The principal author of this notice is Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Nicholas Fox at 267-466-2192 (not toll-free numbers).

A - Section 101 of the SECURE 2.0 Act

B - Section 102 of the SECURE 2.0 Act

C - Section 112 of the SECURE 2.0 Act

D - Section 113 of the SECURE 2.0 Act

E - Section 117 of the SECURE 2.0 Act

F - Section 326 of the SECURE 2.0 Act

G - Section 332 of the SECURE 2.0 Act

H - Section 348 of the SECURE 2.0 Act

I - Section 350 of the SECURE 2.0 Act

J - Section 501 of the SECURE 2.0 Act

K - Section 601 of the SECURE 2.0 Act

L - Section 604 of the SECURE 2.0 Act

Section 101 of the SECURE 2.0 Act amends the Internal Revenue Code (Code) to add new section 414A. Section 414A(a) generally provides that a cash or deferred arrangement (CODA) will not be treated as a qualified CODA described in section 401(k), and an annuity contract otherwise described in section 403(b) that is purchased under a salary reduction agreement will not be treated as described in section 403(b), unless the CODA or salary reduction agreement satisfies the automatic enrollment requirements of section 414A(b). Section 414A(b) requires the CODA or salary reduction agreement to be an eligible automatic contribution arrangement (as defined in section 414(w)(3)) that provides permissible withdrawals and satisfies certain additional requirements involving default elective contributions and default investments.

Section 414A(c) sets forth several exceptions to the application of section 414A(a). Among other exceptions, section 414A(c)(2)(A)(i) and (ii) provides that section 414A(a) does not apply to any qualified CODA established before the date of the enactment of section 101 of the SECURE 2.0 Act (December 29, 2022) or to any annuity contract purchased under a plan established before the date of the enactment of section 101 of the SECURE 2.0 Act. For purposes of this notice, a qualified CODA or section 403(b) plan that is established before December 29, 2022, is called a pre-enactment qualified CODA or pre-enactment section 403(b) plan.

However, section 414A(c)(2)(B) of the Code provides that, in the case of an employer adopting a plan maintained by more than one employer after the date of the enactment of section 101 of the SECURE 2.0 Act, section 414(c)(2)(A) of the Code does not apply to that employer, and section 414A(a) applies with respect to that employer as if that plan were a single plan.

Section 101(c) of the SECURE 2.0 Act provides that the amendments made by section 101 apply to plan years beginning after December 31, 2024.

Q. A-1: When is a qualified CODA established for purposes of determining whether the qualified CODA is excepted under section 414A(c)(2)(A)(i) of the Code from the requirements related to automatic enrollment (that is, whether the qualified CODA is a pre-enactment qualified CODA)?

A. A-1: For purposes of section 414A(c)(2)(A)(i), a qualified CODA is established on the date plan terms providing for the CODA are adopted initially. This is the case even if the plan terms providing for the CODA are effective after the adoption date. For example, if an employer adopted a plan that included a qualified CODA on October 3, 2022, with an effective date of January 1, 2023, then the qualified CODA would have been established on October 3, 2022 (that is, before December 29, 2022), even though the qualified CODA was not effective until after December 29, 2022.

Q. A-2: If a single employer plan that includes a pre-enactment qualified CODA is merged with another plan that includes a pre-enactment qualified CODA, will the qualified CODA included in the ongoing plan after the merger be treated as a pre-enactment qualified CODA?

A. A-2: Yes. In the case of the merger of two single employer plans, each of which includes a pre-enactment qualified CODA, the treatment of the qualified CODA included in the ongoing plan as a pre-enactment qualified CODA is unaffected by the merger. The result is the same if a single employer plan that includes a pre-enactment qualified CODA is merged with a plan maintained by more than one employer that includes a pre-enactment qualified CODA.

Q. A-3: If a plan that includes a qualified CODA that is not a pre-enactment qualified CODA is merged with a plan that includes a pre-enactment qualified CODA, will the qualified CODA included in the ongoing plan be treated as a pre-enactment qualified CODA after the merger?

A. A-3: Generally, no. However, if, in connection with a transaction described in section 410(b)(6)(C), a single employer plan that includes a qualified CODA that is not a pre-enactment qualified CODA is merged with another single employer plan that includes a pre-enactment qualified CODA, and the plan that includes the pre-enactment qualified CODA is designated as the ongoing plan, then the qualified CODA included in the ongoing plan continues to be treated as a pre-enactment qualified CODA after the merger, provided that the merger occurs by the end of the section 410(b)(6)(C) transition period.

In addition, if a single employer plan that includes a qualified CODA that is not a pre-enactment qualified CODA is merged into a plan maintained by more than one employer that includes a pre-enactment qualified CODA, then the qualified CODA included in the ongoing plan would not be treated as a pre-enactment qualified CODA with respect to that employer. However, in that case, the merger would not affect whether the qualified CODA is treated as a pre-enactment qualified CODA with respect to other employers that participate in the ongoing plan.

Q. A-4: If a plan that includes a qualified CODA is spun-off from a plan that includes a pre-enactment qualified CODA, is the qualified CODA included in the new spun-off plan also treated as a pre-enactment qualified CODA?

A. A-4: Generally, yes. If the plan from which the new plan was spun-off was a single employer plan that included a pre-enactment qualified CODA, then the qualified CODA included in the spun-off plan is also treated as a pre-enactment qualified CODA. However, if the plan from which the new plan was spun-off was a plan maintained by more than one employer that was established before December 29, 2022, then the qualified CODA included in the spun-off plan is treated as a pre-enactment qualified CODA only if the qualified CODA in the plan maintained by more than one employer was treated as a pre-enactment qualified CODA with respect to the employer sponsoring the spun-off plan.

Q. A-5: How do the rules of section 414A(c)(2)(A)(ii) apply to section 403(b) plans?

A. A-5: In general, the rules of section 414A that apply to qualified CODAs also apply to section 403(b) plans. However, under section 414A(c)(2)(A)(ii), a section 403(b) plan is excepted from the requirements of section 414A(a) as a pre-enactment section 403(b) plan if it was established before December 29, 2022, without regard to the date of adoption of plan terms that provide for salary reduction agreements.

Q. A-6: For plan years beginning after December 31, 2024, does section 414A(a) apply to a starter 401(k) deferral-only arrangement described in section 401(k)(16)(B) or to a safe harbor deferral-only plan described in section 403(b)(16)(B) (which were added to the Code by section 121 of the SECURE 2.0 Act, applicable to plan years beginning after December 31, 2023)?

A. A-6: Generally, yes. Unless an exception set forth in section 414A(c) of the Code applies (for example, the exception for a new or small business under section 414A(c)(4)(A) or (B)), section 414A(a) applies to a starter 401(k) deferral-only arrangement or to a safe harbor deferral-only plan for plan years beginning after December 31, 2024. Although section 414A(c) sets forth several exceptions to the application of section 414A(a), section 414A(c) does not include a specific exception for a starter 401(k) deferral-only arrangement described in section 401(k)(16)(B) or for a safe harbor deferral-only plan described in section 403(b)(16)(B). Similarly, sections 401(k)(16) and 403(b)(16) do not provide that a starter 401(k) deferral-only arrangement or a safe harbor deferral-only plan is treated as satisfying the requirements of section 414A.

Section 102 of the SECURE 2.0 Act amends section 45E of the Code to provide, for an eligible employer within the meaning of section 408(p)(2)(C)(i)¹: (1) an increased small employer pension plan startup cost credit for qualifying small employers with no more than 50 employees; (2) a new credit based on matching and nonelective contributions made by qualifying small employers with no more than 100 employees; and (3) revised rules for the disallowance of deductions for certain small employer plan startup costs and matching and nonelective contributions to take into account the new credit based on matching and nonelective contributions.

Section 102(a) of the SECURE 2.0 Act adds new paragraph (e)(4) to section 45E of the Code. Section 45E(e)(4) provides for an increase in the small employer pension plan startup cost credit provided under section 45E(a) (startup costs credit), so that the credit for an eligible employer with no more than 50 employees is increased from 50 percent to 100 percent of the qualified startup costs paid or incurred by the eligible employer (increased startup costs credit). A startup costs credit (including the increased startup costs credit) is available to an eligible employer for a first credit year and each of the two taxable years immediately following the first credit year (together, a 3-year startup costs credit period), as described in section 45E(b) and (d)(3) and is subject to a dollar limitation set forth in section 45E(b). Under section 45E(d)(3), the first credit year is (1) the taxable year that includes the date that the eligible employer plan to which such costs relate becomes effective with respect to the eligible employer, or (2) at the election of the eligible employer, the taxable year preceding the taxable year that the plan becomes effective.

Section 102(b) of the SECURE 2.0 Act adds new section 45E(f) to the Code. Section 45E(f) provides for an additional amount of credit under section 45E based on employer matching and nonelective contributions to an eligible employer plan other than a defined benefit plan (employer contributions credit). Under section 45E(f)(1), an eligible employer is entitled to a credit for a taxable year equal to a specified applicable percentage of aggregate employer contributions (other than any elective deferrals, as defined in section 402(g)(3)) made by the employer during the taxable year to an eligible employer plan (other than a defined benefit plan, as defined in section 414(j)). The amount of the credit under section 45E(f)(1) is limited, under section 45E(f)(2)(A), to no more than $1,000 with respect to any employee. In addition, under section 45E(f)(2)(C), contributions with respect to any employee who receives wages, as defined under section 3121(a) (that is, wages for purposes of the Federal Insurance Contributions Act (FICA) (chapter 21 of the Code)), from the employer for the taxable year in excess of $100,000 (indexed for inflation) are excluded from the credit amount calculation for the taxable year. Further, under section 45E(f)(2)(B), the amount determined under section 45E(f)(1) (after applying the section 45E(d)(2)(A) and (C) limitations) is reduced through a credit phase-in formula by 2 percent for each employee of the employer for the preceding taxable year in excess of 50 employees. For purposes of the credit formula in section 45E(f)(1), section 45E(f)(3) provides that the applicable percentage is 100 percent for the first taxable year during which the eligible employer plan is established with respect to the eligible employer (the first employer contributions credit taxable year), 100 percent for the second employer contributions credit taxable year, 75 percent for the third employer contributions credit taxable year, 50 percent for the fourth employer contributions credit taxable year, and 25 percent for the fifth employer contributions credit taxable year (together, a 5-year employer contributions credit period).

Section 102(c) of the SECURE 2.0 Act amends section 45E(e)(2) of the Code with respect to the disallowance of deductions for certain small employer plan startup costs and matching and nonelective contributions to take into account the new credit under section 45E(f), by providing that no deduction is allowed (1) for that portion of the qualified startup costs paid or incurred for the taxable year that is equal to so much of the portion of the credit determined under section 45E(a) as is properly allocable to such costs, and (2) for that portion of the employer contributions by the employer for the taxable year that is equal to so much of the credit increase determined under section 45E(f) as is properly allocable to such contributions.

Section 102(d) of the SECURE 2.0 Act provides that the amendments to section 45E of the Code made by section 102 of the SECURE 2.0 Act apply to taxable years beginning after December 31, 2022.

Q. B-1: Is the employer contributions credit under section 45E(f) of the Code treated as a separate credit that is in addition to the startup costs credit under section 45E(a)?

A. B-1: Yes. For example, an eligible employer might be eligible both for a startup costs credit calculated under section 45E(a) (as limited by the dollar limitation in section 45E(b)), and an additional employer contributions credit calculated under section 45E(f)(1) (as limited by the dollar, wage, and credit phase-in limitations in section 45E(f)(2), but not the dollar limitation in section 45E(b)).

Q. B-2: When is an eligible employer plan treated as being established, for purposes of determining the first (and subsequent) employer contributions credit taxable years during the 5-year employer contributions credit period for which an eligible employer can claim an employer contributions credit under section 45E(f)?

A. B-2: An eligible employer plan is treated as being established, for purposes of determining the first (and subsequent) employer contributions credit taxable years during the 5-year employer contributions credit period for which an eligible employer is permitted to claim an employer contributions credit under section 45E(f), on the date the plan becomes effective with respect to the eligible employer. This determination of the first employer contributions credit taxable year during the 5-year employer contributions credit period is similar to the determination of the taxable year that is the first credit year during the 3-year startup costs credit period under section 45E(a), as defined in section 45E(d)(3), except that an employer is permitted to elect, under section 45E(d)(3)(B), for the first startup costs credit year to be the taxable year preceding the taxable year in which the plan becomes effective with respect to the eligible employer. Thus, an eligible employer may be able to claim both the startup costs credit and the employer contributions credit beginning with the taxable year in which the plan becomes effective with respect to the eligible employer. If an eligible employer elects, for purposes of the startup costs credit, for the taxable year preceding the taxable year in which the plan becomes effective with respect to the eligible employer to be the first startup costs credit year, then the 5-year employer contributions credit period begins with the second taxable year of the 3-year startup costs credit period.

Q. B-3: How does a change in an employer’s status as an eligible employer under section 408(p)(2)(C)(i) due to a change in the number of the employer’s employees who received at least $5,000 of compensation from the employer for the preceding taxable year affect the employer’s eligibility for the employer contributions credit under section 45E(f) for taxable years during the employer’s 5-year employer contributions credit period?

A. B-3: An employer is eligible for the employer contributions credit for a taxable year during the employer’s 5-year employer contributions credit period only if (1) the employer was an eligible employer under section 408(p)(2)(C)(i)(I) for the first employer contributions credit taxable year during the employer’s 5-year employer contributions credit period, and (2) the employer is an eligible employer under section 408(p)(2)(C)(i) for the taxable year with respect to which the employer contributions credit is claimed. Accordingly, if an employer had more than 100 employees for the taxable year preceding the first employer contributions credit taxable year during the employer’s 5-year employer contributions credit period, the employer will not become eligible for the employer contributions credit for the first time in a subsequent taxable year, even if the number of employees who received at least $5,000 of compensation from the employer drops to 100 or fewer for a taxable year following the taxable year preceding the first taxable year in the employer’s 5-year employer contributions credit period.

Q. B-4: How does a change in an employer’s status as an eligible employer under section 408(p)(2)(C)(i) due to a change in the number of the employer’s employees who received at least $5,000 of compensation from the employer for a taxable year that precedes a particular taxable year during the employer’s 3-year startup costs credit period affect the employer’s eligibility for (1) the startup costs credit under section 45E(a) for that particular taxable year or (2) the increased startup costs credit under section 45E(e)(4) for that particular taxable year?

A. B-4: (1) An employer is eligible for the startup costs credit under section 45E(a) (disregarding the increased startup costs credit under section 45E(e)(4)) for a taxable year during the employer’s 3-year startup costs credit period only if (a) the employer was an eligible employer under section 408(p)(2)(C)(i)(I) for the first taxable year during the employer’s 3-year startup costs credit period, and (b) the employer is an eligible employer under section 408(p)(2)(C)(i) for the taxable year with respect to which the startup costs credit is claimed. Accordingly, if an employer had more than 100 employees for the taxable year preceding the first taxable year during the employer’s 3-year startup costs credit period, the employer will not become eligible for the employer contributions credit for the first time in a subsequent taxable year, even if the number of employees who received at least $5,000 of compensation from the employer drops to 100 or fewer for a taxable year following the taxable year preceding the first taxable year during the employer’s 3-year startup costs credit period.

(2) An employer is eligible for the increased startup costs credit under section 45E(e)(4) for a taxable year during the employer’s 3-year startup costs credit period only if (a) the employer was an eligible employer under section 408(p)(2)(C)(i)(I), applied by substituting “50 employees” for “100 employees,” for the first taxable year during the employer’s 3-year startup costs credit period, and (b) the employer is an eligible employer under section 408(p)(2)(C)(i), applied by substituting “50 employees” for “100 employees,” for the taxable year with respect to which the startup costs credit is claimed. Accordingly, if an employer had more than 50 employees for the taxable year immediately preceding the first taxable year during the employer’s 3-year startup costs credit period, the employer will not become eligible for the increased startup costs credit under section 45E(e)(4) for the first time in a subsequent taxable year, even if the number of employees who received at least $5,000 of compensation from the employer drops to 50 or fewer for a taxable year following the taxable year preceding the first taxable year during the employer’s 3-year startup costs credit period.

Q. B-5: Is it possible for an employer that was eligible for the startup costs credit under section 45E(a) for a taxable year that began on or before December 31, 2022, to be eligible for the increased startup costs credit under section 45E(e)(4) or the employer contributions credit under section 45E(f) for a taxable year that begins after December 31, 2022?

A. B-5: Yes. However, an employer that was eligible for the startup costs credit under section 45E(a) for a taxable year that began on or before December 31, 2022, can be eligible for the increased startup costs credit under section 45E(e)(4) or the employer contributions credit under section 45E(f) for a taxable year that begins after December 31, 2022, only if there is a taxable year during the employer’s applicable 3- or 5-year credit period that begins after December 31, 2022. For example, for an eligible employer with a calendar year taxable year that maintains a plan that became effective on January 1, 2021: (1) the 5-year employer contributions credit period began with the eligible employer’s 2021 taxable year and ends with the employer’s 2025 taxable year; and (2) for the three employer contributions credit taxable years in the 5-year employer contributions credit period that begin after December 31, 2022, it is possible, if the employer meets the eligibility requirements described in Q&A B-3 of this notice, for the employer to be eligible for an employer contributions credit equal to the applicable percentage of aggregate employer contributions set forth in section 45E(f)(1) (75 percent for the 2023 taxable year, 50 percent for the 2024 taxable year, and 25 percent for the 2025 taxable year).

