with your TPA and counsel to be sure your plans can be administered properly.