Employee Benefit Advisor Winter 2023

Employee Benefit Advisor – Shannon & Associates LLP | Kent, WA

2024 Limitations Adjusted (As Provided in Section 415 (D)

Notice 2023-75

Section 415 of the Internal Revenue Code (“Code”) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under section 415. Under section 415(d), the adjustments are to be made under adjustment procedures similar to those used to adjust benefit amounts under section 215(i)(2)(A) of the Social Security Act.

Cost-of-living Adjusted Limits For 2024

Effective January 1, 2024, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) of the Code is increased from $265,000 to $275,000.

For a participant who separated from service before January 1, 2024, the participant’s limitation under a defined benefit plan under section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2023, by 1.0351.

The limitation for defined contribution plans under section 415(c)(1)(A) is increased in 2024 from $66,000 to
$69,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2024 are as follows:

  • The limitation under section 402(g)(1) on the exclusion for elective deferrals described in section 402(g)(3) is increased from $22,500 to $23,000.
  • The annual compensation limit under sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $330,000 to $345,000.
  • The dollar limitation under section 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is increased from $215,000 to $220,000.
  • The dollar amount under section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $1,330,000 to
    $1,380,000, while the dollar amount used to determine the lengthening of the 5-year distribution period
    is increased from $265,000 to $275,000.
  • The limitation used in the definition of “highly compensated employee” under section 414(q)(1)(B) is increased from $150,000 to $155,000.
  • The dollar limitation under section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in section 401(k)(11) or section 408(p) for individuals aged 50 or over remains $7,500. The dollar limitation under section 414(v)(2)(B) (ii) for catch-up contributions to an applicable employer plan described in section 401(k)(11) or section 408(p) for individuals aged 50 or over remains $3,500.
  • The annual compensation limitation under section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under section 401(a)(17) to be taken into account, is increased from $490,000 to $505,000.
  • The compensation amount under section 408(k)(2)(C) regarding simplified employee pensions remains $750.
  • The limitation under section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $15,500 to $16,000.
  • The limitation on the aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer under section 457(e) (11)(B)(ii) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $7,000 to $7,500.
  • The limitation on deferrals under section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $22,500 to $23,000.
  • The limitation under section 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan remains $60,000.
  • The compensation amount under § 1.61-21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $130,000 to $135,000. The compensation amount under § 1.61-21(f)(5)(iii) is increased from $265,000 to $275,000.
  • The dollar limitation on premiums paid for a qualifying longevity annuity contract under § 1.401(a)(9)-6, A-17(b)(2)(i), which was increased to $200,000 pursuant to section 202 of the SECURE 2.0 Act of 2022 (“SECURE 2.0 Act”1) with respect to contracts purchased or received in an exchange on or after December 29, 2022 remains $200,000.

The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under section 432(e)(9)(H)(v)(III)(aa) of the Code is adjusted using the cost-of-living adjustment provided under section 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under section 432(e)(9)(H)(v)(III)(aa) is increased from $1,256,000,000 to $1,369,000,000.

The Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2024 are as follows:

  • The adjusted gross income limitation under section 25B(b)(1)(A) for determining the retirement savings contributions credit for married taxpayers filing a joint return is increased from $43,500 to $46,000; the limitation under section 25B(b)(1)(B) is increased from $47,500 to $50,000; and the limitation under sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $73,000 to $76,500.
  • The adjusted gross income limitation under section 25B(b)(1)(A) for determining the retirement savings contributions credit for taxpayers filing as head of household is increased from $32,625 to $34,500; the limitation under section 25B(b)(1)(B) is increased from $35,625 to $37,500; and the limitation under sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $54,750 to $57,375.
  • The adjusted gross income limitation under section 25B(b)(1)(A) for determining the retirement savings contributions credit for all other taxpayers is increased from$21,750 to $23,000; the limitation under section 25B(b)(1)(B) is increased from $23,750 to $25,000; and the limitation under sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $36,500 to $38,250.
  • The deductible amount under section 219(b)(5)(A), which limits the amount of an individual’s deductible qualified retirement contributions for a taxable year, is increased from $6,500 to $7,000. The increase in the deductible amount pursuant to section 219(b)(5)(B)(ii) for individuals who have attained age 50 before the close of the taxable year remains $1,000.
  • The applicable dollar amount under section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $116,000 to $123,000. The applicable dollar amount under section 219(g)(3) (B)(ii) for all other taxpayers who are active participants (other than married taxpayers filing separate returns) is increased from $73,000 to $77,000. If an individual or the individual’s spouse is an active participant, the applicable dollar amount under section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $218,000 to $230,000.
  • Accordingly, under section 219(g)(2)(A), the deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified plan (or another retirement plan specified in section 219(g)(5)) and have adjusted gross incomes (as defined in section 219(g)(3)(A)) between $77,000 and $87,000, increased from between $73,000 and $83,000. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $123,000 and $143,000, increased from between $116,000 and $136,000. For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $230,000 and $240,000, increased from between $218,000 and $228,000. For a married individual filing a separate return who is an active participant, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The adjusted gross income limitation under section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $218,000 to $230,000. The adjusted gross income limitation under section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $138,000 to $146,000. The applicable dollar amount under section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.
  • Accordingly, under section 408A(c)(3)(A), the adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is between $230,000 and $240,000 for married couples filing jointly, increased from between $218,000 and $228,000. For singles and heads of household, the income phase-out range is between $146,000 and $161,000, increased from between $138,000 and $153,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.
  • The aggregate amount of qualified charitable distributions that are not includible in gross income under section 408(d)(8)(A) is increased from $100,000 to $105,000. The amount of qualified charitable distributions made directly to a split-interest entity that are not includible in gross income under section 408(d)(8)(F) pursuant to a one-time election is increased from $50,000 to $53,000.