Q. B-6: Is an eligible employer permitted to take into account, for purposes of determining the employer contributions credit under section 45E(f) for a taxable year, contributions to an individual who does not have wages as defined in section 3121(a) in excess of the $100,000 (indexed for inflation) wage limitation set forth in section 45E(f)(2)(C) for the taxable year, even if the individual has earned income that is not wages as defined in section 3121(a) for the taxable year in excess of the $100,000 amount or the individual is a state or local government employee with remuneration in excess of the $100,000 amount whose services are excluded from employment under section 3121(b)(7)?

A. B-6: Yes. The $100,000 (indexed for inflation) wage limitation set forth in section 45E(f)(2)(C), under which no contributions with respect to any individual who receives wages from the employer for a taxable year in excess of $100,000 (indexed for inflation) may be taken into account for purposes of determining employer contributions credits for the taxable year, only applies with respect to an individual who has wages as defined in section 3121(a) that are in excess of the wage limitation for the taxable year. Accordingly, contributions with respect to an individual who does not have any wages as defined in section 3121(a) for a taxable year because the individual is self-employed (including a partner) or because the individual is a state or local government employee whose services are excluded from employment under section 3121(b)(7) (and, thus, does not have wages as defined in section 3121(a)) may be taken into account for purposes of determining employer contributions credits for the taxable year, even if the individual has earned income or remuneration from a state or local government in excess of the $100,000 wage limitation.

Q. B-7: In which taxable year of an eligible employer is a matching or nonelective contribution made by the employer to an eligible employer plan taken into account for purposes of the employer contributions credit under section 45E(f)?

A. B-7: A matching or nonelective contribution made by an eligible employer to an eligible employer plan is taken into account for purposes of the employer contributions credit for the same taxable year that a deduction under section 404(a) would apply with respect to the contribution. Thus, an employer is deemed to have made a matching or nonelective contribution on the last day of the preceding taxable year if the contribution is on account of that taxable year and is not made later than the time prescribed by law for filing the return for that taxable year (including extensions thereof). See section 404(a)(6).

Section 112 of the SECURE 2.0 Act amends the Code to add new section 45AA, which provides a military spouse retirement plan eligibility credit for small employers (section 45AA credit). This new credit provides a business credit under section 38 of the Code for an eligible employer that provides for participation and benefits to a military spouse under an eligible defined contribution plan or plans of the employer (as defined under section 45AA(e)) within two months after the military spouse’s date of hire by the employer.

Section 45AA(a) provides that the section 45AA credit for the taxable year is equal to the sum of (1) $200 with respect to each military spouse who is an employee of the employer and who participates in an eligible defined contribution plan of the employer at any time during the taxable year, plus (2) so much of the contributions made by the employer (other than an elective deferral as defined in section 402(g)(3)) to all eligible defined contribution plans with respect to the employee during the taxable year as do not exceed $300.

Section 45AA(b) provides that, for purposes of the section 45AA credit, a military spouse is only taken into account for the taxable year which includes the date on which the spouse began participating in the eligible defined contribution plan of the employer and the two succeeding taxable years (3-year credit period).

Section 45AA(c) provides that the term “eligible small employer” means an eligible employer as defined in section 408(p)(2)(C)(i)(I), which requires that an employer have had no more than 100 employees who received at least $5,000 of compensation from the employer for the preceding taxable year.

Section 45AA(d) defines a military spouse as any individual who is married (within the meaning of section 7703 as of the first date that the employee is employed by the employer) to an individual who is a member of the uniformed services (as defined in section 101(a)(5) of title 10, United States Code) serving on active duty. For purposes of the credit, an employer may rely on an employee’s certification that the employee’s spouse is a member of the uniformed services if the certification provides the name, rank, and service branch of the spouse. However, section 45AA(d)(2) of the Code provides that a military spouse does not include any individual who is a highly compensated employee of the employer (within the meaning of section 414(q)).

Section 45AA(e) defines an eligible defined contribution plan as any defined contribution plan (as defined in section 414(i)) of the eligible small employer if, under the terms of the plan, (1) military spouses employed by the employer are eligible to participate in the plan not later than the date which is two months after the date on which the military spouse begins employment with the employer, and (2) military spouses who are eligible to participate in the plan (A) are immediately eligible to receive an amount of employer contributions under the plan which is not less than the amount of contributions that a similarly situated participant who is not a military spouse would be eligible to receive under the plan after two years of service, and (B) immediately have a nonforfeitable right to the employee’s accrued benefit derived from employer contributions under the plan.

Section 45AA(f) provides that all persons treated as a single employer under section 414(b), (c), (m), or (o) will be treated as one employer for purposes of section 45AA.

Section 112(e) of the SECURE 2.0 Act provides that the section 45AA credit applies to taxable years of the employer beginning after December 29, 2022.

Q. C-1: May an employer claim the section 45AA credit with respect to a military spouse for any taxable year of the employer within the 3-year credit period for which the employer does not meet the requirements of section 408(p)(2)(C)(i)(I) of the Code?

A. C-1: No. Section 45AA(c) specifies that the employer must meet the requirements of section 408(p)(2)(C)(i)(I) to be eligible for the section 45AA credit for a taxable year. For example, if an employer had no more than 100 employees who received at least $5,000 of compensation from the employer for the taxable year preceding the 2024 taxable year but more than 100 such employees for the taxable year preceding both the employer’s 2023 and 2025 taxable years, with respect to a military spouse whose 3-year credit period begins in the employer’s 2023 taxable year and ends in the employer’s 2025 taxable year, the employer is eligible for the section 45AA credit only for the employer’s 2024 taxable year.

Q. C-2: May an eligible small employer claim the section 45AA credit with respect to a military spouse who participated in a defined contribution plan of the employer before the employer amends the plan to become an eligible defined contribution plan, or adopts another plan that is an eligible defined contribution plan in which the military spouse participates?

A. C-2: Yes. If an employer amends the plan (or adopts another plan) to become an eligible defined contribution plan, the employer is eligible for the section 45AA credit for the employer’s taxable year that includes the later of the date on which the plan or amendment becomes effective and the date on which the military spouse began participating in the plan after it was amended (or adopted) to become an eligible defined contribution plan and any of the 2 succeeding taxable years during which the military spouse participates in the plan for any period (3-year credit period). A military spouse’s 3-year credit period begins from the first date that the military spouse participates in any eligible defined contribution plan of the employer. For example, for an eligible small employer that uses the calendar year as the employer’s taxable year and that amends a defined contribution plan, effective January 1, 2024, to provide the benefits enumerated in section 45AA(e) to all military spouses employed by the employer, with respect to a military spouse who began participating in the plan on June 15, 2020 (and who has not participated in any other eligible defined contribution plans of the employer), the employer may claim a section 45AA credit (of the applicable amount) for any of the employer’s 2024, 2025, or 2026 taxable years during which the military spouse participates in the plan for any period.

Q. C-3: May an eligible small employer claim the section 45AA credit with respect to a military spouse whose 3-year credit period described in Q&A C-2 of this notice began during a taxable year of the employer beginning on or before December 29, 2022?

A. C-3: Yes. The employer is eligible for the section 45AA credit for any taxable year of the employer beginning after December 29, 2022 that remains within the military spouse’s 3-year credit period, as described in Q&A C-2 of this notice. For example, for an eligible small employer that uses the calendar year as the employer’s taxable year and that adopted a defined contribution plan that provides the benefits enumerated in section 45AA(e) to all employees employed by the employer and that became effective as of January 1, 2021, with respect to a military spouse who began participating in the plan within 2 months of the spouse’s date of hire by the employer on June 15, 2022, the employer may claim a section 45AA credit (of the applicable amount) for any of the employer’s 2023 and 2024 taxable years during which the spouse participates in the plan for any period.

Section 401(k)(4)(A), prior to amendment by section 113(a) of the SECURE 2.0 Act, provided that “a cash or deferred arrangement of any employer shall not be treated as a qualified cash or deferred arrangement if any other benefit is conditioned (directly or indirectly) on the employee electing to have the employer make or not make contributions under the arrangement in lieu of receiving cash. The preceding sentence shall not apply to any matching contribution (as defined in section 401(m) of the Code) made by reason of such an election.” This provision is commonly referred to as the contingent benefit rule.

Section 403(b)(12)(A) describes nondiscrimination requirements that apply to section 403(b) plans under which employees participate pursuant to salary reduction agreements. Section 403(b)(12)(A)(ii), which is commonly referred to as the universal availability requirement, provides that a section 403(b) plan will satisfy the applicable nondiscrimination requirements if all employees of the organization may elect to have the employer make contributions of more than $200 pursuant to a salary reduction agreement if any employee of the organization may elect to have the organization make contributions for such contracts pursuant to such agreement.

Section 1.403(b)-5(b)(2) provides that an employee is not treated as being permitted to have section 403(b) elective deferrals contributed on the employee’s behalf unless the employee is provided an effective opportunity that satisfies the requirements of that paragraph. An effective opportunity is not considered to exist if there are any other rights or benefits (other than matching contributions or other rights or benefits listed in § 1.401(k)-1(e)(6)(i)) that are conditioned (directly or indirectly) upon the participant making or failing to make a cash or deferred election with respect to a contribution to a section 403(b) contract.

Section 113(a) of the SECURE 2.0 Act amended section 401(k)(4)(A) of the Code to provide that a de minimis financial incentive (not paid for with plan assets) provided to employees who elect to have the employer make contributions under the arrangement in lieu of receiving cash will not violate the contingent benefit rule of section 401(k)(4)(A).

Section 113(b) of the SECURE 2.0 Act amended section 403(b)(12)(A) of the Code to provide that a plan does not fail to satisfy section 403(b)(12)(A)(ii) solely by reason of offering a de minimis financial incentive (not derived from plan assets) to employees to elect to have the employer make contributions pursuant to a salary reduction agreement.

Section 113(c) of the SECURE 2.0 Act amended section 4975(d) of the Code to add a new paragraph (24) under which the provision of a de minimis financial incentive described in section 401(k)(4)(A) is exempted from the tax on prohibited transactions. As a conforming change, section 113(d) of the SECURE 2.0 Act amended section 408(b) of the Employee Retirement Income Security Act of 1974, Pub. L. 93-406, 88 Stat. 829, as amended (ERISA), to add a new paragraph (21) under which the provision of a de minimis financial incentive described in either section 401(k)(4)(A) or 403(b)(12)(A) of the Code is exempted from the ERISA prohibited transaction rules.

Section 113 of the SECURE 2.0 Act did not specify what would constitute a de minimis financial incentive described in section 401(k)(4)(A) or 403(b)(12)(A)(ii) of the Code. However, legislative history mentions gift cards in small amounts as an example of a de minimis financial incentive an employer might offer to boost employee participation in workplace retirement plans (see H. Rept. 117-283, Part 1 (117 Cong. 2d Sess.) at 86).

Section 113 of the SECURE 2.0 Act is effective for plan years beginning after December 29, 2022.

Q. D-1: Is there a limit on the value of a financial incentive for the incentive to be a de minimis financial incentive described in section 401(k)(4)(A) of the Code?

A. D-1: A financial incentive is a de minimis financial incentive described in section 401(k)(4)(A) only if it does not exceed $250 in value.

Q. D-2: Does the exception to the contingent benefit rule that is described in section 401(k)(4)(A) for a de minimis financial incentive provided to employees who elect to have the employer make contributions under a CODA apply to an employee for whom an election to defer is already in effect?

A. D-2: A de minimis financial incentive is described in section 401(k)(4)(A) only if it is offered to employees for whom no election to defer under the CODA is already in effect. Thus, for example, if an employer announces on February 1, 2024, that any employee for whom an election to defer under a CODA is not in effect on that date and who, within the next 90 days, makes an election to defer, will receive a $200 gift card, then the gift card is a de minimis financial incentive that does not cause the CODA to fail to be a qualified CODA on account of the contingent benefit rule of section 401(k)(4)(A). A financial incentive does not fail to be a de minimis financial incentive described in section 401(k)(4)(A) merely because the incentive is provided in the form of installments that are contingent on the employee’s continuing to defer (even if those installments are paid over more than one plan year). Thus, if the employer in the preceding example provides a $100 gift card (instead of providing a $200 gift card) with a promise to provide an additional $100 gift card a year later, but only if the employee continues to defer at that later date, then the $200 total amount of gift cards is still a de minimis financial incentive within the meaning of section 401(k)(4)(A).

Q. D-3: Can a matching contribution within the meaning of section 401(m)(4) be a de minimis financial incentive described in section 401(k)(4)(A)?

A. D-3: No. A matching contribution cannot be a de minimis financial incentive described in section 401(k)(4)(A).

Q. D-4: Is the provision of a de minimis financial incentive described in section 401(k)(4)(A) subject to the rules under the Code that apply with respect to a plan contribution?

A. D-4: No. A de minimis financial incentive described in section 401(k)(4)(A) is not subject to the Code rules that apply to a plan contribution, including the qualification requirements of section 401(a) and the deductibility timing rules of section 404(a).

Q. D-5: What is an employee’s tax treatment with respect to a de minimis financial incentive described in section 401(k)(4)(A) that is provided by an employer?

A. D-5: If an employer provides a de minimis financial incentive described in section 401(k)(4)(A) to an employee, that incentive constitutes remuneration that is includible in the employee’s gross income and wages and is subject to applicable withholding and reporting requirements for employment tax purposes, unless the provision of the de minimis financial incentive satisfies an exception under the Code. For example, the $200 gift card described in Q&A D-2 of this notice is not excludable from the employee’s gross income as a de minimis fringe benefit within the meaning of section 132(e) and § 1.132-6(c) because, as a cash equivalent, it is not eligible for that exclusion (and therefore the gift card is includible in the employee’s gross income and wages and is a taxable fringe benefit for employment tax and reporting purposes unless another exception applies).

Q. D-6: Do the rules of Q&A D-1 through Q&A D-5 of this notice apply with respect to a de minimis financial incentive described in section 403(b)(12)(A) of the Code that is offered to employees to elect to have the employer make contributions to a section 403(b) plan on their behalf pursuant to a salary reduction agreement?

A. D-6: Yes. The statutory provisions that apply with respect to a de minimis financial incentive described in section 403(b)(12)(A) are generally the same as the statutory provisions that apply with respect to a de minimis financial incentive described in section 401(k)(4)(A). Accordingly, the rules of Q&A D-1 through Q&A D-5 of this part D of this notice also apply with respect to a de minimis financial incentive described in section 403(b)(12)(A).

A SIMPLE IRA plan under section 408(p) or a SIMPLE 401(k) plan under section 401(k)(11) is a plan under which employees may elect to have salary reduction contributions (or elective contributions, in the case of a SIMPLE 401(k) plan) made on their behalf, and which may only be sponsored by an eligible employer defined in section 408(p)(2)(C)(i) (that is, generally, an employer who has 100 or fewer employees who received at least $5,000 of compensation from the employer for the preceding year). Under a SIMPLE IRA plan or SIMPLE 401(k) plan, the employer generally is required to make either (1) a matching contribution equal to the employee’s salary reduction contributions or elective contributions that do not exceed 3 percent of the employee’s compensation or (2) a nonelective contribution of 2 percent of the employee’s compensation (regardless of whether the employee elects to make contributions). Section 116 of the SECURE 2.0 Act amends sections 408(p) and 401(k)(11) of the Code to permit the employer to make additional nonelective contributions (up to 10 percent of compensation of each employee eligible to participate, but initially limited to $5,000 with respect to each employee). Under section 408(p)(2)(D), an employer generally cannot make contributions to a SIMPLE IRA plan or a SIMPLE 401(k) plan for a year if the employer maintained another qualified plan with respect to which contributions were made or benefits accrued for the period beginning with the year that the SIMPLE IRA plan or SIMPLE 401(k) plan was established and ending with the current year.

Notice 98-4, 1998-1 CB 269, provides guidance regarding SIMPLE IRA plans, such as guidance on the determination of the number of employees who received at least $5,000 of compensation for the preceding year and the required notifications to employees.

Section 117 of the SECURE 2.0 Act amends sections 408(p), 401(k)(11), and 414(v) of the Code to increase both the annual salary reduction contribution/elective contribution limit and the limit on additional catch-up contributions beginning at age 50 for a SIMPLE IRA plan or a SIMPLE 401(k) plan for certain eligible employers. For some of those eligible employers, the increased limits apply automatically; while other of those eligible employers must make an election for the increased limits to apply and must also make additional employer contributions. The increased limits are 110 percent of the otherwise applicable limits for 2024.²

Section 117(h) of the SECURE 2.0 Act provides that the amendments made by section 117 of the SECURE 2.0 Act apply for taxable years beginning after December 31, 2023.

