The Internal Revenue Service (IRS) recently issued two fact sheets related to certain retirement plan changes provided in the SECURE 2.0 Act of 2022 (SECURE 2.0). The first fact sheet focuses on changes to Form W-2 reporting, while the second provides answers to frequently asked questions (FAQs) about disaster relief distributions and loans.

Changes to Form W-2

On May 2, 2024, the IRS issued Fact Sheet 2024-18, reminding plan sponsors of the changes under SECURE 2.0 that may impact reporting on Forms W-2 (including U.S. territory Forms W-2AS, W-2GU, and W-2VI) beginning with the 2023 tax year. If 2023 W-2s have been filed without taking these changes into account, Form W-2c will need to be filed to correct the error(s). Visit www.irs.gov/w2, for more information.

De minimis financial incentives

Section 113 of SECURE 2.0 allows employers to provide small financial incentives (such as gift cards) to encourage their nonparticipating employees to make 401(k) or 403(b) contributions, without violating the “contingent benefit rule” of the Internal Revenue Code (IRC), which otherwise prohibits employer-provided benefits (except matching contributions) that are conditioned on the employee making elective deferral contributions to the plan. These incentives are generally considered part of the employee’s taxable income and are subject to regular tax withholding and Form W-2 reporting requirements unless an exception applies. For example, a gift card, as a cash equivalent, is a taxable fringe benefit that is taxable as wages.¹

Roth SIMPLE and Roth SEP IRAs

Under Section 601 of SECURE 2.0, employers that sponsor a Simplified Employee Pension (SEP) or a Savings Incentive Match Plan for Employees (SIMPLE) IRA can offer employees the option of having their salary reduction contributions deposited into a Roth IRA instead of a traditional IRA. These Roth employee elective contributions are subject to federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. Employer contributions to Roth SIMPLE or Roth SEP IRAs are not subject to such federal withholding and taxes, but they must be reported as a taxable amount on Form 1099-R for the tax year in which they are allocated to the employee’s account, in the same manner as if done for a Roth IRA conversion (for which an exception applies to the 10% additional tax if under age 59½).²

Designated Roth nonelective and matching contributions

Under Section 604 of SECURE 2.0, plans can allow employees to designate matching and nonelective contributions made after December 29, 2022, as Roth contributions if such contributions are fully vested when made, even if the plan does not permit Roth elective deferral contributions. These contributions are not subject to federal income tax withholding or FICA and FUTA taxes. However, they must be reported as a taxable amount on Form 1099-R for the tax year in which they are allocated to the employee’s account, in the same manner as an in-plan Roth rollover to a designated Roth account.³

Disaster relief frequently asked questions

On May 3, 2024, the IRS posted Fact Sheet 2024-19 with frequently asked questions (FAQs) related to distributions and loans made to certain individuals affected by federally declared disasters occurring on or after January 26, 2021. Section 331 of SECURE 2.0 permits employers to amend their defined contribution (DC) plans—including 401(k), 403(b), governmental 457(b), and money purchase pension plans—or defined benefit (DB) plans to provide recovery distributions and/or loans related to qualified disasters. Highlights from the FAQs are as follows:

Qualified disaster

A qualified disaster is a disaster that has been declared a “major disaster” by the president and is listed on the Federal Emergency Management Agency (FEMA) website. A disaster’s category could change over time as new information about the severity of the event emerges. FEMA will identify the incident period of a qualified disaster, which can be as short as a single day (e.g., tornado) or span multiple days (e.g., hurricane).

Qualified individual

Individuals whose primary residence is in the qualified disaster area during the incident period and who suffer an economic loss due to the qualified disaster may be eligible for a disaster relief distribution and/or loan. The FAQ provides the following examples of an economic loss:

• “Loss, damage to, or destruction of real or personal property from fire, flooding, looting, vandalism, theft, wind or other cause
• “Loss related to displacement from the individual’s home, or
• Loss of livelihood due to temporary or permanent layoffs.”

Plans may rely on “reasonable representations” from the participant that they are a qualified individual unless the plan is aware of information to the contrary.