Drafting Information

The principal author of this notice is Tom Morgan of the Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at (202) 317-6700 (not a toll-free call).

Changes Coming to Form 5500 for 2023

Changes are coming to the Form 5500 for the 2023 plan year. These changes are part of the Form 5500 Modernization Initiative that was announced back in 2016.

  • The biggest change will be for defined contributions plans in how “large plan status” will be determined which drives the requirement to have a plan audit. In the past, the large plan status has been determined by the number of eligible participants at the start of the plan year. Starting in 2023 plan participants with account balances will be used as the methodology instead of eligible participants. This change is expected to reduce the number of large plans that will require an audit by over 8,000. It may make sense in some situations to continue doing the plan audit, in particular if you are a growing company and anticipate attaining large plan status in the near future.
  • There will be additional compliance questions on the Form 5500 for 2023. The IRS will gather information about the method used for coverage and nondiscrimination testing the plan performed. They will also be requesting information on the Favorable IRS Opinion Letter for the plan document.
  • The DOL has an ongoing goal of transparency and improved reporting of fees and expenses. For Schedule H, there will be additional administrative expenses categories for 2023.
  • Beginning January 1, 2024, plans will have the option to electronically or paper file their Form 5558 Extension.

Please contact us with any questions you have regarding these changes.

Proposed IRS Regulations for 401(K) Plans with Long-term, Part-time Employees

The IRS has issued proposed regulations that would amend the rules for Code Sec. 401(k) plans to provide guidance on long-term, part-time employees and their ability to participate in 401(k) plans.

These proposed regulations reflect changes made by the SECURE Act and the SECURE 2.0 Act, which relate to the participation of these employees in qualified cash or deferred arrangements (CODAs). Prior to these acts, CODAs were not permitted to require employees to complete a period of service beyond what was allowed under Code Sec. 410(a)(1). In general, the period permitted under Code Sec. 410(a)(1) was the later of attainment of age 21 or completion of a 12-month period during which the employee has at least 1,000 hours of service. The SECURE Act changed eligibility coverage for 401(k) plans to allow those who had worked at least 500 hours in three consecutive years to participate under a plan’s salary deferral provision – with service required to be counted beginning with plan years on or after January 1, 2021. SECURE 2.0 shortened the period to two years effective for 2025 and later plan years, and expanded applicability to ERISA-covered 403(b) plans allowing salary deferrals.

The proposed regulations are set to apply to plan years beginning on or after January 1, 2024, but taxpayers can rely on them before the final regulations are published. The proposal includes:

  • A definition of long-term, part-time employee, including eligibility to participate and the effect of various service crediting rules
  • Participation requirements including determination of 12-month periods and eligibility conditions not based on age and service
  • Years of vesting service and treatment of former long-term, part-time employees
  • Applicability of nonelective and matching contributions and coordination with employer elections
  • Employer elections regarding nondiscrimination coverage and top-heavy rules

Note that these are proposed rules, and the IRS has extended a comment period that closes on January 26, 2024.

Please feel free to reach out to us if you have any questions or would like further clarification.

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