Q. E-1: For which eligible employers do the increased limits under section 117 of the SECURE 2.0 Act apply?

A. E-1: The increased limits under section 117 of the SECURE 2.0 Act apply to an eligible employer described in section 408(p)(2)(E)(iv)³ of the Code. An eligible employer is described in section 408(p)(2)(E)(iv) if, during the 3-taxable year period preceding the first year that the employer maintained the SIMPLE IRA plan or SIMPLE 401(k) plan, the employer (including any member of the employer’s controlled group or any predecessor of the employer or any member) has not established or maintained a qualified plan under section 401(a), a section 403(a) annuity plan, or a section 403(b) plan under which contributions were made or benefits were accrued for substantially the same employees as are eligible to participate in the SIMPLE IRA plan or SIMPLE 401(k) plan.

Q. E-2: What are the differences in how the increased limits apply to eligible employers described in section 408(p)(2)(E)(iv) depending on the number of employees of the employer?

A. E-2: The increased limits apply automatically in the case of an eligible employer described in section 408(p)(2)(E)(iv) that has no more than 25 employees who received at least $5,000 of compensation for the preceding calendar year. For an employer that has more than 25 employees who received at least $5,000 of compensation for the preceding year, the increased limits apply only if the employer makes an election for the increased limits to apply. If the employer makes an election for the increased limits to apply, the employer must provide higher matching or nonelective contributions, as described in Q&A E-5 of this notice.

Q. E-3: How are the number of employees who received at least $5,000 of compensation for the preceding year determined?

A. E-3: The rules set forth in Q&A B-1 of Notice 98-4 apply for purposes of calculating the number of employees. Thus, all employees employed at any time during the calendar year are taken into account, regardless of whether they are eligible to participate in the SIMPLE IRA plan or SIMPLE 401(k) plan (including employees excludable under the rules of section 410(b)(3) or who have not met the plan’s minimum eligibility requirements, as well as self-employed individuals described in section 401(c)(1) who received earned income from the employer during the year).

For purposes of determining whether an employer has no more than 25 employees who received at least $5,000 of compensation for the preceding year, there generally is a 2-year grace period. Thus, if an employer that has no more than 25 employees increases the number of employees to more than 25, the employer will still be treated as having 25 employees for two years following the last year the employer had no more than 25 employees (unless the increase in the employer’s number of employees was due to an acquisition, disposition, or similar transaction involving the eligible employer).

Q. E-4: How does an employer reflect the increased limits?

A. E-4: An employer that must make an election to apply the increased limits must take formal written action to make an election to reflect the increased limits and should maintain documentation of the election in the plan’s records. An employer (including employers for whom the increased limits apply automatically) must reflect the increased limits in the plan terms (see section II.J. of this notice regarding plan amendment deadlines) and must notify employees of the increased limits (see Q&A E-6 of this notice).

Q. E-5: If an employer makes an election to apply the increased limits, what other contributions must be made?

A. E-5: If an employer makes an election under Q&A E-4 of this notice to apply the increased limits, the employer must make matching contributions equal to the employee’s salary reduction contributions or elective contributions that do not exceed 4 percent (increased from 3 percent) of the employee’s compensation or make a nonelective contribution of 3 percent (increased from 2 percent) of the employee’s compensation (regardless of whether the employee elects to make contributions).

Q. E-6: Who must an employer notify of the increased limits?

A. E-6: The employer must notify employees of the increased limits. The notice must be included in the annual employer notification that informs employees of the opportunity to enter into a salary reduction agreement or to modify a prior agreement. In the case of an employer for whom the increased limits apply pursuant to an election, the employer also must notify employees of the increased matching contribution or increased nonelective contribution. The employer should also (1) notify the SIMPLE IRA plan’s or SIMPLE 401(k) plan’s financial institution and payroll provider of the increased limits, and (2) keep records of all actions concerning the increased limits. However, the employer does not need to notify the IRS of the election to apply the increased limits.

Q. E-7: What is the deadline for an employer to make the election to apply the increased limits for a year?

A. E-7: An employer election to apply the increased limits for a calendar year must be made before the employer provides the annual notice to each employee of the employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement for that calendar year, as provided in Q&A G-1 of Notice 98-4.

Q. E-8: For how long is an employer election to apply the increased limits effective?

A. E-8: An employer’s election to apply the increased limits is effective until it is revoked by the employer. The employer must take formal written action to revoke the election before the employer provides the annual notice to each employee of the employee’s opportunity to enter into a salary reduction agreement or to modify a prior agreement for the next calendar year. The employer should maintain documentation of the revocation in the plan’s records.

If an employer revokes a prior election to apply the increased limits, the employer must also amend the plan terms to reflect the revocation (see section II.J. of this notice regarding plan amendment deadlines) and notify employees of the applicable limits (see generally Q&A E-6 of this notice).

Section 72(t)(1) generally imposes a 10 percent additional tax on any distribution from a qualified retirement plan within the meaning of section 4974(c), unless the distribution qualifies for one of the exceptions listed in section 72(t)(2). Section 326 of the SECURE 2.0 Act amended section 72(t)(2) of the Code to add a new exception to the 10 percent additional tax for any distribution made to a terminally ill individual.

Section 72(t)(2)(L) permits an employee⁴ who is a terminally ill individual to receive a distribution (terminally ill individual distribution) on or after the date on which the employee has been certified by a physician as having a terminal illness. Section 72(t)(2)(L)(ii) provides that the term “terminally ill individual” has the same meaning given that term under section 101(g)(4)(A), except that “84 months” is substituted for “24 months.”

Section 72(t)(2)(L)(iii) provides that, in order to be considered a terminally ill individual, an employee must furnish sufficient evidence to the plan administrator in the form and manner as the Secretary of the Treasury (Secretary) may require. A terminally ill individual distribution is includible in gross income but is not subject to the 10 percent additional tax under section 72(t)(1). Section 72(t)(2)(L)(iv) provides that a terminally ill individual distribution may be repaid following rules similar to repayment of qualified birth or adoption distributions in section 72(t)(2)(H)(v).

The amendment made to section 72(t)(2) by section 326 of the SECURE 2.0 Act applies to terminally ill individual distributions made after December 29, 2022.

The Treasury Department and the IRS intend to issue regulations under section 72(t) of the Code, including providing guidance on exceptions under section 72(t)(2) as added by the SECURE 2.0 Act (such as the exception to the 10 percent additional tax for an eligible distribution to a domestic abuse victim).

Under section 408(p)(2)(D), an employer that maintains a SIMPLE IRA plan for a calendar year generally is not permitted to maintain another plan, contract, pension, or trust described in section 219(g)(5)(A) or (B) to which contributions were made or benefits were accrued for service in the year. Also, prior to amendment by section 332 of the SECURE 2.0 Act, section 408(d)(3)(G) of the Code provided that if section 72(t)(6) applied to a distribution (that is, the distribution is from a SIMPLE IRA within the first two years of an individual’s participation in the SIMPLE IRA plan), then the individual could only roll over the distribution to another eligible retirement plan if the other eligible retirement plan was a SIMPLE IRA.

Section 332(a) of the SECURE 2.0 Act amended section 408(p) of the Code by adding paragraph (11). Section 408(p)(11)(A) permits an employer to elect (in such form and manner as the Secretary may prescribe), at any time during a year, to terminate the qualified salary reduction arrangement under a SIMPLE IRA plan if the employer establishes and maintains a safe harbor section 401(k) plan to replace the terminated arrangement.

Section 408(p)(11)(B) provides a combined limit on the total of the salary reduction contributions under the terminated arrangement and elective contributions under the safe harbor section 401(k) plan for the transition year described in section 408(p)(11)(C) (that is, the period beginning after the termination date and ending on the last day of the calendar year during which the termination occurs). Under this limit, the total of those contributions must not exceed the time-weighted average of the limits that apply, on a full year basis, to a SIMPLE IRA plan (after the application of the catch-up provisions of section 414(v)) and a section 401(k) plan.

Section 332(b) of the SECURE 2.0 Act adds section 72(t)(6)(B) to the Code and amends section 408(d)(3)(G). Under the addition and amendment, the limitation on rollovers of a distribution from a SIMPLE IRA does not apply if an employer terminates the qualified salary reduction arrangement of a SIMPLE IRA plan and establishes a section 401(k) plan or section 403(b) plan, provided that the amount is paid in a rollover contribution described in section 408(d)(3) into a qualified trust under section 401(k) (but only if such contribution is subsequently subject to the rules of section 401(k)(2)(B)) or an annuity contract described in section 403(b) (but only if such contribution is subsequently subject to the rules of section 403(b)(12).⁸

Section 401(k)(12)(D) generally requires a CODA that is intended to satisfy the requirements of section 401(k)(12) to provide an annual notice to each eligible employee that is sufficiently accurate and comprehensive to apprise the employee of the employee’s rights and obligations under the CODA. A similar notice requirement applies under section 401(k)(13)(E) to a CODA that is intended to satisfy the requirements of section 401(k)(13). Under section 401(k)(16)(B)(iii), a CODA that is intended to satisfy the notice requirements of section 401(k)(16) must satisfy the requirements of section 401(k)(13)(E).

Section 1.401(k)-3(d)(2)(ii) lists certain information that generally must be described in a notice for the notice to be considered sufficiently accurate and comprehensive under section 401(k)(12)(D) of the Code and subject to the additional information requirements under § 1.401(k)-3(k)(4)(ii) and under section 401(k)(13)(E) of the Code.

Section 332(c) of the SECURE 2.0 Act provides that amendments made by section 332 apply to plan years beginning after December 31, 2023.

Q. G-1: How does an employer terminate a SIMPLE IRA plan?

A. G-1: An employer terminates a SIMPLE IRA plan by taking formal written action that specifies the date as of which the plan is terminated (termination date).

Q. G-2: If an employer terminates a SIMPLE IRA plan, when do the contributions under the plan cease?

A. G-2: If an employer terminates a SIMPLE IRA plan, then no salary reduction contributions may be made under the plan with respect to compensation that would be paid after the termination date. However, the employer must make employer matching contributions under the plan attributable to salary reduction contributions or nonelective contributions, based on the employees’ compensation earned through the termination date of the SIMPLE IRA plan.

Q. G-3: Who must the employer notify of the termination of a SIMPLE IRA plan?

A. G-3: The employer must notify employees of the termination of a SIMPLE IRA plan at least 30 days before the termination date. The notification must specify that no salary reduction contributions will be made to the plan with respect to compensation that would be paid after the termination date. The notice must also include a statement that employees will receive matching contributions attributable to salary reduction contributions or nonelective contributions based on the employees’ compensation through the termination date of the SIMPLE IRA plan. The employer should also (1) notify the SIMPLE IRA plan’s financial institution and the employer’s payroll provider that the employer will cease making any SIMPLE IRA contributions, and (2) keep records of all actions concerning the termination of the SIMPLE IRA plan. However, the employer does not need to notify the IRS that the SIMPLE IRA plan has been terminated.

Q. G-4: If a participant takes a distribution from a terminated SIMPLE IRA plan within the first two years of participation under the plan, under what circumstances can that distribution be rolled over to another eligible retirement plan that is not a SIMPLE IRA?

A. G-4: If a participant takes a distribution from a terminated SIMPLE IRA plan within the first two years of participation under the plan, the distribution may be rolled over to an eligible retirement plan that is not a SIMPLE IRA only if the amount is rolled over to either: (1) a section 401(k) plan that is subject to the distribution limits of section 401(k)(2)(B) of the Code; or (2) a section 403(b) plan that is subject to the distribution limits of section 403(b)(11).

Q. G-5: Is the establishment of a safe harbor section 408(k) plan under section 408(p)(11) an exception to the rule in section 408(p)(2)(D)?

A. G-5: Yes. The rule under section 408(p)(11) that permits an employer to terminate a SIMPLE IRA plan and replace it with a section 401(k) safe harbor plan is an exception to the section 408(p)(2)(D) prohibition on an employer maintaining both a SIMPLE IRA plan and another plan, contract, pension, or trust described in section 219(g)(5)(A) or (B) in the same calendar year.

Q. G-6: When a SIMPLE IRA plan is replaced by a safe harbor section 401(k) plan mid-year, how are the elective contribution limits determined under the safe harbor section 401(k) plan?

A. G-6: When a SIMPLE IRA plan is replaced by the safe harbor section 401(k) plan mid-year, the total amount that may be contributed as salary reduction contributions under the terminated SIMPLE IRA plan and as elective contributions under the safe harbor section 401(k) plan may not exceed the weighted average of the salary reduction contribution and elective contribution limits for each of those plans (weighted by how many of the 365 days in the transition year each plan was in effect). Thus, the total amount that may be contributed as elective contributions to the safe harbor section 401(k) plan is equal to-

(1) The annual limit on salary reduction contributions under a SIMPLE IRA plan for the year (taking into account catch-up contributions described in section 414(v)), multiplied by a fraction equal to the number of days the SIMPLE IRA plan was in effect for that year divided by 365, plus

(2) The annual limit on elective contributions under a section 401(k) plan for the year, under section 402(g), multiplied by a fraction equal to the number of days the safe harbor plan was in effect for that year divided by 365, minus

(3) Any salary reduction contributions under the SIMPLE IRA plan for the year.

Q. G-7: If an employer elects during a year to terminate a qualified salary reduction arrangement under section 408(p)(2), and the employer establishes and maintains a safe harbor section 401(k) plan to replace the terminated arrangement, must the notice required under section 401(k)(12)(D), (13)(E), or (16)(B)(iii) for the year the safe harbor plan is established describe the limit on contributions to the safe harbor section 401(k) plan for the transition year pursuant to section 408(p)(11)(B)?

A. G-7: Yes. Under § 1.401(k)-3(d)(2)(ii)(D), a notice must accurately describe the type and amount of compensation that may be deferred under the plan for the notice to satisfy the requirements of section 401(k)(12)(D), (13)(E), or (16)(B)(iii) of the Code. Accordingly, the notice required under section 401(k)(12)(D), (13)(E), or (16)(B)(iii) for the transition year must describe the limit on contributions to the safe harbor section 401(k) plan for that year pursuant to section 408(p)(11)(B).

Under section 411(a), for a defined benefit plan to be qualified under section 401(a), it must satisfy the accrual requirements of section 411(b)(1). Section 411(b)(1)(A), (B), and (C) provide three alternative methods of demonstrating that the plan satisfies the accrual requirements, each of which limits the extent to which accruals under a defined benefit plan can be provided at a greater rate later in a participant’s career (commonly referred to as backloading). Under each of these alternative methods, all relevant factors used to compute benefits are treated as remaining constant as of the current year for all years after the current year.

Section 348(a) of the SECURE 2.0 Act, which is titled “Cash Balance,” amends section 411(b) of the Code to add paragraph (6), effective for plan years beginning after December 29, 2022. Section 411(b)(6) provides a special rule for applying the anti-backloading rules of section 411(b)(1)(A), (B), and (C) for applicable defined benefit plans, as defined in section 411(a)(13)(C). Under section 411(b)(6), for purposes of applying the rules of section 411(b)(1) in the case of an applicable defined benefit plan that provides variable interest crediting rates, the interest crediting rate that is treated as in effect and as the projected interest crediting rate is a reasonable projection of that variable interest crediting rate, not to exceed 6 percent. Section 348(b) of the SECURE 2.0 Act amends ERISA by adding corresponding provisions to ERISA section 204(b)(6).

Section 411(a)(13)(C)(i) of the Code defines the term “applicable defined benefit plan” as a defined benefit plan under which the accrued benefit (or any portion of the accrued benefit) is calculated as the balance of a hypothetical account maintained for the participant or as an accumulated percentage of the participant’s final average compensation. Under section 411(a)(13)(C)(ii), the Secretary is instructed to issue regulations that include in the definition of an applicable defined benefit plan any defined benefit plan (or any portion of such a plan) that has an effect similar to an applicable defined benefit plan.

Under section 411(b)(1)(H), a defined benefit plan does not satisfy the requirements of section 411(b)(1) if, under the plan, the employee’s benefit accrual is ceased, or the rate of an employee’s benefit accrual is reduced, because of the attainment of any age. Under section 411(b)(5)(B)(i)(I), an applicable defined benefit plan is treated as violating section 411(b)(1)(H) if any interest credit (or an equivalent amount) for any plan year is at a rate that is greater than a market rate of return.

Section 1.411(b)-1 provides rules for the application of section 411(b)(1)(A), (B), and (C) of the Code. Under that section, the rules generally providing that all relevant factors used to compute benefits are treated as remaining constant for all future years under the three alternative methods are interpreted as meaning that the factors are treated as remaining constant as of the beginning of the current plan year for all subsequent plan years. Section 1.411(b)-1(b)(2)(ii)(G) (relating to the 133 1/3 percent rule) provides that a plan that determines any portion of the participant’s accrued benefit pursuant to a statutory hybrid benefit formula⁹ that utilizes an interest crediting rate described in § 1.411(b)(5)-1(d) that is a variable rate that was less than zero for the prior plan year is not treated as failing to satisfy the requirements of § 1.411(b)-1(b)(2) for the current plan year merely because the plan assumes for purposes of § 1.411(b)-1(b)(2) that the variable rate is zero for the current plan year and all future plan years.

