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.
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.
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.
A recent CLE webinar guided benefits counsel and advisers on recent rules and regulations in providing fringe benefits to employees and avoiding dangerous and costly issues that arise regarding such benefits including personal liability under ERISA. The panel discussed key considerations in structuring fringe benefits, tax traps, de minimis rules, effective correction procedures and methods to minimize fiduciary risks. The PowerPoint presentation for the portion of the webinar dealing with tax aspects is now available at this link.
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 Tax Cuts and Jobs Act of 2017 made a number of changes affecting the compensation and benefits that governmental, church, and other tax-exempt organizations can provide to their employees. Given the short time between introduction and passage of the Act, it is not surprising that many of the new provisions are unclear in their application. Moreover, some of them may produce unintended consequences for these organizations.
As part of a symposium on “Recent Developments in Benefits/Executive Compensation Affecting Tax Exempt Organizations,” Carol V. Calhoun gave a presentation on the ways in which the Tax Cuts and Jobs Act of 2017 will affect the compensation and benefits of such organizations. A copy of the PowerPoint for her speech can be found at this link.
The recently passed tax bill imposes a 21% excise tax on excess compensation and excess severance benefits of certain executives of nonprofit and governmental employers. The provision has a substantial impact on the compensation and benefits that such organizations can provide for their executives. Moreover, the determination of which employers, and which executives, are covered includes several traps for the unwary.