Tax Court Rules on New Secure 2.0 Limits for IRA-Related Penalties

News March 06, 2024 at 04:17 PM
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What You Need To Know

  • Secure 2.0 established a six-year statute of limitations on the 6% excess IRA contribution penalty and a three-year SOL on penalties for missed RMDs.
  • A petitioner appealed an $8.4 million penalty he had racked up over 11 years after a rollover he made was determined to be ineligible.
  • The tax court found that the new SOLs were not retroactive, leaving the petitioner on the hook for the full amount.
RMD on wooden blocks

A recent tax court decision found that the new six-year statute of limitations on the 6% excess IRA contribution penalty is not retroactive, according to Sarah Brenner, director of retirement education at Ed Slott & Co.

The time limit, along with a three-year statute of limitations on penalties for missed required minimum distributions, were established by the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act, Brenner wrote Tuesday in a blog post.

In Couturier v. Commissioner, the tax court ruled on Feb. 28 "that the SOL for the excess contribution penalty should NOT be applied retroactively," Brenner states, and thus the petitioner was still on the hook for a multimillion-dollar penalty.

The case, Brenner stated, "arose from a last-ditch appeal by Clair Couturier who had previously been found to have owed $8.4 million in excess contribution penalties after he attempted to roll over $26 million in plan funds he received in a buyout package."

A 'Ton of Problems'

In separate comments to ThinkAdvisor Wednesday, Brenner relayed that the Couturier case "involved a large rollover from a plan that had a ton of problems."

Ultimately, the IRS "determined that about $25 million in funds were ineligible for rollover," Brenner explained. "When ineligible dollars are rolled over to an IRA, that creates an excess contribution in the IRA. This is actually one of the more common ways an excess contribution can happen and that surprises people!"

Couturier, who did the rollover, "was subsequently hit with a 6% excise tax (penalty) for each of 11 years, resulting in a total excise tax of $8,476,705," Brenner said. "Yikes!"

IRS Form 5329

Prior to Secure 2.0, the statute of limitations for both penalties "was not considered to start to run" until IRS Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, was filed, Brenner explains.

If Form 5329 was not filed, Brenner writes, "the IRS could have potentially assessed penalties at any time, even years into the future, and gone all the way back to the first year when any excess contribution or missed RMD was made."

In Secure 2.0, Congress said the new SOL for both penalties was "effective upon enactment," which was Dec. 29, 2022.

"But the new law was not clear on whether the new SOL applied only for years on or after 2022 or also applied retroactively for years prior to 2022," Brenner states. "The IRS has not issued any guidance on this."

Brenner warns, however, that "this case has already been appealed multiple times, so it is possible that this is not the final word here."

While there were two previous appeals, the latest one involving Couturier "is the most interesting because it involves the new statute of limitations on excess contributions from Secure 2.0," Brenner relays.

While Couturier could appeal yet again and the Tax Court decision wasn't unanimous, Brenner continued, "this ruling stands as a caution to any advisors who may have believed that excess contributions from many years prior (before SECURE 2.0) could now just be ignored due to the new statute of limitations."

Further, while the new Secure 2.0 statute of limitations for missed RMD penalties was not at issue in Couturier case, "that statute of limitations has the same effective date as the statute of limitations for the excess contribution penalty," Brenner explained in the email. "So, this new ruling would certainly seem to indicate that the statute of limitations for the missed RMD penalty is also not retroactive."

Brenner added: "Those who missed RMDs in years prior to Secure 2.0 would likely still be on the hook for penalties. This is more reason to act now and take those long ago missed RMDs and ask the IRS to waive any penalties."

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