Section 1.411(b)(5)-1(d)(1)(i) provides that a statutory hybrid plan¹⁰ satisfies the requirements of section 411(b)(1)(H) of the Code only if, for any plan year, the interest crediting rate with respect to benefits determined under a statutory hybrid benefit formula is not greater than a market rate of return. Under § 1.411(b)(5)-1(d)(1), an interest crediting rate is not in excess of a market rate of return only if the interest crediting rate is described in § 1.411(b)(5)-1(d)(3) through (5) (or is a rate that can never be in excess of one of those rates). Section 1.411(b)(5)-1(d)(3) provides for interest rates that are based on long-term investment grade corporate bonds. Section 1.411(b)(5)-1(d)(4) provides for interest rates that are: (1) based on Treasury bonds, (2) based on changes in the cost of living, (3) based on short and mid-term investment grade corporate bonds, or (4) a fixed 6 percent. Section 1.411(b)(5)-1(d)(5) provides for investment-based interest crediting rates that are not greater than a market rate of return.

Section 1.411(b)(5)-1(d)(6) provides rules for determining whether a plan with an interest crediting rate that is equal to the greater of two or more interest crediting rates provides an effective interest crediting rate in excess of a market rate of return. Under those rules, an interest crediting rate based on investment-grade corporate bonds under § 1.411(b)(5)-1(d)(3) or (d)(4)(iv) may be combined with an annual floor of 4 percent and an interest crediting rate based on Treasury bonds or a cost-of-living index under § 1.411(b)(5)-1(d)(4)(ii) or (iii) may be combined with an annual floor of 5 percent. If the interest crediting rate is an investment-based rate, it is not permitted to be combined with any annual floor (but may be combined with a cumulative floor described in § 1.411(b)(5)-1(d)(6)(iii)).

Section 1.411(b)(5)-1(e)(3) provides that the right to future interest credits determined in the manner specified under the plan and not conditioned on future service is a factor that is used to determine the participant’s accrued benefit, for purposes of section 411(d)(6). Thus, to the extent that benefits have accrued under the terms of a statutory hybrid plan that entitle the participant to future interest credits, an amendment to the plan to change the interest crediting rate must satisfy section 411(d)(6) if the revised rate under any circumstances could result in interest credits that are smaller as of any date after the applicable amendment date than the interest credits that would be provided without regard to the amendment.

Section 411(d)(6) provides generally that a plan is treated as not satisfying the requirements of section 411 if a plan amendment decreases the accrued benefit of a participant. For this purpose, a plan amendment that eliminates or reduces an early retirement benefit or retirement-type subsidy, or eliminates an optional form of benefit, with respect to benefits attributable to service before the amendment, generally is treated as reducing a participant’s accrued benefit.

As described in section II.J. of this notice, section 501 of the SECURE 2.0 Act sets forth provisions with respect to plan amendments adopted pursuant to a provision of the SECURE 2.0 Act or the regulations thereunder, including a provision specifying that, except as provided by the Secretary (or the Secretary’s delegate), a retirement plan will not violate section 411(d)(6) of the Code because of an amendment made to the plan that is made pursuant to the SECURE 2.0 Act.

Q. H-1: What is the effect of the enactment of section 348 of the SECURE 2.0 Act for a cash balance plan¹¹?

A. H-1: For a cash balance plan that provides for pay credits to participants that increase with a participant’s age or service and provides for a variable interest crediting rate, the effect of the enactment of section 348 of the SECURE 2.0 Act is that the plan no longer risks violating the accrual requirements of section 411(b)(1) of the Code if that interest crediting rate falls below a certain point. To prevent such a violation prior to the enactment of section 348 of the SECURE 2.0 Act, a plan of this type had to provide for a fixed annual minimum interest crediting rate as part of its interest crediting rate. With the enactment of section 348 of the SECURE 2.0 Act, the fixed annual minimum interest crediting rate is no longer needed to avoid a violation of section 411(b)(1) of the Code for this type of plan.

Q. H-2: Under what circumstances is an amendment to a cash balance plan made pursuant to section 348 of the SECURE 2.0 Act?

A. H-2: An amendment to a cash balance plan is made pursuant to section 348 of the SECURE 2.0 Act (and is therefore eligible for the treatment in section 501 of the SECURE 2.0 Act) only if: (1) the plan is currently providing for principal credits that increase with a participant’s age or service, and the amendment is to change the plan’s interest crediting rate, or (2) the plan is implementing such a pattern of principal credits as part of the amendment.

Q. H-3: Does the exception from section 411(d)(6) of the Code for certain amendments that is provided under section 501 of the SECURE 2.0 Act apply to an amendment that reduces a participant’s accumulated benefit?

A. H-3: No, the exception from section 411(d)(6) of the Code under section 501 of the SECURE 2.0 Act does not apply to an amendment that reduces a participant’s accumulated benefit determined as of the end of the interest crediting period that includes the applicable amendment date (as defined in § 1.411(d)-3(g)(4)) for the amendment. Thus, the exception from section 411(d)(6) of the Code applies with respect to an amendment that affects interest credits for interest crediting periods beginning after the later of the effective date of the amendment or the date the amendment is adopted, but not interest credits for interest crediting periods beginning before the later of the effective date of the amendment or the date the amendment is adopted.

Q. H-4: For which amendments affecting future interest crediting rates that are made pursuant to section 348 of the SECURE 2.0 Act does the exception from section 411(d)(6) of the Code apply?

A. H-4: The exception from section 411(d)(6) of the Code provided under section 501 of the SECURE 2.0 Act applies to a plan amendment affecting future interest crediting rates that is made pursuant to section 348 of the SECURE 2.0 Act only if: (1) the plan’s interest crediting rate prior to the amendment is the greater of a fixed annual minimum rate or an interest rate described in § 1.411(b)(5)-1(d)(3) or (4), and the amendment either (a) reduces or eliminates the fixed minimum interest crediting rate while retaining the underlying interest rate described in § 1.411(b)(5)-1(d)(3) or (4), or (b) changes the interest crediting rate to an investment-based rate described in § 1.411(b)(5)-1(d)(5); or (2) the plan’s interest crediting rate prior to the amendment is a permitted fixed rate described in § 1.411(b)(5)-1(d)(4)(v), and the amendment changes the interest crediting rate to any permitted variable rate, subject to a limitation that the amount by which the new variable interest crediting rate is less than the maximum variable interest crediting rate of the same type must not exceed the amount by which the pre-amendment fixed interest crediting rate was less than the maximum fixed interest crediting rate of 6 percent.

Q. H-5: Does the enactment of section 348 of the SECURE 2.0 Act have an impact on a statutory hybrid plan that is not a cash balance plan?

A. H-5: The Treasury Department and the IRS expect that a sponsor of a statutory hybrid plan that is not a cash balance plan will have no reason to apply section 411(b)(6) of the Code as added by section 348 of the SECURE 2.0 Act; accordingly, no amendment to the plan would be made pursuant to section 348 of the SECURE 2.0 Act.

Section 350(a) of the SECURE 2.0 Act adds new section 414(cc) to the Code. Section 414(cc) provides that, if certain conditions are satisfied, a plan or arrangement will not fail to be treated as described in section 401(a), 403(b), 408, or 457(b) solely by reason of a corrected reasonable administrative error made (1) in implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee covered by such a feature), or (2) by failing to afford an eligible employee the opportunity to make an affirmative election because the employee was improperly excluded from the plan (implementation error).

Section 414(cc)(2)(B)(i) specifies that the date by which an implementation error with respect to elective deferrals must be corrected is the earlier of (1) the date of the first payment of compensation made by the employer to the employee on or after the last day of the 9½-month period after the end of the plan year during which the error with respect to the employee first occurred, or (2) in the case of an employee who notifies the plan sponsor of the error, the date of the first payment of compensation made by the employer to the employee on or after the last day of the month following the month in which the notification was made.

Section 414(cc)(2)(B)(ii) provides that, in the case of an employee who would have been entitled to additional matching contributions had any missed elective deferrals been made, the plan sponsor must make a corrective allocation of matching contributions to which the employee would have been entitled (adjusted to account for earnings) had the missed elective deferrals been made, and that the additional matching contributions must be allocated not later than the deadline for allocating corrective matching contributions specified by the Secretary in regulations, or other guidance of general applicability.

Section 414(cc)(2)(B)(iii) through (v) provides that the implementation error must be corrected for all similarly situated participants in a nondiscriminatory manner and that notice of the error that satisfies regulations or other guidance prescribed by the Secretary must be given to employees affected by the error within 45 days after the date on which correct deferrals begin.

Section 414(cc)(2) also provides that the correction described in section 414(cc)(2) may occur before or after the participant has terminated employment and may occur without regard to whether the error is identified by the Secretary.

Section 414(cc)(3) provides that if the requirements in section 414(cc)(2) are satisfied, an employer is not required to provide employees affected by the error with the missed amount of elective deferrals resulting from the error through a qualified nonelective contribution, or otherwise.

Section 414(cc)(4) provides that the Secretary will, by regulations or other guidance of general applicability, prescribe (i) the deadline for making a corrective allocation of matching contributions, (ii) the content of the required notice to affected employees, (iii) the manner in which the amount of the corrective matching allocation is determined, (iv) the manner of adjustment to account for earnings on matching contributions, and (v) such other rules as are necessary to carry out the purposes of the subsection.

Section 350(b) of the SECURE 2.0 Act provides that section 414(cc) of the Code applies with respect to any errors for which the date referred to in section 414(cc) is after December 31, 2023, and that, prior to the application of any regulations or other guidance prescribed under section 414(cc), taxpayers may rely upon their reasonable good faith interpretations of the provisions of section 414(cc).

Q. I-1: For purposes of determining the effective date of section 414(cc) with respect to an implementation error in accordance with section 350(b) of the SECURE 2.0 Act, what is “the date referred to in section 414(cc)”?

A. I-1: For purposes of determining the effective date of section 414(cc) of the Code with respect to an implementation error in accordance with section 350(b) of the SECURE 2.0 Act, “the date referred to in section 414(cc)” is the date by which an employer must implement correct deferrals in accordance with section 414(cc)(2)(B)(i) of the Code (or, with respect to a terminated employee, the date by which they would have been implemented but for the termination of employment). This date is the earlier of (1) the date of the first payment of compensation made by the employer to the employee on or after the last day of the 9½-month period after the end of the plan year during which an implementation error with respect to the employee first occurred, or (2) in the case of an employee who notifies the plan sponsor of the error, the date of the first payment of compensation made by the employer to the employee on or after the last day of the month following the month in which the notification was made. Accordingly, the effective date with respect to an implementation error may vary depending on, for example, the date the error occurs, the date compensation is paid, whether the employee notifies the plan sponsor of the error, and whether the plan year is a fiscal year or calendar year.

For example, Employer X sponsors a calendar year 401(k) plan that includes an automatic contribution enrollment feature. On January 1, 2023, Employer X fails to automatically enroll an eligible employee due to an implementation error. The employee does not inform Employer X of the error. Under section 414(cc)(2)(B), Employer X has until the date of the first payment of compensation made by the employer to the employee on or after October 15, 2024 (the last day of the 9½-month period after the end of the 2023 plan year) to begin corrected elective deferrals for the eligible employee. The date of the first payment of compensation made to the employee after October 15, 2024, is October 18, 2024. Because October 18, 2024, is after December 31, 2023, section 414(cc) applies with respect to the error that occurred on January 1, 2023.

Q. I-2. How may a plan sponsor correct, pursuant to section 414(cc), an implementation error to which section 414(cc) is applicable?

A. I-2. In general, the sponsor of a plan to which section 414(cc) applies may correct, pursuant to section 414(cc), an implementation error by following the safe harbor correction method set forth in Appendix A, section .05(8), of Rev. Proc. 2021-30, 2021-31 IRB 172, for failures related to automatic contribution features in a section 401(k) plan or a section 403(b) plan. However, see Q&A I-4 of this notice for rules regarding the deadline for making the allocation of matching contributions with respect to missed elective deferrals.

Q. I-3. Is section 414(cc) available for correcting an implementation error with respect to an individual even if the individual terminates employment before corrected deferrals would otherwise have begun?

A. I-3. Yes. In general, the sponsor of a plan to which section 414(cc) applies is permitted to correct an implementation error with respect to both active and terminated employees, by following, as described in Q&A I-2 of this notice, the correction method set forth in Appendix A, section .05(8), of Rev. Proc. 2021-30, for failures related to automatic contribution features in a section 401(k) plan or a section 403(b) plan, including by satisfying the notice requirement set forth in Appendix A, section .05(8)(c). However, the notice provided to a terminated employee is not required to include the following information set forth in Appendix A, section .05(8)(c): (1) a statement that appropriate amounts have begun to be deducted from compensation and contributed to the plan (or that appropriate deductions and contributions will begin shortly), or (2) an explanation that the affected terminated employee may elect an increased deferral percentage to make up for the missed deferral opportunity.

Q. I-4. If an individual affected by an implementation error would have been entitled to additional matching contributions had missed elective deferrals been made, what is the deadline for making a corrective allocation of matching contributions with respect to the missed elective deferrals?

A. I-4. A corrective allocation of matching contributions (adjusted for earnings) must be made within a reasonable period, as determined applying all relevant facts and circumstances, after the date on which the correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment). A corrective allocation of matching contributions that is made by the last day of the sixth month following the month in which correct elective deferrals begin (or, with respect to a terminated employee, would have begun but for the termination of employment) will be treated as having been made within a reasonable period.

In addition, with respect to an automatic contribution error that begins on or before December 31, 2023, as described in the safe harbor correction method of Appendix A, section .05(8) of Rev. Proc. 2021-30, for failures related to automatic contribution features in a section 401(k) plan or a section 403(b) plan, a corrective allocation of matching contributions made by the end of the third plan year following the year in which the error occurred will be treated as having been made within a reasonable period.

Section 501 of the SECURE 2.0 Act provides, in general, that a retirement plan or annuity contract will be treated as being operated in accordance with the terms of the plan during a specified period (as described in paragraph (3) of this section II.J) and, except as provided by the Secretary of the Treasury (or the Secretary’s delegate), a retirement plan will not fail to satisfy the anti-cutback requirements of section 411(d)(6) of the Code or section 204(g) of ERISA,¹² by reason of a plan amendment made pursuant to any amendment made by the SECURE 2.0 Act or pursuant to any regulation issued by the Secretary of the Treasury or the Secretary of Labor (or a delegate of either such Secretary) under the SECURE 2.0 Act, provided that:

(1) the amendment is adopted no later than the last day of the first plan year beginning on or after January 1, 2025, or, for an applicable collectively bargained plan (a plan maintained pursuant to one or more collective bargaining agreements between employee representatives and one or more employers ratified before December 29, 2022), or for a governmental plan (within the meaning of section 414(d) of the Code), the last day of the first plan year beginning on or after January 1, 2027, or such later date as the Secretary may prescribe (the section 501 date);

(2) the amendment applies retroactively to the effective date of the SECURE 2.0 Act provision or the regulations thereunder (or, in the case of an amendment not required by a provision of the SECURE 2.0 Act or the regulations thereunder, the effective date specified by the plan); and

(3) the plan or contract is operated as if the amendment were in effect during the period beginning on the effective date of the SECURE 2.0 Act provision or the regulations thereunder (or, in the case of an amendment not required by a provision of the SECURE 2.0 Act or the regulations thereunder, the effective date specified by the plan or contract) and ending on the section 501 date or, if earlier, the date the amendment is adopted.

Section 501(c) of the SECURE 2.0 Act modifies section 601(b)(1) of Division O of the Further Consolidated Appropriations Act, 2020, Pub. L. 116-94, 133 Stat. 2534, known as the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act), sections 2202(c)(2)(A) and 2203(c)(2)(B)(i) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act),¹³ and section 302(d)(2)(A) of Title III of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act), enacted as Division EE of the Consolidated Appropriations Act, 2021, to extend plan amendment deadlines with respect to these sections to coordinate with the plan amendment deadlines under section 501 of the SECURE 2.0 Act, as applicable.¹⁴

Section 601 of the SECURE 2.0 Act amends certain provisions of the Code to permit an employee who participates in a SIMPLE IRA plan or simplified employee pension (SEP) arrangement to designate a Roth IRA as the IRA to which contributions under the plan or arrangement are made.

Section 601(a) of the SECURE 2.0 Act amends section 408A of the Code by striking subsection (f). Prior to the deletion, section 408A(f) provided that (1) a SEP or SIMPLE IRA account could not be designated as a Roth IRA, and (2) contributions to any such SEP or SIMPLE IRA account would not be taken into account for purposes of the Roth IRA contribution limit of section 408A(c)(2)(B).

Section 601(b)(1) of the SECURE 2.0 Act amends section 408(k) of the Code by adding a new paragraph (section 408(k)(7)) that provides that a Roth IRA will not be treated as a SEP unless the employee elects for the Roth IRA to be so treated (at such time and in such manner as the Secretary may provide).

Section 601(c) of the SECURE 2.0 Act similarly amends section 408(p) of the Code by adding a new paragraph (section 408(p)(12)) that provides that a Roth IRA will not be treated as a simple retirement account unless the employee elects for the Roth IRA to be so treated (at such time and in such manner as the Secretary may provide).

Added by section 601(b) of the SECURE 2.0 Act, new subsection 402(h)(1)(C) of the Code provides that any contribution under a SEP which is made to a Roth IRA is not excludable from the employee’s gross income. Section 402(k) provides that rules similar to the rules in section 402(h)(1) applies to contributions under a SIMPLE IRA plan. Therefore, any contribution under a SIMPLE IRA which is made to a Roth IRA is not excludable from the employee’s gross income.