Qualified disaster recovery distribution

A distribution made from the plan to a qualified individual on or after the first day of the qualified disaster’s incident period and before 180 days after the latest of the following dates, is a qualified disaster recovery distribution.

• December 29, 2022
• The first day of the qualified disaster’s incident period
• The date the disaster is declared a major disaster

Up to $22,000 in distributions aggregated across all plans in which an individual participates and covering a single disaster can be considered a qualified disaster recovery distribution.

Qualified disaster recovery distributions may be made before an “otherwise permitted distributable event” from a DC plan (such as attaining age 59½, termination of employment, or disability). However, they may not be made from a defined benefit (DB) plan before an otherwise permitted distributable event, and spousal consent is required to pay amounts in a form other than a qualified joint and survivor annuity.

Repayments

Qualified individuals may repay some or all of the qualified disaster recovery distribution within three years from the day after the date the distribution was received. Individuals will not owe federal income tax on the amount of the distribution that is repaid. Plans that accept repayments are to treat them as rollover contributions, even if the plan does not otherwise accept rollover contributions. However, plans that do not accept rollover contributions are not required to accept repayments of qualified disaster recovery distributions.

Taxation and reporting

Qualified disaster recovery distributions are not subject to the 10% additional tax on early distributions but should be included as income on the individual’s federal income tax return. The individual can reflect up to $22,000 of qualified disaster distributions as income in the year of receipt or spread the amounts equally over three years starting with the year of receipt.

“Even if an employer does not treat a distribution as a qualified disaster recovery distribution, an individual may still treat a distribution as such on their federal income tax return if they are a qualified individual and the distribution meets the requirements to be a qualified disaster recovery distribution.” Individuals may use Form 8915-F, Qualified Disaster Retirement Plan Distributions and Repayments, for this purpose.

Plans should report qualified disaster recovery distributions on Form 1099-R, regardless of whether the individual repays the amount in the same year. A qualified individual may file amended federal income tax return(s) to claim a tax refund of amounts repaid that were reported as income in any prior tax year.

Qualified distributions for buying or building a primary residence in a qualified disaster area

This distribution is a hardship distribution from a 401(k) or 403(b) plan issued within the period beginning 180 days before the incident period and not later than 30 days after the incident period of a qualified disaster and which was to be used to buy or build a primary residence in a qualified disaster area, but which was not used due to the qualified disaster.

Some or all of these distributions may be repaid anytime between the first day of the qualified disaster’s incident period and before 180 days after the latest of the following dates.

• December 29, 2022
• The first day of the qualified disaster’s incident period
• The date the disaster is declared a major disaster

Repayments up to the amount of the qualified distribution may be contributed to an eligible retirement plan “to which a rollover contribution of that distribution can be made” and federal income taxes will not apply to the amount of the distribution that is repaid.

Loans

SECURE 2.0 allows employers to grant qualified individuals up to one year of additional time to make repayments on certain plan loans that are outstanding on or after the latest of:

• December 29, 2022
• The first day of the qualified disaster’s incident period
• The date the disaster is declared a major disaster

Loan repayments due during the incident period or up to 180 days after the incident period are eligible for the delay and payments due after this period will be adjusted to reflect the delay and accrued interest during the delay.

Employers are also allowed under SECURE 2.0 to raise the maximum loan amount qualified individuals may receive within 180 days after the start of a qualified disaster’s incident period to up to 100% of the individual’s vested benefit under the plan but not to exceed $100,000 (less the value of the individual’s outstanding plan loans).

The FAQs are general in nature and may not address a specific individual’s situation. The IRS will not rely on them to review individual cases, but taxpayers who reasonably and in good faith rely on them will not be penalized if they are found to have underpaid taxes. These FAQs may be updated in the future.

Please contact your Milliman consultant to discuss how these IRS releases may impact your plan(s).

¹ Additional information can be found in Q&A D1 through D6 in IRS Notice 2024-2.

² Additional information can be found in Q&A K1 through K8 in IRS Notice 2024-2.

³ Additional information can be found in Q&A L1 through L11 in IRS Notice 2024-2.