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SECURE Act 2.0: Correction Program for IRA’s

As the post below discusses, SECURE Act 2.0 modified the IRS’s Employee Plans Compliance Resolution System. EPCRS is currently available only for employer-sponsored plans (qualified plans, 403(b) plans, simplified employee pensions (IRC §408(k)) and SIMPLE IRA plans (IRC §408(p)). There is no similar program to allow the correction of errors affecting individual retirement accounts and annuities. Some of those mistakes can have severely unfavorable tax consequences.


SECURE Act 2.0 directs the IRS to “expand” EPCRS to IRA’s. “Expand” isn’t quite le mot juste. Very little of the current EPCRS guidance has any application, even by analogy, to IRA’s. To carry out the Congressional mandate, the IRS will have to decide which IRA blunders should be covered by the program and what correction methods are appropriate.


The Act specifies two issues that Congress expects to be part of the correction program: failure to receive required minimum distributions and attempted rollovers of distributions from inherited IRA’s. The former is a common problem that the IRS already addresses by waiving the excise tax on RMD deficiencies that were due to “reasonable cause” and are corrected through the receipt of make-up distributions. (See Treas. Reg. §54.4974-2, Q&A-7.) It isn’t obvious that a new program will be able to do a great deal more.


Distributions from inherited IRA’s cannot be rolled over; a purported rollover is a taxable event. SECURE Act 2.0 states that taxpayers who make this mistake should be permitted to avoid the tax consequences by returning the distribution to the IRA from which it came. That solution will need to be fleshed out. An ineligible rollover is most likely to occur when the holder of an inherited IRA wants to change IRA custodians and thinks that he can do so by closing out his account at the old custodian and rolling it over to an account with the new one. The correct procedure is a direct custodian-to-custodian transfer. Getting it wrong should be rare – IRA custodians are well aware of the peculiarities of inherited IRA’s – but accidents happen. There can be no reasonable objection to the Act’s goal of negating the tax liability arising merely from choosing the wrong form for the transaction, though returning the funds to the original custodian so that it can immediately transfer them back to its successor seems otiose.


A situation not mentioned by the Act where a correction mechanism would be useful is excess IRA contributions, which, if not withdrawn by the extended due date of the tax return for the year of contribution, are subject to a six percent excise tax, payable by the IRA owner. The tax recurs each year until the excess is corrected.


Correction can sometimes take a long time. Suppose, for example, that someone receives a $100,000 distribution from his employer’s 401(k) plan, attempts to roll it over to his IRA, misses the 60-day deadline for completing the rollover, isn’t eligible for a waiver of the deadline and doesn’t withdraw the erroneous rollover (with attributable income) by the extended due date of his tax return. The purported rollover is taxed in the year of distribution, and the owner is liable for $6,000 of excise tax. If he withdraws the excess during the following year, he will pay no further excise tax, but the withdrawal will be fully includible in taxable income, notwithstanding that it has been taxed already. The alternative is to reduce the excess each year by the maximum IRA contribution ($6,500 in 2023 plus an extra $1,000 for IRA owners who are at least 50 years old), thus avoiding double income inclusion while slowly reducing the excise tax liability. A way to shortcut that slow and painful process would be welcome.


Speculation about what the IRS will and won’t include in the IRA correction program is, however, highly premature at this point. While the Act “requires” implementation within two years, the IRS has a long history of treating statutory deadlines as advisory only (and it isn’t as if it has nothing else to do at the moment). We can probably expect to see this feature in late 2025 or early 2026, at the earliest.


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