Section 601(e) of the SECURE 2.0 Act provides that these amendments apply to taxable years beginning after December 31, 2022.

Q. K-1: Is an employer required to offer an employee an election to designate a Roth IRA as the IRA to which SIMPLE IRA plan or SEP arrangement contributions are made (Roth contribution election)?

A. K-1: No. The employer is not required to offer an employee a Roth contribution election.

Q. K-2: If an employer offers a Roth contribution election, when may an employee make the election?

A. K-2: For a SIMPLE IRA plan, the employer must offer employees the same effective opportunity to make a Roth contribution election as the employees have to enter into a salary reduction agreement under the plan, the minimum requirements of which are provided in section 408(p)(5) of the Code, as described in Notice 98-4.

For a SEP arrangement with a Salary Reduction SEP (SARSEP) component, the employer must offer employees the same effective opportunity to make a Roth contribution election as the employees have to enter into a salary reduction agreement under the SARSEP arrangement.

For a SEP arrangement without a SARSEP component, the employer must offer employees an effective opportunity, as described in § 1.401(k)-1(e)(2)(ii), to elect that a SEP contribution is to be made to a Roth IRA.

In all cases, an election to have a contribution made to a Roth IRA must be made before the contribution is made.

Q. K-3: May an employer make SIMPLE IRA plan or SEP arrangement contributions to a Roth IRA without an employee’s prior Roth contribution election, for example, under the terms of an automatic enrollment arrangement?

A. K-3: No. An employer can make contributions to a Roth IRA under a SIMPLE IRA plan or SEP arrangement only if the employee has affirmatively elected that contributions under the plan or arrangement are to be made to a Roth IRA.

Q. K-4: In which taxable year is a Roth IRA contribution includible in the employee’s income?

A. K-4: A salary reduction contribution made to a Roth IRA is includible in the employee’s gross income for the taxable year that includes the date on which the employee would otherwise have received the salary reduction contribution as wages or salary if the employee had not elected for the amount to be contributed to the SIMPLE IRA plan or SEP arrangement.

An employer matching or nonelective contribution made to a Roth IRA is includible in the employee’s gross income for the taxable year that includes the date on which the contribution is made to the Roth IRA. The preceding sentence applies even if the employer matching contribution or nonelective contribution is treated as if it were made for the prior taxable year of the employer, as described in section 404(h)(1)(B) or (m)(2)(B).

Q. K-5: How is a contribution to a Roth IRA under a SIMPLE IRA plan or SEP arrangement reported?

A. K-5: The employer must report salary reduction contributions made to a Roth IRA on Form W-2, Wage and Tax Statement, Box 12, using Code F (for a SARSEP) or Code S (for a SIMPLE IRA), and include the same amount in Boxes 1,3, and 5.

The employer must report employer matching and nonelective contributions made to a Roth IRA on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts, etc., in the same manner as the reporting that would have applied if (1) there were no after-tax contributions made to any of the employee’s IRAs, and (2) the matching or nonelective contributions were made to an IRA that was not a Roth IRA and then immediately converted to a Roth IRA. Thus, the contributions must be reported using Form 1099-R, for the year in which the contributions are made to the employee’s Roth IRA, with the total reported in boxes 1 and 2a of Form 1099-R, using code 2 or 7 in box 7, and the IRA/SEP/SIMPLE checkbox in box 7 checked.

Q. K-6: Which amounts contributed to a Roth IRA under a SIMPLE IRA plan or SEP arrangement are subject to income tax withholding, FICA and the Federal Unemployment Tax Act (FUTA) (chapter 23 of the Code)?

A. K-6: The salary reduction contributions contributed to a Roth IRA under a SIMPLE IRA plan or SEP arrangement are subject to income tax withholding, FICA, and FUTA taxes.

Matching contributions and nonelective contributions that are made to an IRA under a SIMPLE IRA plan or SEP arrangement are excluded from wages under section 3401(a). Similarly, matching contributions and nonelective contributions that are made to a Roth IRA under a SIMPLE IRA plan or SEP arrangement are excluded from wages under section 3401(a). Accordingly, these matching contributions and nonelective contributions are not wages, as defined in section 3401(a), for purposes of federal income tax withholding under section 3402. However, an employee on whose behalf either type of contribution is made may need to increase the employee’s withholding or make estimated tax payments to avoid an underpayment penalty.

Matching contributions and nonelective contributions that are made to an IRA under a SIMPLE IRA plan or SEP arrangement are excluded from wages under section 3121(a)(5)(C) and (H). Similarly, matching contributions and nonelective contributions that are made to a Roth IRA under a SIMPLE IRA plan or SEP arrangement are excluded from wages under section 3121(a)(5)(C) and (H) (and those contributions are not added back into wages under section 3121(v)(1)(A)). Accordingly, those contributions are not wages, as defined in section 3121(a), for purposes of FICA.

Matching and nonelective contributions that are made to an IRA under a SIMPLE IRA plan or SEP arrangement also are excluded from wages under section 3306(b)(5)(C) and (H). Similarly, matching contributions and nonelective contributions that are made to a Roth IRA under a SIMPLE IRA plan or SEP arrangement are excluded from wages under section 3306(b)(5)(C) and (H). Accordingly, those contributions are not wages, as defined in section 3306(b), for purposes of FUTA.

Q. K-7: How may an employer make SIMPLE IRA plan or SEP arrangement contributions to a Roth IRA prior to the amendment of IRS forms and Listings of Required Modifications?

A. K-7: An employer using any of Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution, Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution, Form 5305-SEP, Simplified Employee Pension—Retirement Accounts Contribution Agreement, Form 5305A-SEP, Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement, or a prototype plan document approved by the IRS, may continue to use (or begin to use) the form or document without amendment, until the IRS issues new forms or provides new guidance on prototype plan documents.

Q. K-8: What is the effect of the deletion of section 408A(f)(2) on the Roth IRA contribution limit in section 408A(c)(2)(B)?

A. K-8: The deletion of section 408A(f)(2) will be addressed in future guidance.

Prior to amendment by section 604 of the SECURE 2.0 Act, section 402A of the Code generally permitted an applicable retirement plan (that is, a qualified plan under section 401(a), a section 403(b) plan, or a section 457(b) plan maintained by an employer described in section 457(e)(1)(A) (an eligible governmental plan)) to include a qualified Roth contribution program as defined in section 402A(b)(1). Prior to that amendment, a qualified Roth contribution program was a program under which an employee could elect to make designated Roth contributions in lieu of all or a portion of elective deferrals the employee was otherwise eligible to make under the applicable retirement plan. These contributions have been referred to as designated Roth contributions; however, for purposes of this notice, they are referred to as designated Roth elective contributions.

Prior to amendment by section 604 of the SECURE 2.0 Act, section 402A(a) of the Code provided that if an applicable retirement plan includes a qualified Roth contribution program, then (1) any designated Roth elective contribution made by an employee pursuant to the program is treated as an elective deferral for purposes of chapter 1 of the Code, except that the contribution “shall not be excludable from gross income,” and (2) the plan (and any arrangement that is part of the plan) is not treated as failing to satisfy any requirement of chapter 1 of the Code solely by reason of including the program.

Section 604(a) of the SECURE 2.0 Act amends section 402A(a) of the Code to redesignate section 402A(a)(2) as section 402A(a)(4) and to add the following as section 402A(a)(2) and (3): “(2) any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf on account of the employee’s contribution, elective deferral, or (subject to the requirements of section 401(m)(13)) qualified student loan payment shall be treated as a matching contribution for purposes of this chapter, except that such contribution shall not be excludable from gross income,” and “(3) any designated Roth contribution which pursuant to the program is made by the employer on the employee’s behalf and which is a nonelective contribution shall be nonforfeitable and shall not be excludable from gross income...”

Section 604(b) of the SECURE 2.0 Act makes a conforming change to the definition of a “qualified Roth contribution program” under section 402A(b)(1) of the Code. As amended, a “qualified Roth contribution program” means a program under which an employee may elect to make, or to have made on the employee’s behalf, designated Roth contributions in lieu of all or a portion of elective deferrals the employee is otherwise eligible to make, or of matching contributions or nonelective contributions that may otherwise be made on the employee’s behalf, under the applicable retirement plan.

Section 604(c) of the SECURE 2.0 Act amends the definition of a “designated Roth contribution” under section 402A(c)(1) of the Code to mean any elective deferral, matching contribution, or nonelective contribution that is excludable from gross income of an employee without regard to section 402A, and that the employee designates (at such time and in such manner as the Secretary may prescribe) as not being so excludable. For purposes of this notice, matching contributions and nonelective contributions that an employee designates as Roth contributions are referred to as designated Roth matching contributions and designated Roth nonelective contributions.

Section 604(d) of the SECURE 2.0 Act adds section 402A(f)(3) of the Code, which defines “matching contribution” for purposes of section 402A to mean any matching contribution described in section 401(m)(4)(A), and any contribution to an eligible governmental plan on behalf of an employee and on account of the employee’s elective deferral under the plan, but only if the contribution is nonforfeitable at the time received.

Section 604(e) of the SECURE 2.0 Act provides that the amendments made by section 604 apply to contributions made after December 29, 2022.

Q. L-1: Do rules similar to the rules of § 1.401(k)-1(f) apply to designated Roth matching contributions and designated Roth nonelective contributions?

A. L-1: Yes. Rules similar to the rules for designated Roth elective contributions under § 1.401(k)-1(f) (other than § 1.401(k)-1(f)(4)(i) and (6)) apply to designated Roth matching contributions and designated Roth nonelective contributions. For example, similar to the rules under § 1.401(k)-1(f)(1) that apply to designated Roth elective contributions: (1) any designation of a matching contribution or nonelective contribution as a Roth contribution must be made by the employee no later than the time that the contribution is allocated to the employee’s account and must be irrevocable, and (2) designated Roth matching contributions and designated Roth nonelective contributions are subject to inclusion treatment and separate accounting rules. In addition, to the extent a plan permits an employee to designate matching contributions or nonelective contributions as Roth contributions, an employee must have an effective opportunity to make (or change) that designation at least once during each plan year.

Q. L-2: If an employee designates a matching contribution or nonelective contribution as a Roth contribution, for which taxable year is that designated Roth matching contribution or designated Roth nonelective contribution includible in the individual’s gross income?

A. L-2: A designated Roth matching contribution or designated Roth nonelective contribution is includible in an individual’s gross income for the taxable year in which the contribution is allocated to the individual’s account. The preceding sentence applies even if the designated Roth matching contribution or designated Roth nonelective contribution is deemed to have been made on the last day of the prior taxable year of the employer under section 404(a)(6) of the Code.

Q. L-3: May an employee designate a matching contribution or nonelective contribution as a Roth contribution if the employee is not fully vested in that type of contribution at the time the contribution is allocated to the employee’s account?

A. L-3: No. Under section 402A(f)(3), a matching contribution may be designated as a Roth contribution only if the employee is fully vested in matching contributions at the time the contribution is allocated to the employee’s account. Similarly, under section 402A(a)(3), a nonelective contribution may be designated as a Roth contribution only if the employee is fully vested in nonelective contributions at the time the contribution is allocated to the employee’s account. For example, if at the time a matching contribution is allocated to the employee’s account, the employee is only partially vested in the portion of the employee’s account balance attributable to matching contributions, then the employee may not designate any part of that matching contribution as a Roth contribution.

Q. L-4: If matching contributions or nonelective contributions under an applicable retirement plan are subject to a vesting schedule, will the plan fail to satisfy section 401(a)(4) (if applicable) merely because the plan provides that an employee may designate a matching contribution or nonelective contribution as a Roth contribution only if the employee is fully vested in that type of contribution at the time the contribution is allocated to the employee’s account?

A. L-4: Under § 1.401(a)(4)-4(e)(3)(i), the term “other right or feature” generally means any right or feature applicable to employees under the plan, except as provided in § 1.401(a)(4)-4(e)(3)(ii). Because there is no applicable exception under § 1.401(a)(4)-4(e)(3)(ii), an employee’s right under a plan to designate a matching contribution or nonelective contribution that may otherwise be made on the employee’s behalf under the plan as a Roth contribution is an “other right or feature” for purposes of § 1.401(a)(4)-4(e)(3).

However, pursuant to the authority in § 1.401(a)(4)-1(d) to issue additional guidance that is necessary or appropriate in applying the nondiscrimination requirements of section 401(a)(4) of the Code, a plan will not be treated as failing to satisfy section 401(a)(4) merely because the plan provides that an employee may designate a matching contribution or nonelective contribution as a Roth contribution only if the employee is fully vested in that type of contribution at the time the contribution is allocated to the employee’s account (even if the right to make that designation is not currently available to a group of employees that would satisfy section 410(b) without regard to the average benefit percentage test of § 1.410(b)-5)).

Q. L-5: Are designated Roth matching contributions or designated Roth nonelective contributions included in wages, as defined in section 3401(a) of the Code, for purposes of federal income tax withholding under section 3402?

A. L-5: No. Matching contributions and nonelective contributions that are made to a qualified plan under section 401(a) (including a section 401(k) plan), a section 403(b) plan, or an eligible governmental plan are excluded from wages under section 3401(a). Similarly, designated Roth matching contributions and designated Roth nonelective contributions that are made to a qualified plan under section 401(a), a section 403(b) plan, or an eligible governmental plan are excluded from wages under section 3401(a). Accordingly, designated Roth matching contributions and designated Roth nonelective contributions are not wages, as defined in section 3401(a), for purposes of federal income tax withholding under section 3402. However, an employee who designates a matching contribution or nonelective contribution as a Roth contribution may need to increase the employee’s withholding or make estimated tax payments to avoid an underpayment penalty.

Q. L-6: Are designated Roth matching contributions or designated Roth nonelective contributions that are contributed to a qualified plan under section 401(a) or to a section 403(b) plan included in wages, as defined in section 3121(a), for purposes of FICA, or as defined in section 3306(b), for purposes of FUTA?

A. L-6: No. Matching contributions and nonelective contributions that are contributed to a qualified plan under section 401(a) or to a section 403(b) plan are excluded from wages under section 3121(a)(5)(A) and (D). Similarly, designated Roth matching contributions and designated Roth nonelective contributions that are contributed to a qualified plan under section 401(a) or to a section 403(b) plan are excluded from wages under section 3121(a)(5)(A) and (D) (and those contributions are not added back to wages under section 3121(v)(1)(A)). Accordingly, those contributions are not wages, as defined in section 3121(a), for purposes of FICA.

Matching and nonelective contributions that are contributed to a qualified plan under section 401(a) or to a section 403(b) plan also are excluded from wages under section 3306(b)(5)(A) and (D). Similarly, designated Roth matching contributions and designated Roth nonelective contributions that are contributed to a qualified plan under section 401(a) or to a section 403(b) plan are excluded from wages under section 3306(b)(5)(A) and (D). Accordingly, those contributions are not wages, as defined in section 3306(b), for purposes of FUTA.

Q. L-7: Are designated Roth nonelective contributions that are contributed to an eligible governmental plan (including amounts that would be treated as matching contributions under section 401(m) if the plan were a qualified plan) included in wages, as defined in section 3121(a), for purposes of FICA?

A. L-7: Section 3121(a) defines wages as all remuneration for employment, unless specifically excluded. Section 3121(v)(2) includes special timing rules that apply in determining when amounts deferred under an eligible governmental plan (including employers’ contributions) are required to be taken into account. Under these sections, an amount deferred under an eligible governmental plan is required to be taken into account for purposes of social security and Medicare taxes as of the later of when the services are performed or when there is no substantial risk of forfeiture of the rights to such amount. Because designated Roth nonelective contributions that are contributed to an eligible governmental plan (including amounts that would be treated as matching contributions under section 401(m) if the plan were a qualified plan) must be fully vested at the time the contribution is allocated to a participant’s account, these contributions are subject to social security and Medicare taxes at that time. However, FICA tax applies to employees of state and local governments only if they are subject to social security or Medicare tax under section 3121(b)(7)(E) (relating to agreements entered into pursuant to section 218 of the Social Security Act) or another provision of the Code, such as section 3121(b)(7)(F) (relating to state and local government employees who are not members of a state or local retirement system), or section 3121(u) (relating to Medicare). See also Notice 2003-20, 2003-1 CB 894.

Q. L-8: Are designated Roth nonelective contributions that are contributed to an eligible governmental plan (including amounts that would be treated as matching contributions under section 401(m) if the plan were a qualified plan) included in wages, as defined in section 3306(b), for purposes of FUTA?

A. L-8: Section 3306(c)(7) generally provides a FUTA exemption for service performed in the employ of a state or any political subdivision thereof or any instrumentality of any one or more of the foregoing. In accordance with this provision, designated Roth nonelective contributions that are contributed to an eligible governmental plan (including amounts that would be treated as matching contributions under section 401(m) if the plan were a qualified plan) are excluded from wages under section 3306(c)(7). Accordingly, those contributions are not wages, as defined in section 3306(b), for purposes of FUTA. See also Notice 2003-20.

Q. L-9: If designated Roth matching contributions or designated Roth nonelective contributions are allocated to an individual’s account in a taxable year, what reporting obligations apply to those contributions?

