Congress Passes the Consolidated Appropriations Act, 2023

A $1.72 trillion omnibus spending bill, which was signed into law on December 29, 2022, funds the federal government through the end of its 2023 fiscal year ending September 30, 2023. Tax-wise the changes primarily affect qualified retirement plans and IRAs. Some anticipated tax changes were not included in the final bill. Among them, notably, was an anticipated extension of the favorable child tax credit rules that applied in 2021, so 2020 rules apply for 2022 and beyond unless the new Congress makes a separate, retroactive change.

Retirement-related changes. The major news on the tax front is that the new law incorporates the SECURE Act 2.0, which makes many changes to the rules governing qualified retirement plans and IRAs. The following is a listing of the key changes: 

• Mandatory automatic enrollment imposed on employers for eligible employees in 401(k) and 403(b) plans, with a minimum employee contribution in the first year of not less than 3% of compensation or more than 10%. The percentage increases by 1% each year, up to a maximum of 15%. An employee may reduce the designated contribution percentage or opt out of participation. “Small employer” and other exceptions will continue to apply. Mandatory automatic enrollment is effective after 2024.
• Increased catch-up contributions for 401(k) and SIMPLE-IRAs. There also will be additional catch-up contributions for those age 60, 61, 62, and 63. These changes apply after 2024.
• Indexing IRA catch-up contribution limits after 2023.
• Raising the age at which required minimum distributions (RMDs) must be taken, from current age 72 to age 73 after 2023. For those who turn 74 after 2032, RMDs aren’t triggered until age 75.
• Long-term part-timers can participate in an employer-sponsored retirement plan after having two years with at least 500 hours (instead of having three years) for plan years beginning after 2024.
• Student loan repayments will be treated as elective deferrals for purposes of employer matching contributions to 401(k)s and SIMPLE-IRAs, starting in 2024.
• Additional nonelective contributions to SIMPLE-IRAs and SIMPLE 401(k) plans after 2023 will be allowed, up to 10 percent of compensation with an inflation-adjusted cap of $5,000.
• Enhancement of contribution levels to qualified longevity annuity contracts (QLACs) by eliminating the 25% account balance limit for contracts purchased after December 29, 2022, (as adjusted for inflation) and increasing the dollar limit on premiums from $145,000 for 2022 to $200,000 for 2023. The $200,000 limit will be subject to cost-of-living increases after 2023.
• The retirement Saver’s Credit will be replaced by a “Saver’s Match” of up to $1,000 by the federal government, for contributions to qualified retirement plans, IRAs and Roth IRAs, for certain qualifying individuals, starting in 2027.
• New emergency savings accounts under which a qualified retirement plan may set up a special after-tax account for non-highly compensated employees in which the lesser of 3% of compensation or $2,500 may be contributed. Contributions also may be rolled over to a Roth account or IRA.
• Withdrawals for emergency expenses from retirement plans up to $1,000 per year to pay personal expenses won’t be subject to the 10% early distribution penalty and may be repaid within 3 years and taxes paid can be refunded by filing an amended return. These changes apply after 2023.
• Penalty-free withdrawals in the case of domestic abuse situations up to the lesser of $10,000 or 50% of the account balance, effective for distributions after 2023.
• Penalty-free withdrawals by those with terminal illness, effective for distributions after December 29, 2022.
• Overall reduction in the penalty for failing to take sufficient required minimum distributions from the current 50% to 25%, or 10% if the failure is fixed within a “correction window” (the period ending the earliest of the mailing of a deficiency note, the date the tax is imposed, or the second year after the year for the penalty). This change is effective starting in 2023.
• Set a 3-year limit on recontributions of qualified birth or adoption distributions for distributions after December 29, 2022.
• Disaster recovery withdrawals or loans (distributions within 180 days before or 30 days after an incident period) from qualified plans and IRAs up to $22,000 apply for those in federally-declared disaster areas. Income from the distribution may be spread over 3 years and can be recontributed within 3 years to recoup any taxes paid by filing an amended return. This relief applies retroactively to federal disasters occurring on or after January 26, 2021.
• Retirement plan funds can be used to pay long-term care premiums within set limits and are exempt from early distribution penalties, effective for distributions made three years after December 29, 2022.
• 529 funds up to $35,000 in accounts at least 15 years old can be rolled over tax free to Roth IRAs; the income limits for Roth IRA contributions do not apply in this case. This change applies to distributions after 2023.
• Household employers can set up a SEP for contributions benefiting their employees in tax years after December 29, 2022.

Other tax-related changes. While there were not many tax-related changes other than those retirement-related listed above, some to note include:

• Increasing the availability and benefits of ABLE accounts for people with disabilities after 2025.
• Permitting certain corrections to deeds granting conservation easements. The IRS is supposed to publish safe harbor deed language within 120 days of December 29, 2022 (April 28, 2023) and there’s a 90-day period for amending an easement deed. This provision is designed to provide some relief to restrictions on charitable conservation easements made under the new law.
• Denial of a charitable deduction for syndicated conservation easements. They will no longer be treated as a qualified conservation easement if the amount of the contribution by owners of a pass-through entity (e.g., a partnership or limited liability company) exceeds 2.5 times the sum of each owner’s basis in the entity. There’s an exception for family partnerships. This is effective for easements contributed after December 29, 2022.