On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 20221 (the “Act”) into law. After passing the House of Representatives along party lines (51-50), the Act was passed with Vice President Kamala Harris casting the tie-breaking vote.

Often referred to as a “slimmed-down” Build Back Better Act, this Act primarily addresses health care, climate change, and corporate taxation. The Act also impacts retirement plans.

Compliance Snapshot

  • For certain large corporations, the Act assesses an additional minimum tax of 15% on “book income,” further defined below. However, there are some complexities when calculating this amount when considering the assets and income of 401(k) plans.
  • Additionally, the Act imposes a 1% excise tax on corporate stock repurchases if the stock repurchase is not contributed to a 401(k) plan.

Additional Minimum Tax on Corporate “Book Income”

The Act imposes an additional minimum tax of 15% on corporate “book income,” or more technically, on the “adjusted financial statement income” (“AFSI”) of corporate taxpayers with more than $1 billion in income.

When determining the AFSI, corporations (other than S-corporations, regulated investment companies and real estate investment trusts) must satisfy the “average annual adjusted financial statement income test,” often referred to as the “book income test.” A company meets this test if its annual adjusted financial statement income for the three previous taxable years exceeds $1 billion.

For this test, “adjusted financial statement income” means the company’s net income or loss reflected on the company’s financial statement for any given tax year.

For example, to determine if a company meets the book income test, a company in 2023 would calculate its average annual adjusted financial statement income for a three-year period – running from 2020 to 2022 to determine if it exceeds the $1 billion threshold.

If the company does exceed the $1 billion threshold, then the company would be subject to the additional minimum tax of 15% for tax years on and after December 31, 2022.

This provision potentially sweeps qualified retirement plan asset and income changes into the calculation of “book income,” if not properly excluded when calculating the AFSI.

This means that:

  • Any associated retirement plan expenses should not be included when computing AFSI, and When calculating the AFSI amount, employers should reduce the overall AFSI amount by any allowable employer retirement plan deductions for 401(k) contributions or other plan-related expenses.

However, if these 401(k) assets legally revert back to the employer (such as after a 401(k) plan termination) and those amounts are taken into corporate income, then those amounts must be included in the AFSI calculation.

Additional Tax on Corporate Stock Repurchases

The Act also addresses corporate stock repurchases, placing a 1% excise tax on the fair market value of any repurchase occurring after December 31, 2022. The Act defines a “repurchase” by referencing Internal Revenue Code Section 3172, which states that stock is considered redeemed (or repurchased) by the company if the company acquires stock from its shareholders in exchange for property.

So, for example, a company repurchases its stock when it buys the stock back from its shareholders for cash. As such, the 1% excise tax would apply to this transaction under the Act.

However, if a company contributes the repurchased stock to an employer-sponsored retirement plan, such as a 401(k) plan, then the excise tax would not apply.

What Employers Need to Know

  • Large corporations must understand how to calculate “book income,” keeping in mind how to exclude certain 401(k) plan expense and deductions.
  • Corporations with stock should be aware that the repurchase of such company stock will incur a 1% excise tax if the stock repurchase is not contributed to a 401(k) plan.

Additional Resources

  1. The Inflation Reduction Act of 2022, H.R. 5376 – 117th Congress (2021-2022). https://www.congress.gov/bill/117th-congress/house-bill/5376/text
  2. 26 U.S.C. Section 317. https://www.govinfo.gov/content/pkg/USCODE-2010-title26/pdf/USCODE-2010-title26-subtitleA-chap1-subchapC-partI-subpartC-sec318.pdf
  3. The Inflation Reduction Act of 2022, H.R. 5376 – 117th Congress (2021-2022). https://www.congress.gov/bill/117th-congress/house-bill/5376/text
  4. 26 U.S.C. Section 317. https://www.govinfo.gov/content/pkg/USCODE-2010-title26/pdf/USCODE-2010-title26-subtitleA-chap1-subchapC-partI-subpartC-sec318.pdf

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).

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Jenny Kiesewetter — Jenny is a Retirement Plan Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline retirement plan compliance. In her free time, Jenny enjoys spending time with her friends and family, traveling, live music, and dining out.