A. L-9: The reporting obligations that apply to a designated Roth matching contribution or designated Roth nonelective contribution are the same as if: (1) the contribution had been the only contribution made to an individual’s account under the plan, and (2) the contribution, upon allocation to that account, had been directly rolled over to a designated Roth account in the plan as an in-plan Roth rollover. Thus, designated Roth matching contributions and designated Roth nonelective contributions to a qualified plan under section 401(a) or to a section 403(b) plan must be reported using Form 1099-R for the year in which the contributions are allocated to the individual’s account. The total amount of designated Roth matching contributions and designated Roth nonelective contributions that are allocated in that year are reported in boxes 1 and 2a of Form 1099-R, and code “G” is used in box 7.

The same reporting applies to designated Roth nonelective contributions that are contributed to an eligible governmental plan (including amounts that would be treated as matching contributions under section 401(m) if the plan were a qualified plan).

Q. L-10: If a plan uses a safe harbor definition of compensation under § 1.415(c)-2(d)(3) or (4) for purposes of section 415 of the Code, are designated Roth matching contributions or designated Roth nonelective contributions included in that safe harbor definition of compensation?

A. L-10: No. In general, the safe harbor definition of compensation under § 1.415(c)-2(d)(3) includes wages within the meaning of section 3401(a) of the Code (for purposes of income tax withholding at the source), plus amounts that would be included in wages but for an election under section 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). However, as described in Q&A L-5 of this notice, designated Roth matching contributions and designated Roth nonelective contributions are not included in wages within the meaning of section 3401(a) (nor would those contributions have been included in wages but for an election to have those contributions made as Roth contributions).

Similarly, the safe harbor definition of compensation under § 1.415(c)-2(d)(4) generally includes amounts that are compensation under § 1.415(c)-2(d)(3), plus all other payments of compensation to an employee by his employer (in the course of the employer’s trade or business) for which the employer is required to furnish the employee a written statement under sections 6041(d), 6051(a)(3), and 6052 of the Code. However, designated Roth matching contributions and designated Roth nonelective contributions are not payments of compensation to an employee by his employer for which the employer is required to furnish the employee a written statement under sections 6041(d), 6051(a)(3), and 6052.

Q. L-11: If an applicable retirement plan includes a qualified Roth contribution program, which types of designated Roth contributions must an employee be permitted to elect to make, or have made on the employee’s behalf, under the program?

A. L-11: Pursuant to section 402A(b)(1), a qualified Roth contribution program may, but is not required, to include every type of designated Roth contribution. Thus, an employee generally may be permitted to designate an elective contribution as a Roth contribution without being permitted to designate a matching contribution or nonelective contribution as a Roth contribution. Similarly, an employee generally may be permitted to designate a matching contribution or nonelective contribution (or both) as a Roth contribution without being permitted to designate an elective contribution as a Roth contribution. However, the right to make designated Roth contributions is a right or feature subject to the requirements of section 401(a)(4). See § 1.401(k)-1(a)(4)(iv)(B) and Q&A L-4 of this notice.

Further, under sections 402(c)(8)(B) and 402A(c)(3)(A) of the Code, if any portion of an eligible rollover distribution is attributable to payments or distributions from a designated Roth account (as defined in section 402A), that portion is permitted to be rolled over only to another designated Roth account or to a Roth IRA. For purposes of sections 402(c)(8)(B) and 402A(c)(3)(A), the term “designated Roth account” includes a separate account that is established for designated Roth matching contributions or designated Roth nonelective contributions. Similarly, section 402A(c)(4)(B) requires an applicable retirement plan to include a qualified Roth contribution program in order for the plan to permit employees to make in-plan Roth rollovers. For purposes of section 402A(c)(4)(B), a qualified Roth contribution program includes a program under which an employee may designate a matching contribution or nonelective contribution as a Roth contribution, even if the employee is not permitted to designate an elective contribution as a Roth contribution.

Section 430 specifies the minimum funding requirements that apply to single-employer plans (except for CSEC plans under § 414(y)) pursuant to § 412. Section 430(h)(2) specifies the interest rates that must be used to determine a plan’s target normal cost and funding target. Under this provision, present value is generally determined using three 24-month average interest rates (“segment rates”), each of which applies to cash flows during specified periods. To the extent provided under § 430(h)(2)(C)(iv), these segment rates are adjusted by the applicable percentage of the 25-year average segment rates for the period ending September 30 of the year preceding the calendar year in which the plan year begins.¹ However, an election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the segment rates.

Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly corporate bond yield curve, and the 24-month average corporate bond segment rates used to compute the target normal cost and the funding target. Consistent with the methodology specified in Notice 2007-81, the monthly corporate bond yield curve derived from November 2023 data is in Table 2023-11 at the end of this notice. The spot first, second, and third segment rates for the month of November 2023 are, respectively, 5.50, 5.76, and 5.83.

The 24-month average segment rates determined under § 430(h)(2)(C)(i) through (iii) must be adjusted pursuant to § 430(h)(2)(C)(iv) to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates. For this purpose, any 25-year average segment rate that is less than 5% is deemed to be 5%. The 25-year average segment rates for plan years beginning in 2022, 2023 and 2024 were published in Notice 2021-54, 2021-41 I.R.B. 457, Notice 2022-40, 2022-40 I.R.B. 266, and Notice 2023-66, 2023-40 I.R.B. 992, respectively. The applicable minimum and maximum percentages are 95% and 105% for plan years beginning in 2022, 2023 and 2024.

The three 24-month average corporate bond segment rates applicable for December 2023 without adjustment for the 25-year average segment rate limits are as follows:

 

The adjusted 24-month average segment rates set forth in the chart below reflect § 430(h)(2)(C)(iv) of the Code. The 24-month averages applicable for December 2023, adjusted to be within the applicable minimum and maximum percentages of the corresponding 25-year average segment rates in accordance with § 430(h)(2)(C)(iv) of the Code, are as follows:

Section 431 specifies the minimum funding requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a minimum amount for the full-funding limitation described in § 431(c)(6)(A), based on the plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate current liability for this purpose must be no more than 5 percent above and no more than 10 percent below the weighted average of the rates of interest on 30-year Treasury securities during the four-year period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B. 383, provides guidelines for determining the weighted average interest rate. The rate of interest on 30-year Treasury securities for November 2023 is 4.66 percent. The Service determined this rate as the average of the daily determinations of yield on the 30-year Treasury bond maturing in August 2053 determined each day through November 8, 2023 and the yield on the 30-year Treasury bond maturing in November 2053 determined each day for the balance of the month. For plan years beginning in December 2023, the weighted average of the rates of interest on 30-year Treasury securities and the permissible range of rates used to calculate current liability are as follows:

In general, the applicable interest rates under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. Notice 2007-81 provides guidelines for determining the minimum present value segment rates. Pursuant to that notice, the minimum present value segment rates determined for November 2023 are as follows:

The principal author of this notice is Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or Tony Montanaro at 626-927-1475 (not toll-free numbers).

 

¹ Pursuant to § 433(h)(3)(A), the third segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount of the full funding limitation under § 433(c)(7)(C)).

The relief granted in this notice is available only to eligible taxpayers for accruals of additions to tax under §§ 6651(a)(2) and 6651(a)(3) for the failure to pay during the relief period. An “eligible taxpayer” is any taxpayer:

The relief granted in this notice is available only to eligible taxpayers who have filed an eligible return. An “eligible return” is one of the following income tax returns:

1. Income Tax Returns of Individuals:

2. Income Tax Returns of Trusts, Estates, Certain Taxable Corporations, and Certain Tax-Exempt Organizations:

For purposes of the relief granted in this notice, the “relief period” is the period that begins on the date the IRS issued an initial balance due notice to the eligible taxpayer, or February 5, 2022, whichever is later, and ends on March 31, 2024. Eligible taxpayers will remain liable for any addition to tax for the failure to pay tax that accrued before or after the relief period. Eligible taxpayers will also remain liable for interest that accrues during the relief period as a result of any underpayment of tax for taxable year 2020 or 2021.

The relief described in this notice does not apply to any addition to tax, penalty, or interest that is not specifically listed in the grant of relief under section III of this notice. In addition, the relief described in section III of this notice is not available with respect to any return for which the penalty for fraudulent failure to file under § 6651(f) or the penalty for fraud under § 6663 applies. The relief described in section III of this notice also does not apply to any addition to tax for the failure to pay in an offer in compromise under § 7122 that is accepted by the IRS because acceptance of the offer conclusively settles all of the liabilities in the offer under § 301.7122-1(e)(5) of the Procedure and Administration Regulations (26 CFR part 301). Finally, the relief described in section III of this notice does not apply to any addition to tax for the failure to pay that is settled in a closing agreement under § 7121 or finally determined in a judicial proceeding.

The principal author of this notice is Christian Lagorio of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information on this notice regarding the use of an employee-provided automobile, contact Mr. Lagorio at (202) 317-7005 (not a toll-free number). For further information on this notice regarding the use of an employer-provided automobile, contact Stephanie Caden of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), at (202) 317-4774 (not a toll-free number).

¹ Unless otherwise specified, all “section” or “§” references are to sections of the Internal Revenue Code (Code) or the Income Tax Regulations (26 CFR part 1).

The principal author of this announcement is Michael Franklin of the Office of the Associate Chief Counsel (Procedure and Administration). If you need help completing Form 15434, have questions on the status of your ERC Voluntary Disclosure Program application, or have other ERC Voluntary Disclosure Program related questions, contact the ERC Voluntary Disclosure hotline at 414-231-2222 (not a toll-free number).

Consistent with the April 2023 proposed regulations, previously proposed §1.30D-2(a) through (h) are proposed to apply to new clean vehicles placed in service on or after January 1, 2023, for taxable years ending after April 17, 2023. Newly proposed §1.30D-2(j) through (m) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Consistent with the April 2023 proposed regulations, previously proposed §1.30D-3(a) through (c) and (f) are proposed to apply to new clean vehicles placed in service after April 17, 2023, for taxable years ending after April 17, 2023. Newly proposed §1.30D-3(d) and (e) are proposed to apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

Section 30D(d)(7) provides that the excluded entity provisions apply to vehicles placed in service after December 31, 2023, for battery components, and after December 31, 2024, for applicable critical minerals. Accordingly proposed §1.30D-6 is proposed to apply to new clean vehicles placed in service after December 31, 2023.

Taxpayers may rely on these proposed regulations for vehicles placed in service prior to the date final regulations are published in the Federal Register, provided the taxpayer follows the proposed regulations in their entirety, and in a consistent manner.

This notice of proposed rulemaking modifies proposed §§1.30D-2 and 1.30D-3 of the April 2023 proposed regulations.

Before these proposed amendments to the regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request.

A public hearing will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register.

Announcement 2023-16, 2023-20 I.R.B. 854 (May 15, 2023), provides that public hearings will be conducted in person, although the IRS will continue to provide a telephonic option for individuals who wish to attend or testify at a hearing by telephone. Any telephonic hearing will be made accessible to people with disabilities.

Guidance cited in this preamble is published in the Internal Revenue Bulletin and is available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC, 20402, or by visiting the IRS website at https://www.irs.gov.

The principal author of these proposed regulations is the Office of the Associate Chief Counsel (Passthroughs and Special Industries). However, other personnel from the Treasury Department, the DOE, and the IRS participated in their development.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR parts 1 as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order for §1.30D-6 to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.30D-6 also issued under 26 U.S.C. 30D.

* * * * *

Par. 2. Section 1.30D-0, as proposed to be added at 88 FR 23370 (April 17, 2023) and proposed to be amended at 88 FR 70310 (October 10, 2023), is amended by:

a. Adding paragraphs (k), (l), and (m) under §1.30D-2;

b. Revising paragraphs (e) and (f) under §1.30D-3;

c. Adding paragraph (g) under §1.30D-3; and

d. Adding an entry in numerical order for §1.30D-6.

The additions and revisions read as follows:

§1.30D-0 Table of contents.

* * * * *

§1.30D-2 Definitions for purposes of section 30D.

* * * * *

(k) Manufacturer.

(l) Qualified manufacturer.

(m) New clean vehicle.

* * * * *

§1.30D-3 Critical mineral and battery component requirements.

* * * * *

(e) Upfront review of battery component and applicable critical minerals requirements.

(f) Severability.

(g) Applicability date.

* * * * *

§1.30D-6 Excluded entities.

(a) Definitions.

(1) Applicable critical mineral.

(2) Assembly.

(3) Battery.

(4) Battery cell.

(5) Battery cell production facility.

(6) Battery component.

(7) Compliant-battery ledger.

(8) Constituent materials.

(9) Extraction.

(10) Foreign entity of concern.

(11) FEOC-compliant.

(12) Manufacturing.

(13) Non-traceable battery material.

(i) In general.

(ii) [Reserved]

(14) Processing.

(15) Recycling.

(b) Due diligence.

(1) In general.

(2) Transition rule for non-traceable battery materials.

(c) Excluded entity restriction.

(1) In general.

(2) Determination of FEOC-compliant batteries.

(3) Determination of FEOC-compliant battery cell.

(i) In general.

(ii) Temporary allocation-based determination for applicable critical materials contained in constituent materials of a battery cell.

(A) In general.

(B) Allocation limited to applicable critical minerals in the battery cell.

(C) Separate allocation for each class of constituent materials.

(D) Allocation within each product line of battery cells.

(E) Limitation on number of FEOC-compliant battery cells.

(F) Termination of temporary allocation-based determination.

(iii) Transition rule for non-traceable battery materials.

(4) Determination of FEOC-compliant battery components and applicable critical minerals.

(i) In general.

(ii) Applicable critical minerals.

(A) In general.

(B) Associated constituent materials.

(C) Exception for applicable critical minerals not contained in the battery.

(D) Recycling.

(iii) Timing of determination of FEOC-compliant status.

(iv) Examples.

(A) Example 1: Timing of FEOC compliance determination.

(B) Example 2: Form of applicable critical mineral.

(C) Example 3: Recycling of applicable critical mineral.

(5) Third-party manufacturers or suppliers.

(d) Compliant-battery ledger.

(1) In general.

(2) Determination of number of batteries.

(i) In general.

(ii) Upfront review.

(iii) Decrease or increase to compliant-battery ledger.

(3) Tracking FEOC-compliant batteries.

(4) Reconciliation of battery estimates.

(e) Rule for 2024.

(1) In general.

(2) Determination.

(f) Inaccurate attestations, certifications, or documentation.

(1) In general.

(2) Inadvertence.

(3) Intentional disregard of fraud.

(g) Examples.

(1) Example 1: In general.

(2) Example 2: Rules for third-party suppliers.

(3) Example 3: Applicable critical minerals.

(4) Example 4: Comprehensive example.

(h) Severability.

(i) Applicability date.

Par. 3. Section 1.30D-2, as proposed to be added at 88 FR 23370 (April 17, 2023) and proposed to be amended at 88 FR 70310 (October 10, 2023), is amended by revising paragraphs (a), (f), and (i) and adding paragraphs (k), (l), and (m) to read as follows:

§1.30D-2 Definitions for purposes of section 30D.

(a) In general. The definitions in this section apply for purposes of section 30D of the Internal Revenue Code (Code) and the section 30D regulations.

* * * * *

(f) Section 30D regulations. Section 30D regulations means §1.30D–1, this section, and §§1.30D–3 through 1.30D–6.

* * * * *

(i) Applicability date. Paragraphs (a) through (h) of this section apply to new clean vehicles placed in service on or after January 1, 2023, for taxable years ending after April 17, 2023. Paragraphs (j) through (m) of this section apply for new clean vehicles placed in service on or after January 1, 2024, for taxable years ending after December 31, 2023.

* * * * *

(k) Manufacturer. A manufacturer means any manufacturer within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency (EPA) for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq.) and as defined in 42 U.S.C. 7550(1). If multiple manufacturers are involved in the production of a vehicle, the requirements provided in section 30D(d)(3) must be met by the manufacturer who satisfies the reporting requirements of the greenhouse gas emissions standards set by the EPA under the Clean Air Act (42 U.S.C. 7521 et seq.) for the subject vehicle.

(l) Qualified manufacturer. A qualified manufacturer means a manufacturer that meets the requirements described in section 30D(d)(3). The term qualified manufacturer does not include any manufacturer whose qualified manufacturer status has been terminated by the Internal Revenue Service (IRS). The IRS may terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence with respect to any requirements of section 30D, the section 30D regulations, or any guidance under section 30D, including with respect to the periodic written reports described in section 30D(d)(3) and §1.30D-2(m) and any attestations, documentation, or certifications described in §1.30D-3(e) and §1.30D-6(d), at the time and in the manner provided in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(a) of this chapter). See §1.30D-6(f) for additional rules regarding inaccurate determinations and documentation.

(m) New clean vehicle. A new clean vehicle means a vehicle that meets the requirements described in section 30D(d). A vehicle does not meet the requirements of section 30D(d) if—

(1) The qualified manufacturer fails to provide a periodic written report for such vehicle prior to the vehicle being placed in service, reporting the vehicle identification number (VIN) of such vehicle and certifying compliance with the requirement of section 30D(d);

(2) The qualified manufacturer provides incorrect information with respect to the periodic written report for such vehicle;

(3) The qualified manufacturer fails to update its periodic written report in the event of a material change with respect to such vehicle; or

(4) For new clean vehicles placed in service after December 31, 2024, the qualified manufacturer fails to meet the requirements of §1.30D-6(d).

