The Internal Revenue Service today issued IRS Notice 2023-75, setting out the limits on benefits and contributions for 2024. As expected, the limits rose, but not as steeply as last year. Maximum deferrals under a 401(k) or 403(b) plan rose from $22,500 to $23,000, while maximum benefits under a defined benefit plan rose from $265,000 to $275,000.
The Social Security Administration today issued a News Release announcing that the Social Security wage base will rise from $160,200 in 2023 to $168,600 in 2024. In addition, based on the issuance of the CPI-U for September 2023 we have been able to project section 415 and several other IRS limits for 2024.
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.
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.
The Comparison of 457(b) Plans, 401(k) Plans, 403(b) Plans, and Deemed IRAs chart has now been updated to reflect recent developments, including:
- 2023 limits on contributions and benefits
- Changes in the Employee Plans Compliance Resolution System (EPCRS)
- Changes in the IRS determination letter program for 401(k) plans
- Addition of an IRS determination letter program for individually designed 403(b) plans
- The IRS opinion letter program for pre-approved 403(b) plans
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.
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.
A new article, Section 403(b) Plan Design and Compliance, discusses the rules that apply when eligible tax-exempt organizations establish tax-sheltered annuities, custodial accounts, or retirement income accounts, as described in Section 403(b) of the Internal Revenue Code (403(b) plans).
This article addresses the following topics:
- 403(b) Plan Overview
- Eligible Employers and Employees
- ERISA Coverage of 403(b) Plans
- Qualification Requirements
- 403(b) Plan Contributions
- 403(b) Plan Distributions
- Implementation and Operation
- Correcting 403(b) Plan Errors
- Terminating 403(b) Plans
- EP Subcommittee Report: 403(b) Plan Issues and Recommendations
- Advantages and Disadvantages of 403(b) Plans
In March 2017, the Internal Revenue Service (IRS) began issuing advisory and opinion letters to the first preapproved retirement programs described in Internal Revenue Code (I.R.C.) § 403(b) (403(b) plans). A new article, Pre-Approved 403(b) Plans, discusses preapproved 403(b) plans, including their advantages, legal pitfalls, and other issues that an eligible employer may consider when determining whether to convert its existing 403(b) plan into a preapproved plan.
The major topics are:
- What Is a 403(b) Plan?
- What Is a Preapproved 403(b) Plan?
- What Are the Advantages of a Preapproved 403(b) Plan?
- What Are the Legal Pitfalls of a Preapproved 403(b) Plan?
- What Operational Issues Can Arise for a Preapproved Plan?
- What Practical Issues Can Arise for a Preapproved Plan?
- When Should an Employer Adopt a Preapproved 403(b) Plan?
- Can the Employer Cure Past Plan Issues by Adopting a Preapproved 403(b) Plan?
- What Should an Employer Do If It Did Not Comply with the Written Plan Document Requirement in the Past?
The IRS maintains pre-approved plan programs (1) for retirement plans described in I.R.C. § 401(a) (qualified plans), and (2) for annuity contracts or custodial accounts described in I.R.C. § 403(b) (403(b) plans). A new chart shows what types of plans are and are not eligible to use the pre-approved plan program.