SECURE 2.0 Roth Catch-up Requirement Notice – Effect on Governmental Plans
(Posted on August 28, 2023 by )


On August 25, 2023, the IRS issued Notice 2023-62, dealing with the SECURE 2.0 requirement that any age 50 catch-up contributions by an employee with prior-year FICA wages over $145,000 (to be indexed with inflation) be made on a Roth basis, rather than a pre-tax basis. The guidance had two effects:

  • The requirement that catch-up contributions for individuals over age 50 with prior-year FICA wages over $145,000 be made in the form of Roth contributions was delayed until 2026.
  • The language of the statute had suggested that no catch-up contributions could be made at all beginning in 2024. The IRS has confirmed that it will continue to treat catch-up contributions as permissible.

While the guidance applies to 401(k) plans, most governmental entities are not permitted to have 401(k) plans. However, it also affects governmental 457(b) plans, along with 403(b) plans for those governmental entities that are permitted to have 403(b) plans (governmental instrumentalities that also have tax-exempt status under section 501(c)(3), and public schools and universities). It is particularly significant for governmental entities which maintain both 403(b) and 457(b) plans, since an employee is able to double the usual amount of catch-ups by making a catch-up election with respect to both plans.

The IRS also announced its intention to issue further guidance in three areas:

  • In determining whether an individual has $145,000 in FICA wages, wages exempt from FICA will not be counted. Among other things, this would mean that state and local government entities not subject to Social Security would not have to comply with the new rules at all.
  • For a participant in a multiple employer plan with compensation from two or more participating employers, the determination of whether the Roth catch-up rule applies would be made on an employer-by-employer basis. So for example, in a statewide plan, compensation that an individual received from one governmental employer would not have to be combined with that from another in applying the $145,000 limit.
  • When the new rules become effective in 2026, a plan may treat a pre-tax catch-up election for a participant subject to the Roth catch-up rule as though it were a Roth catch-up election, without the need to obtain an updated election from the participant. For example, suppose that a participant over age 50 with compensation of $145,000 elects to make a contribution of 25% of compensation. The maximum for 2023 (without catch-ups) would be $22,500. Assuming this limit were still in effect in 2026 (it rises with inflation), the employer would not need to get a separate election in order to have an additional $7,500 taken from the participant’s compensation and contributed on a Roth basis.

While these three points would be helpful to impacted plan sponsors, they are not yet the IRS’s formal position.

General information on the effect of the notice (for nongovernmental as well as governmental plans) can be found at this link. Information on the amount of regular and catch-up contributions can be found at this link.

Fifth Edition of the Governmental Plans Answer Book Published
(Posted on December 12, 2022 by )


The Fifth Edition of the Governmental Plans Answer Book has now been published. The Governmental Plans Answer Book is the only full-length treatise on the law governing the retirement plans that federal, state, and local governments maintain for their employees. The law has changed a lot since the Fourth Edition was published in 2017, and the new edition has been updated to reflect them.

The Fifth Edition of Governmental Plans Answer Book gives subscribers the most relevant, current, and practice-oriented answers to the issues faced daily by plan administrators, attorneys, actuaries, consultants, accountants, and other pension professionals as they navigate the requirements and procedures involved in administering their plans. It examines the following significant changes and case law in this area: Read more.

2023 IRS Benefits & Contributions Limits Announced
(Posted on November 7, 2022 by )


On November 7, 2022, the IRS issued IRS Notice 2022-55, 2022–45 I.R.B. 443, announcing the changes in pensions and benefits limits for 2023. With inflation higher this year than in prior years, the changes were substantial. The maximum limit on deferrals under 401(k), 403(b), and 457(b) plans rose from $20,500 to $22,500; the maximum annual additions (primarily to defined contribution plans) rose from $61,000 to $66,000; and the annual limit on compensation taken into account rose from $305,000 to $330,000. Most other limits also rose significantly.

A chart showing details, and limits from 1996 to 2023, can be found at this link.

 

 
 

New PowerPoint: New IRS Correction Rules for Retirement Plans
(Posted on October 13, 2021 by )


A recent CLE webinar provided employee benefits counsel, plan sponsors, and administrators guidance on identifying critical retirement plan issues and correction methods. The panel discussed new IRS self-correction rules and procedures and the primary focus areas of IRS and DOL examinations and audits.

The PowerPoint presentation for the portion of the webinar giving a step by step guide on correcting some common 401(k) plan issues is now available at this link.

IRS Revenue Procedure Eases Correction Procedures
(Posted on July 16, 2021 by )


The IRS has just issued a new revenue procedure, Rev. Proc. 2021-30, which limits the number of plans that have to make IRS filings under the Voluntary Correction Program (“VCP”) in order to correct past errors.

The guidance expands the Self-Correction Program (“SCP”), which does not require an IRS filing, in two ways:

  • Significant operational failures: The correction period for self-correction of significant operational failures is extended from two to three years.
  • Retroactive plan amendments: The revenue procedure removes the requirement that all participants in the plan benefit from the retroactive amendment, making it easier to use retroactive plan amendments to correct operational failures under SCP.

The revenue procedure also adds new options with regard to correction of overpayments.
Read more.

New Benefits Guide: Government and Tax-Exempt Organizations
(Posted on December 30, 2020 by )


Carol V. Calhoun has written a Benefits Guide entitled “Government and Tax-Exempt Organizations” for Bloomberg Law. The Bloomberg Law Benefits Guide is intended to be a resource for non-benefits practitioners that is easy to understand and explains complex topics in a straightforward way. Ms. Calhoun’s guide covers the types of plans maintained by governmental and tax-exempt organizations, determination of whether a plan is governmental, legal requirements and restrictions, and correction methods in case of errors in administration. The Benefits Guide is available to Bloomberg subscribers, or a copy of Ms. Calhoun’s chapter is available at this link.

457 Answer Book, Eighth Edition, Published
(Posted on June 22, 2020 by )


The Eighth Edition of the 457 Answer Book was published on June 5, 2020. Carol V. Calhoun is the author of Chapter 1, History of 457 Plans, and Chapter 14, Miscellaneous Issues.

The 457 Answer Book is an in-depth resource that provides answers to the questions that tax-exempt organizations, state and local governments, their accountants, tax and legal advisors, 457 administrators, product providers, and investment counselors need to know.

Guiding readers through all aspects of 457 plan administration — from installation through the audit process — the 457 Answer Book describes: the duties and responsibilities of those performing the functions; the required legal, accounting, and administrative tasks; checklists that facilitate control of each administrative process; and suggested forms.

The 457 Answer Book also provides:

  • The history and legal origins of the plan
  • Design and drafting standards
  • Suggested administrative procedures
  • Data processing and payroll considerations
  • Operations and fund flow mechanics
  • Marketing and sales suggestions
  • And much more

More information on the book can be found at this link.

403(b) and 457(b) Plan Compliance Challenges PowerPoint Now Available
(Posted on August 27, 2019 by )


Sections 403(b) and 457(b) plan compliance presents significant challenges for employee benefits counsel and plan administrators. Sponsors of 403(b) and 457(b) plans must consider the impact of recent regulatory and litigation developments to ensure strict compliance to avoid potential claims.

As part of a Strafford webinar on “403(b) and 457(b) Plan Compliance Challenges,” Carol V. Calhoun gave a presentation on ways in which new developments create challenges for tax-exempt and governmental organizations which sponsor such plans. A copy of the PowerPoint for her speech can be found at this link.