Par. 4. Section 1.30D-3, as proposed to be added at 88 FR 23370 (April 17, 2023), is amended by:

a. Revising paragraph (d);

b Redesignating paragraphs (e) and (f) as paragraphs (f) and (g);

c. Adding new paragraph (e); and

d. Revising newly redesignated paragraph (g).

The revisions and addition read as follows:

§1.30D-3 Critical mineral and battery component requirements.

* * * * *

(d) Excluded entities. For rules regarding excluded entities, see §1.30D-6.

(e) Upfront review of battery component and applicable critical minerals requirements. For new clean vehicles anticipated to be placed in service after December 31, 2024, the qualified manufacturer must provide attestations, certifications and documentation demonstrating compliance with the requirements of section 30D(e), at the time and in the manner provided in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)(a) of this chapter). The IRS, with analytical assistance from the Department of Energy, will review the attestations, certifications, and documentations.

* * * * *

(g) Applicability date. Paragraphs (a) through (c) and (f) of this section apply to new clean vehicles placed in service after April 17, 2023, for taxable years ending after April 17, 2023. Paragraphs (d) and (e) of this section apply to new clean vehicles placed in service on or after January 1, 2024, for taxable years beginning after December 31, 2023.

Par. 5. Section 1.30D-6 is added to read as follows:

§1.30D-6 Excluded entities.

(a) Definitions. This paragraph (a) provides definitions that apply for purposes of section 30D(d)(7) of the Internal Revenue Code (Code) and this section.

(1) Applicable critical mineral. Applicable critical mineral means an applicable critical mineral as defined in section 45X(c)(6) of the Code.

(2) Assembly. Assembly, with respect to battery components, means the process of combining battery components into battery cells and battery modules.

(3) Battery. Battery, for purposes of a new clean vehicle, means a collection of one or more battery modules, each of which has two or more electrically configured battery cells in series or parallel, to create voltage or current. The term battery does not include items such as thermal management systems or other parts of a battery cell or module that do not directly contribute to the electrochemical storage of energy within the battery, such as battery cell cases, cans, or pouches.

(4) Battery cell. Battery cell means a combination of battery components (other than battery cells) capable of electrochemically storing energy from which the electric motor of a new clean vehicle draws electricity.

(5) Battery cell production facility. Battery cell production facility means a facility in which battery cells are manufactured or assembled.

(6) Battery component. Battery component means a component that forms part of a battery and that is manufactured or assembled from one or more components or constituent materials that are combined through industrial, chemical, and physical assembly steps. Battery components may include, but are not limited to, a cathode electrode, anode electrode, solid metal electrode, separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module. Constituent materials are not a type of battery component, although constituent materials may be manufactured or assembled into battery components. Some battery components may be made entirely of inputs that do not contain constituent materials.

(7) Compliant-battery ledger. A compliant-battery ledger, for a qualified manufacturer for a calendar year, is a ledger established under the rules of paragraph (d) of this section that tracks the number of available FEOC-compliant batteries for such calendar year.

(8) Constituent materials. Constituent materials means materials that contain applicable critical minerals and that are employed directly in the manufacturing of battery components. Constituent materials may include, but are not limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell.

(9) Extraction. Extraction means the activities performed to harvest minerals or natural resources from the ground or a body of water. Extraction includes, but is not limited to, operating equipment to harvest minerals or natural resources from mines and wells, or to extract minerals or natural resources from the waste or residue of prior extraction. Extraction concludes when activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in critical mineral processing. Extraction includes the physical processes involved in refining. Extraction does not include the chemical and thermal processes involved in refining.

(10) Foreign entity of concern. Foreign entity of concern (FEOC) has the meaning provided in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5)) and guidance promulgated thereunder by the Department of Energy (DOE).

(11) FEOC-compliant. FEOC-compliant means in compliance with the applicable excluded entity requirement under section 30D(d)(7). In particular--

(i) A battery component (other than a battery cell), with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it is not manufactured or assembled by a FEOC;

(ii) An applicable critical mineral, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not extracted, processed, or recycled by a FEOC;

(iii) A battery cell, with respect to a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components;

(iv) A battery cell, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components and FEOC-compliant applicable critical minerals; and

(v) A battery, with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it contains only FEOC-compliant battery components (other than battery cells) and FEOC-compliant battery cells (as described in paragraph (a)(11)(iii) or (iv) of this section, as applicable).

(12) Manufacturing. Manufacturing, with respect to a battery component, means the industrial and chemical steps taken to produce a battery component.

(13) Non-traceable battery materials—(i) In general. Non-traceable battery materials mean specifically identified, low-value battery materials that originate from multiple sources and are commingled during refining, processing, or other production processes by suppliers to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such battery materials. For this purpose, low-value battery materials are those that have low value compared to the total value of the battery.

(ii) [Reserved].

(14) Processing. Processing means the non-physical processes involved in the refining of non-recycled substances or materials, including the treating, baking, and coating processes used to convert such substances and materials into constituent materials. Processing includes the chemical or thermal processes involved in refining. Processing does not include the physical processes involved in refining.

(15) Recycling. Recycling means the series of activities during which recyclable materials containing critical minerals are transformed into specification-grade commodities and consumed in lieu of virgin materials to create new constituent materials; such activities result in new constituent materials contained in the battery from which the electric motor of a new clean vehicle draws electricity.

(b) Due diligence—(1) In general. The qualified manufacturer must conduct due diligence with respect to all battery components and applicable critical minerals (and associated constituent materials) that are relevant to determining whether such components or minerals are FEOC-compliant. Such due diligence must comply with standards of tracing for battery materials available in the industry at the time of the attestation or certification that enable the manufacturer to know with reasonable certainty the provenance of applicable critical minerals, constituent materials, and battery components. Reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer does not know or have reason to know after its due diligence that such supplier attestation or certification is incorrect. Due diligence must be conducted by the qualified manufacturer prior to its determining information necessary to establish any compliant-battery ledger under paragraph (d) of this section, and on an ongoing basis.

(2) Transition rule for non-traceable battery materials. For any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the due diligence requirement of paragraph (b)(1) of this section may be satisfied by excluding identified non-traceable battery materials. To use this transition rule, qualified manufacturers must submit a report during the up-front review process described in paragraph (d)(2)(ii) of this section demonstrating how the qualified manufacturer will comply with the excluded entity restrictions once the transition rule is no longer in effect.

(c) Excluded entity restriction—(1) In general. In the case of any new clean vehicle placed in service after December 31, 2023, the batteries from which the electric motor of such vehicle draws electricity must be FEOC-compliant. A serial number or other identification system must be used to physically track FEOC-compliant batteries to specific new clean vehicles. The determination that a battery is FEOC-compliant is made as follows:

(i) Step 1. First, the qualified manufacturer determines whether battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant, in accordance with paragraph (c)(4) of this section.

(ii) Step 2. Next, the FEOC-compliant battery components and FEOC-compliant applicable critical minerals (and associated constituent materials) are physically tracked to specific battery cells, in accordance with paragraph (c)(3)(i) of this section. Alternatively, FEOC-compliant applicable critical minerals and associated constituent materials (but not battery components) may be allocated to battery cells, without physical tracking, in accordance with paragraph (c)(3)(ii) of this section. In addition, the determination under paragraph (c)(4) of this section may be made by applying the transition rule for non-traceable battery materials, in accordance with paragraph (c)(3)(iii) of this section.

(iii) Step 3. Finally, the battery components, including battery cells, are physically tracked to specific batteries, in accordance with paragraph (c)(2) of this section.

(2) Determination of FEOC-compliant batteries. The determination that a battery is FEOC-compliant must be made by physically tracking FEOC-compliant battery components (including battery cells) to such battery. With respect to battery cells, a serial number or other identification system must be used to physically track FEOC-compliant battery cells to such batteries.

(3) Determination of FEOC-compliant battery cell—(i) In general. Except as provided in paragraph (c)(3)(ii) of this section, the determination that a battery cell contains FEOC-compliant battery components and FEOC-compliant applicable critical minerals and their associated constituent materials must be made by physically tracking FEOC-compliant battery components to specific batteries cells and by physically tracking the mass of FEOC-compliant applicable critical minerals and their associated constituent materials to specific batteries cells.

(ii) Temporary allocation-based determination for applicable critical materials and associated constituent materials of a battery cell—(A) In general. The determination that a battery cell is a FEOC-compliant battery cell may be based on an allocation of available mass, produced or contracted for, of applicable critical minerals and their associated constituent materials to specific battery cells manufactured or assembled in a battery cell production facility, without the physical tracking of mass of applicable critical minerals and associated constituent materials to specific battery cells.

(B) Allocation limited to applicable critical minerals in the battery cell. The rules of this paragraph (c)(3)(ii) are limited to applicable critical minerals and their associated constituent materials that are incorporated into a battery cell or its battery components. Battery components must be physically tracked.

(C) Separate allocation for each class of constituent materials. Any allocation under this paragraph (c)(3)(ii) with respect to the mass of an applicable critical mineral must be made within the type of associated constituent materials (such as powders of cathode active materials, powders of anode active materials, or foils) in which such mineral is contained. Masses of an applicable critical mineral may not be aggregated across constituent materials with which such applicable critical mineral is not associated, and an allocation of a mass of an applicable critical mineral may not be made from one type of constituent material to another. For example, assume that M, a qualified manufacturer, operates a battery cell production facility. M manufactures a line of battery cells that contains applicable critical mineral Z contained in constituent material 1 and applicable critical mineral Z contained in constituent material 2. With respect to constituent material 1, M procures 20,000,000 kilograms (kg) of applicable critical mineral Z for the battery cell production facility, of which 4,000,000 kg are FEOC-compliant and 16,000,000 kg are not FEOC-compliant. With respect to constituent material 2, M procures another 15,000,000 kg of applicable critical mineral Z for the battery cell production facility, of which 7,500,000 kg are FEOC-compliant and 7,500,000 kg are not FEOC-compliant. M determines which battery cells are FEOC-compliant through an allocation-based determination with respect to battery cells manufactured or assembled in the battery cell production facility. Under this paragraph (c)(3)(ii)(C), any allocation with respect to the mass of applicable critical mineral Z must be made within the type of constituent materials in which such mineral is contained. Thus, M may not aggregate the 4,000,000 kg mass of FEOC-compliant applicable critical mineral Z contained in constituent material 1 with the 7,500,000 kg mass of FEOC-compliant applicable critical mineral Z contained in constituent material 2, and allocations may not be made from constituent material 1 to constituent material 2. As a result, overall FEOC compliance is constrained by the 20 percent of constituent material 1 that is FEOC-compliant due to having 4,000,000 kg of applicable critical mineral Z, even though 33 percent (7,500,000 + 4,000,000)/(20,000,000 + 15,000,000) of the total mass of critical mineral Z is compliant.

(D) Allocation within each product line of battery cells. Any allocation under this paragraph (c)(3)(ii) with respect to applicable critical minerals and their associated constituent materials must be allocated within one or more specific battery cell product lines of the battery cell production facility.

(E) Limitation on number of FEOC-compliant battery cells. If a qualified manufacturer uses an allocation-based determination described in this paragraph (c)(3)(ii), the number of FEOC-compliant battery cells that can be produced from such allocation may not exceed the total number of battery cells for which there is enough of every FEOC-compliant applicable critical mineral. That number will necessarily be limited by the applicable critical mineral that has the lowest percentage of FEOC-compliant supply. For example, if a qualified manufacturer allocates applicable critical mineral A, which is 20 percent FEOC-compliant and applicable critical mineral B, which is 60 percent FEOC-compliant, to a battery cell product line, no more than 20 percent of the battery cells in that battery cell product line will be treated as FEOC-compliant.

(F) Termination of temporary allocation-based determination. The rules of this paragraph (c)(3)(ii) do not apply with respect to any new clean vehicle for which the qualified manufacturer is required to provide a periodic written report after December 31, 2026.

(iii) Transition rule for non-traceable battery materials. For any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the determination of whether a battery cell is FEOC-compliant under this paragraph (c)(3) may be satisfied by excluding identified non-traceable battery materials (and associated constituent materials). To use this transition rule, qualified manufacturers must submit a report during the up-front review process described in paragraph (d)(2)(ii) of this section demonstrating how the qualified manufacturer will comply with the excluded entity restrictions once the transition rule is no longer in effect.

(4) Determination of FEOC-compliant battery components and applicable critical minerals—(i) In general. The determination of whether battery components and applicable critical minerals (and their associated constituent materials) are FEOC-compliant must be made prior to any determination under paragraphs (c)(2) and (3) of this section.

(ii) Applicable critical minerals—(A) In general. Except as provided in paragraph (c)(4)(ii)(D) of this section, the determination of whether an applicable critical mineral is FEOC-compliant takes into account each step of extraction, processing, or recycling through the step in which such mineral is processed or recycled into a constituent material, even if the mineral is not in a form listed in section 45X(c)(6) at every step.

(B) Associated constituent materials. A constituent material is associated with an applicable critical mineral if the applicable critical mineral has been processed or recycled into a constituent material, even if that processing or recycling transformed the mineral into a form not listed in section 45X(c)(6).

(C) Exception for applicable critical minerals not contained in the battery. An applicable critical mineral is disregarded for purposes of the determination under this paragraph (c)(4) if it is fully consumed in the production of the constituent material or battery component and no longer remains in any form in the battery.

(D) Recycling. An applicable critical mineral and associated constituent material that is recycled is subject to the determination under this paragraph (c)(4) if the recyclable material contains an applicable critical mineral, contains material that was transformed from an applicable critical mineral, or if the recyclable material is used to produce an applicable critical mineral at any point during the recycling process. The determination of whether an applicable critical mineral or associated constituent material that is incorporated into a battery via recycling is FEOC-compliant takes into account only activities that occurred during the recycling process.

(iii) Timing of determination of FEOC-compliant status. Whether an entity is a FEOC is determined as of the time of the entity’s performance of the relevant activity, which for applicable critical minerals is the time of extraction, processing, or recycling, and for battery components is the time of manufacturing or assembly. The determination of whether an applicable critical mineral is FEOC-compliant is determined at the end of processing or recycling of the applicable critical mineral into a constituent material, taking into account all applicable steps through and including final processing or recycling.

(iv) Examples. The following examples illustrate the rules under this paragraph (c)(4):

(A) Example 1: Timing of FEOC compliance determination. Mineral X, an applicable critical mineral, was not extracted by a FEOC but was later processed by a FEOC. Mineral X is not FEOC-compliant because one step of the extraction and processing was performed by a FEOC. Any battery containing Mineral X is not FEOC-compliant.

(B) Example 2: Form of applicable critical mineral. Mineral Y is extracted by a FEOC and is intended to be incorporated into the battery of an electric vehicle. Mineral Y is not in a form listed in section 45X(c)(6) at the time of such extraction, but subsequently it is refined into an applicable critical mineral form listed in section 45X(c)(6) by an entity that is not a FEOC. Mineral Y is not FEOC-compliant pursuant to this paragraph (c)(4) because it was extracted by a FEOC, regardless of its form at the time of extraction. Any battery containing Mineral Y is not FEOC-compliant.

(C) Example 3: Recycling of applicable critical mineral. Mineral Z, an applicable critical mineral in a form listed in section 45X(c)(6), was processed by a FEOC in a prior production process. Mineral Z subsequently was derived from recyclable material in a form not listed in section 45X(c)(6). Mineral Z was recycled by an entity that is not a FEOC. Mineral Z is subject to a determination of whether it is FEOC-compliant at the end of the recycling process, because it was at one time an applicable critical mineral. Mineral Z is FEOC-compliant pursuant to this paragraph (c)(4) because it was not recycled by a FEOC.

(5) Third-party manufacturers or suppliers. The determinations under paragraphs (c)(2) through (4) of this section may be made by a third-party manufacturer or supplier that operates a battery cell production facility provided that:

(i) The third-party manufacturer or supplier performs the due diligence described in paragraph (b) of this section;

(ii) The third-party manufacturer or supplier provides the qualified manufacturer of the new clean vehicle information sufficient to establish a basis for the determinations under paragraphs (c)(2) through (4) of this section, including information related to the due diligence described in paragraph (c)(5)(i) of this section;

(iii) The third-party manufacturer or supplier is contractually required to provide the information in paragraph (c)(5)(ii) of this section to the qualified manufacturer and is contractually required to inform the qualified manufacturer of any change in the supply chain that affects the determinations of FEOC compliance under paragraph (c)(2) and (4) of this section; and

(iv) If there are multiple third-party manufacturers or suppliers (such as a case in which a qualified manufacturer contracts with a battery manufacturer, who, in turn, contracts with a battery cell manufacturer or supplier who operates a battery cell production facility), the due diligence and information requirements of this paragraph (c) must be satisfied by each such manufacturer or supplier either directly to the qualified manufacturer or indirectly through contractual relationships.

(d) Compliant-battery ledger—(1) In general. For new clean vehicles placed in service after December 31, 2024, the qualified manufacturer must determine and provide information to the IRS to establish a compliant-battery ledger for each calendar year, as described in paragraphs (d)(2)(i) and (ii) of this section. One compliant-battery ledger may be established for all vehicles for a calendar year, or there may be separate ledgers for specific models or classes of vehicles to account for different battery cell chemistries or differing quantities of cells in each battery.

(2) Determination of number of batteries—(i) In general. To establish a compliant-battery ledger for a calendar year, the qualified manufacturer must determine the number of batteries, with respect to new clean vehicles (as described in section 30D(d) and §1.30D-2(m)) for which the qualified manufacturer anticipates providing a periodic written report during the calendar year, that it knows or reasonably anticipates will be FEOC-compliant, pursuant to the requirements of paragraphs (b) and (c) of this section. The determination is based on the battery components and applicable critical minerals (and associated constituent materials) that are procured or contracted for the calendar year and that are known or reasonably anticipated to be FEOC-compliant battery components or FEOC-compliant applicable critical minerals, as applicable.

(ii) Upfront review. The qualified manufacturer must attest to the number of FEOC-compliant batteries determined under paragraph (d)(2)(i) of this section and provide the basis for the determination, including attestations, certifications and documentation demonstrating compliance with paragraphs (b) and (c) of this section, at the time and in the manner provided in the Internal Revenue Bulletin. The IRS, with analytical assistance from the DOE, will review the attestations, certifications, and documentation. Once the IRS determines that the qualified manufacturer provided the required attestations, certifications, and documentation, the IRS will approve or reject the determined number of FEOC-compliant batteries. The IRS may approve the determined number in whole or part. The approved number is the initial balance in the compliant-battery ledger.

(iii) Decrease or increase to compliant-battery ledger—(A) Once the compliant-battery ledger is established with respect to a calendar year, the qualified manufacturer must determine and take into account any decrease in the number of FEOC-compliant batteries for such calendar year, and any of the prior three calendar years for which the qualified manufacturer had a compliant-battery ledger, within 30 days of discovery. In addition, the qualified manufacturer may determine and take into account any increase in the number of FEOC-compliant batteries. Such determinations, and any supporting attestations, certifications, and documentation, must be provided on a periodic basis, in accordance with paragraph (d)(2)(ii) of this section and the manner provided in the Internal Revenue Bulletin.

(B) The decrease described in paragraph (d)(2)(iii)(A) of this section may decrease the compliant-battery ledger below zero, creating a negative balance in the compliant-battery ledger.

(C) If any decrease described in paragraph (d)(2)(iii)(A) of this section is determined subsequent to the calendar year to which it relates, the decrease must be taken into account in the year in which the change is discovered.

(D) Any remaining balance in the compliant-battery ledger at the end of the calendar year, whether positive or negative, will be included in the compliant-battery ledger for the subsequent calendar year. If a qualified manufacturer has multiple compliant-negative battery accounts, any negative balance will first be included in the compliant-battery ledger for the same model or class of vehicles for the subsequent calendar year. However, if there is no ledger for the same model or class of vehicles in the subsequent calendar year, the IRS can account for such negative balance in the ledger of a different model or class of vehicles of the qualified manufacturer.

(3) Tracking FEOC-compliant batteries. The compliant-battery ledger for a calendar year must be updated to track the qualified manufacturer’s available FEOC-compliant batteries, by reducing the balance in the ledger as the qualified manufacturer submits periodic written reports reporting the vehicle identification numbers (VINs) of new clean vehicles as eligible for the credit under section 30D, at the time and in the manner provided in the Internal Revenue Bulletin. If the balance in the compliant-battery ledger of the qualified manufacturer for a calendar year is zero or less than zero, the qualified manufacturer may not submit additional periodic written reports with respect to section 30D until the number of available FEOC-compliant batteries is increased as described in paragraph (d)(2)(iii)(A) of this section.

(4) Reconciliation of battery estimates. After the end of any calendar year for which a compliant-battery ledger is established, the IRS may require a qualified manufacturer to provide attestations, certifications, and documentation to support the accuracy of the number of the qualified manufacturer’s FEOC-compliant batteries for such calendar year, including with respect to any changes described in paragraph (d)(2)(iii) of this section, at the time and in the manner provided in the Internal Revenue Bulletin.

(e) Rule for 2024--(1) In general. For new clean vehicles that are placed in service after December 31, 2023, and prior to January 1, 2025, the qualified manufacturer must determine whether the battery components contained in vehicles satisfy the requirements of section 30D(d)(7)(B) and whether batteries contained in the vehicle are FEOC-compliant under the rules of paragraphs (b) and (c) of this section. The qualified manufacturer must make an attestation with respect to such determinations at the time and in the manner provided in the Internal Revenue Bulletin. However, for any new clean vehicles for which the qualified manufacturer provides a periodic written report before the date that is 30 days after the date these regulations are finalized, provided that the qualified manufacturer has determined that its supply chains of each battery component with respect such vehicles contain only FEOC-compliant battery components:

(i) For purposes of paragraphs (c)(2) and (3) of this section, the determination of which battery cells or batteries, as applicable, contain FEOC-compliant battery components may be determined without physical tracking;

(ii) For purposes of paragraph (c)(2) of this section, the determination of which batteries contain FEOC-compliant battery cells may be determined without physical tracking (and without the use of a serial number or other identification system); and

(iii) For purposes of paragraph (c)(1) of this section, the determination of which vehicles contain FEOC-compliant batteries may be determined, without physical tracking (and without the use of a serial number or other identification system).

(2) Determination. The determination that a qualified manufacturer’s supply chains of each battery component contain only FEOC-compliant battery components may be made with respect to specific models or classes of vehicles.

(f) Inaccurate attestations, certifications or documentation—(1) In general. If the IRS determines, with analytical assistance from the DOE and after review of the attestations, certification and documentation described in paragraph (d) of this section, that a qualified manufacturer has provided attestations, certifications, or documentation that contain inaccurate information, it may take appropriate action as described in paragraphs (f)(2) and (3) of this section. Such action would affect vehicles and qualified manufacturers on a prospective basis.

(2) Inadvertence. If the IRS determines that the attestations, certifications or documentation for a specific new clean vehicle contain errors due to inadvertence, the following may be required:

(i) The qualified manufacturer may cure the errors identified, including by a decrease in the compliant-battery ledger as described in paragraph (d)(2)(iii) of this section. If the qualified manufacturer has multiple compliant-battery ledgers, the IRS may determine which ledger is to be decreased.

(ii) If the errors are not cured, in the case of a new clean vehicle that has not been placed in service but for which the qualified manufacturer has submitted a periodic written report certifying compliance with the requirement of section 30D(d), such vehicle is no longer considered a new clean vehicle eligible for the section 30D credit.

(iii) If the errors are not cured, in the case of a new clean vehicle that has not been placed in service and for which the qualified manufacturer has not submitted a periodic written report certifying compliance with the requirement of section 30D(d), the qualified manufacturer may not submit such periodic written report.

(iv) If the errors are not cured, in the case of a new clean vehicle that has been placed in service, the IRS may require a decrease in the qualified manufacturer’s compliant-battery ledger as described in paragraph (d)(2)(iii) of this section. If the qualified manufacturer has multiple compliant-battery ledgers, the IRS may determine which ledger is to be decreased.

(3) Intentional disregard or fraud. If the IRS determines that a qualified manufacturer intentionally disregarded attestation, certification, or documentation requirements or reported information fraudulently or with intentional disregard, the following may be required:

(i) All vehicles of the qualified manufacturer that have not been placed in service may no longer be considered new clean vehicles eligible for the section 30D credit.

(ii) The IRS may terminate the written agreement between the IRS and the manufacturer, thereby terminating the manufacturer’s status as a qualified manufacturer as described in §1.30D-2(l). The manufacturer would be required to submit a new written agreement to reestablish qualified manufacturer status at the time and in the manner provided in the Internal Revenue Bulletin.

(g) Examples. The following examples illustrate the rules under paragraphs (b) through (d) of this section:

(1) Example 1: In general—(i) Facts. M is a manufacturer of new clean vehicles and batteries. M also manufactures or assembles battery cells at its own battery cell production facility. M manufactures a line of new clean vehicles that it anticipates will be placed in service in calendar year 2025. Each vehicle contains one battery, and each battery contains 1,000 battery cells. All battery cells are produced at the same battery cell production facility. The battery cells are not manufactured or assembled by a FEOC. Each battery cell contains 10 mass of battery component A. M has procured or is under contract to procure 10,000,000 mass of battery component A for the battery cell production facility, of which 6,000,000 mass is from supplier 1 and 4,000,000 mass is from supplier 2.

(ii) Analysis. (A) Under paragraph (b) of this section, M must conduct due diligence on all battery components and applicable critical minerals (and associated constituent materials) that are contained in the battery to determine whether such components or minerals are FEOC-compliant.

(B) Under paragraph (c)(4) of this section, M must first determine whether the battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant. From its due diligence, M determines that, of the 10,000,000 mass of battery component A, the 6,000,000 mass from supplier 1 is FEOC-compliant while the 4,000,000 mass from supplier 2 is not FEOC-compliant. M determines that all other battery components and applicable critical minerals (and associated constituent materials) of the battery cell are FEOC-compliant, that the battery cell is not manufactured or assembled by a FEOC, and that all battery components (excluding components of the battery cell) of the battery are FEOC-compliant.

(C) Under paragraph (c)(3) of this section, M must determine which battery cells are FEOC-compliant through the physical tracking of the 6,000,000 mass of FEOC-compliant battery component A to determine which 600,000 (6,000,000/10) battery cells are FEOC-compliant. Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 600,000 FEOC-compliant battery cells to 600 (600,000/1,000) specific batteries.

(D) Under paragraph (d)(1) of this section, a compliant-battery ledger must be established for calendar year 2025. For purposes of paragraph (d)(2)(i) of this section, M determines that it will manufacture 600 batteries for calendar year 2025 that are FEOC-compliant. Under paragraph (d)(2)(ii) of this section, M attests to the 600 FEOC-compliant batteries and provides the basis for the determination, including attestations, certifications, and documentation demonstrating compliance with paragraphs (b) and (c) of this section. Once the IRS, with analytical assistance from the DOE, approves the number, a compliant-battery ledger is established with a balance of 600 FEOC-compliant batteries.

(E) M manufactures 100 vehicles that it anticipates will be placed in service in 2025, for which it provides periodic written reports providing the VINs of the vehicles and indicating that such vehicles qualify for the section 30D credit. Under paragraph (d)(3) of this section, the compliant-battery ledger is updated to track the number of FEOC-compliant batteries. The number of batteries contained in the compliant-battery ledger is reduced from 600 to 500. Assuming all of the other requirements of section 30D and the regulations thereunder are met, the 100 vehicles are new clean vehicles that qualify for purposes of section 30D.

(2) Example 2: Rules for third-party suppliers—(i) Facts. The facts are the same as example 1, except that M contracts with BM, a battery manufacturer, for the provision of batteries, and BM contracts with BCS, a battery cell supplier that operates a battery cell production facility, for the provision of battery cells.

(ii) Analysis. Under paragraph (c)(5) of this section, BCS may make the determination in paragraphs (c)(2) through (4) of this section, provided that M, BM and BCS perform due diligence as described in paragraph (b) of this section. In addition, BM and BCS must provide M with information sufficient to establish a basis for the determinations under paragraphs (c)(2) through (4) of this section, including information related to due diligence. Finally, BM and BCS must be contractually required to provide the required information to M, and must also be required to inform the qualified manufacturer of any change in supply chains that affects the determinations of FEOC compliance under paragraphs (c)(2) and (4) of this section. The contractual requirement may be satisfied if BM and BCS each have the contractual obligation to M. Alternatively, it may be satisfied if BCS has a contractual obligation to BM and BM, in turn, has a contractual obligation to M.

(3) Example 3: Applicable critical minerals—(i) Facts. The facts are the same as example 1. In addition, each battery cell contains 20 kilograms (kgs) of applicable critical mineral Z contained in a constituent material. M has procured or is under contract to 20,000,000 kgs of Z for the battery cell production facility, of which 4,000,000 kgs are from supplier 3 and 16,000,000 kgs are from supplier 4.

(ii) Analysis. The analysis is the same as in example 1. In addition, from its due diligence, M determines that of the 20,000,000 kg of applicable critical mineral Z, the 4,000,000 kg from supplier 3 is FEOC-compliant while the 16,000,000 kg from supplier 4 is not FEOC-compliant. Under paragraph (c)(3) of this section, M may determine which battery cells are FEOC-compliant through the physical tracking of the 4,000,000 kg of FEOC-compliant applicable critical mineral Z to 200,000 (4,000,000/20) of the battery cells that also contain battery component A, in order to determine which 200,000 battery cells are FEOC-compliant. Alternatively, M may determine which 200,000 battery cells are FEOC-compliant through an allocation of applicable critical mineral Z (but not battery component A) to battery cells, without physical tracking, under paragraph (c)(3)(ii) of this section. Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 200,000 FEOC-compliant battery cells to 200 (200,000/1,000) specific batteries.

(4) Example 4: Comprehensive example—(i) Facts. M is a manufacturer of new clean vehicles and batteries. M also manufactures or assembles battery cells at its own battery cell production facility. M manufactures a line of new clean vehicles. Each vehicle contains one battery. All battery cells are produced at the same battery cell production facility. The battery cells are not manufactured or assembled by a FEOC. Each battery contains 1,000 NMC 811 battery cells. M anticipates manufacturing 1,000,000 such battery cells for a line of new clean vehicles that it anticipates will be placed in service in calendar year 2025.

(A) Each battery cell contains 1 cathode electrode, 1 anode electrode, 1 separator, and 1 liquid electrolyte. Thus, M procures 1,000,000 of each battery component for the battery cell production facility.

(B) In addition, each NMC 811 cathode incorporates cathode active material (a constituent material) produced using 2.5 kg of applicable critical minerals, consisting of 0.5 kg of lithium hydroxide, 1.6 kg of nickel sulfate, 0.2 kg of cobalt sulfate, and 0.2 kg of manganese sulfate. Thus, M procures 2,500 metric tons (2.5 kg * 1,000,000 / 1,000) of applicable critical minerals for the battery cell production facility, resulting in purchase agreements for 500 metric tons of lithium, 1,600 metric tons of nickel, 200 metric tons of cobalt, and 200 metric tons of manganese.

(ii) Analysis. (A) Under §1.30D-6(b), M must conduct due diligence on all battery components and applicable critical minerals (and associated constituent materials) that are contained in the battery to determine whether such components or minerals are FEOC-compliant.

(B) Under paragraph (c)(4) of this section, M must first determine whether the battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant. From its due diligence M determines that, of the cathode electrodes, 600,000 are not manufactured by a FEOC and are therefore FEOC-compliant; 400,000 are manufactured by a FEOC and are therefore non-compliant. Of the critical minerals that M has procured, M determines that 250 metric tons of lithium hydroxide, 1,200 metric tons of nickel sulfate, and all of the cobalt sulfate and manganese sulfate are FEOC-compliant. All other battery components and applicable critical minerals of the battery cells are FEOC-compliant.

(C) Under paragraph (c)(3) of this section, M must determine which battery cells are FEOC-compliant through the physical tracking of battery components. M may determine which battery cells are FEOC-compliant through the physical tracking of applicable critical minerals. Alternatively, M may determine which battery cells are FEOC-compliant through an allocation of applicable critical minerals (and associated constituent materials) but not battery components.

(D) Under an allocation-based determination, M has procured 500 metric tons of lithium hydroxide incorporated into a constituent material for the battery cell production facility, of which 50 percent (250 / 500 metric tons) is FEOC-compliant. M has procured 1,600 metric tons of nickel sulfate incorporated into a constituent material for the battery cell production facility, of which 75 percent (1,200 / 1,600 metric tons) is FEOC-compliant. Since the lithium hydroxide is the least compliant applicable critical mineral or component, M allocates the FEOC-compliant lithium hydroxide mass to 50 percent or 500,000 (50 percent * 1,000,000) of the total battery cells, and to battery cells that contain FEOC-compliant cathode electrodes and have been allocated FEOC-compliant nickel sulfate. Under paragraph (c)(2)(ii)(E) of this section, the quantity of FEOC-compliant battery cells is limited by the applicable critical mineral (lithium hydroxide) that has the lowest percentage (50 percent) of FEOC-compliant supply.

(E) Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 500,000 FEOC-compliant battery cells to 500 (500,000/1,000) specific batteries.

(F) Under paragraph (d)(1) of this section, a compliant-battery ledger must be established for calendar year 2025. For purposes of paragraph (d)(2)(i) of this section, M determines that it will manufacture 500 batteries for calendar year 2025 that are FEOC-compliant. Under paragraph (d)(2)(ii) of this section, M attests to the 500 FEOC-compliant batteries and provides the basis for the determination, including attestations, certifications, and documentation demonstrating compliance with paragraphs (b) and (c) of this section. Once the IRS, with analytical assistance from the DOE, has approved the number, a compliant-battery ledger is established with a balance of 500 FEOC-compliant batteries.

(h) Severability. The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agency’s intention that the remaining provisions will continue in effect.

(i) Applicability date. This section applies to new clean vehicles placed in service after December 31, 2023.

Douglas W. O’Donnell, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register December 1, 2023, 8:45 a.m., and published in the issue of the Federal Register for December 4, 2023, 88 FR 84098)