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IRS Announces 2023 Employee Benefit Plan Limits

by Jeffrey Holdvogt and Jacob Mattinson | Oct 21, 2022 | Employee Benefits, Employment, Fiduciary and Investment Issues, Retirement Plans

The Internal Revenue Service (IRS) and the Social Security Administration announced the cost-of-living adjustments to the applicable dollar limits on various employer-sponsored retirement and welfare plans and the Social Security wage base for 2023. The table below compares the applicable dollar limits for certain employee benefit programs and the Social Security wage base for 2022 and 2023.*

RETIREMENT PLAN LIMITS (guidance link) 2022 Δ 2023 Annual compensation limit $305,000 ↑ $330,000 401(k), 403(b) & 457(b) before-tax contributions $20,500 ↑ $22,500 Catch-up contributions (if age 50 or older) $6,500 ↑ $7,500 Highly compensated employee threshold $135,000 ↑ $150,000 Key employee officer compensation threshold $200,000 ↑ $215,000 Defined benefit plan annual benefit and accrual limit $245,000 ↑ $265,000 Defined contribution plan annual contribution limit $61,000 ↑ $66,000 Employee stock ownership plan (ESOP) limit for determining the lengthening of the general five-year distribution period $245,000 ↑ $265,000 ESOP limit for determining the maximum account balance subject to the general five-year distribution period $1,230,000 ↑ $1,330,000 HEALTH AND WELFARE PLAN LIMITS (guidance links here and here) 2022 Δ 2023 Health Flexible Spending Accounts Maximum salary reduction limit $2,850 ↑ $3,050 Health FSA Carryover Limit $570 ↑ $610 Dependent Care Flexible Spending Accounts± If employee is married and filing a joint return or if the employee is a single parent $5,000 = $5,000 In employee is married but filing separately $2,500 = $2,500 Excepted Benefit Health Reimbursement Arrangements (EBHRAs) $1,800 ↑ $1,950± Qualified Transportation Fringe Benefit and Qualified Parking (monthly limit) $280 ↑ $300 High Deductible Health Plans (HDHP) and Health Savings Accounts (HSA) HDHP – Maximum annual out-of-pocket limit (excluding premiums): Self-only coverage $7,050 ↑ $7,500 Family coverage $14,100 ↑ $15,000 HDHP – Minimum annual deductible: Self-only coverage $1,400 ↑ $1,500 Family coverage $2,800 ↑ $3,000 HSA – Annual contribution limit: Self-only coverage $3,650 ↑ $3,850 Family coverage $7,300 ↑ $7,750 Catch-up contributions (age 55 or older)± $1,000 ═ $1,000 SOCIAL SECURITY WAGE BASE (guidance link) 2022 Δ 2023 Social Security Maximum Taxable Earnings $147,000 ↑ $160,200

Plan sponsors should update payroll and plan administration systems for the 2023 cost-of-living adjustments and should incorporate the new limits in relevant participant communications, like open enrollment materials and summary plan descriptions.

For further information about applying the new employee benefit plan limits for 2023, contact your regular McDermott lawyer.

* The dollar limits are generally applied on a calendar year basis; however, certain dollar limits are applied on a plan-year, tax-year, or limitation-year basis.

± Not indexed for cost-of-living adjustments, with the exception of limited guidance issued for certain years.

IRS Announces Cost-of-Living Adjustments for Health and Welfare Plans

by Jacob Mattinson and Jeffrey Holdvogt | Oct 19, 2022 | Employee Benefits, Fiduciary and Investment Issues, Health and Welfare Plans

On October 18, 2022, the Internal Revenue Service (IRS) announced cost-of-living adjustments to the applicable dollar limits for certain account-based health and welfare plans (see Rev. Proc. 2022-38). The maximum salary reduction limit for a health flexible spending account (Health FSA) increased to $3,050 for 2023 (from $2,850 in 2022), and the Health FSA carryover limit for plans that have adopted that feature increased to $610 for 2023 (from $570 in 2022). In addition to these increases, the monthly limit for contributions to a qualified transportation fringe benefit and qualified parking program increased to $300 for 2023 (from $280 in 2022). The IRS previously announced (see our article here) cost-of-living adjustments to the applicable dollar limits for health savings accounts (HSAs), high-deductible health plans (HDHPs) and excepted benefit health reimbursement arrangements (HRAs) for 2023 for which we also saw substantial increases.

The Social Security Administration also recently announced that the maximum amount of earnings subject to the Social Security tax will increase to $160,200 for 2023 (from $147,000), resulting in a larger chunk of income being subject to the Social Security tax.

The IRS has yet to announce the 2023 cost-of-living adjustments for retirement plans.

These announcements are timely, if not late, given that many employers are already in the middle of open enrollment for 2023. Plan sponsors should act quickly to update payroll and plan administration, along with open enrollment communications, to account for the changes. For further information about applying the new employee benefit plan limits for 2023, contact one of the authors or your regular McDermott lawyer.

Homework and Deadlines Matter: New IRS Pre-Audit Compliance Program for Retirement Plans

by Marchan Clark, Jeffrey Holdvogt and Diane Morgenthaler | Jun 16, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

Retirement plan sponsors should be aware of a new Internal Revenue Service (IRS) pilot program, which permits plan sponsors to conduct a pre-examination “check-up” of retirement plan administration before the IRS begins a plan examination. As part of the program, the IRS will send a letter notifying a plan sponsor that its retirement plan has been selected for an upcoming examination and give the plan sponsor 90 days to identify and voluntarily correct any compliance issues that may be self-corrected. Failure to respond by the 90-day deadline will result in an examination. Retirement plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best way to respond to the IRS notice.

PRE-EXAMINATION PILOT PROGRAM

The IRS pre-examination compliance pilot program gives plan sponsors a chance to correct certain errors before an examination begins. If a plan sponsor identifies errors, then the plan sponsor may be able to self-correct using the procedures set forth in the IRS Employee Plans Compliance Resolution System (EPCRS) program, and the plan sponsor may notify the IRS of its corrective actions. If mistakes are not eligible for self-correction, the plan sponsor may request a closing agreement. With a closing agreement under the pilot program, the IRS will apply the Voluntary Correction Program (VCP) fee structure to determine the sanctions amount rather than the Audit CAP Program fees, which are unpredictable and typically higher. The IRS will review the plan sponsor’s corrective actions and determine whether it agrees that the plan sponsor appropriately corrected the mistakes. The IRS will then determine whether to issue a closing letter or to conduct a limited or full scope audit. The pilot program begins in June 2022.

It’s not clear what factors the IRS will consider when determining whether to conduct a limited or full scope audit following a plan sponsor’s response. However, it stands to reason that a plan sponsor’s efforts at good faith compliance with the correction requirements may serve to limit the scope because typically the IRS wishes to promote self-correction efforts. It’s also not clear whether the 90-day pre-examination period will apply to all retirement plan audits or only to those randomly selected to be part of the pilot program.

NEXT STEPS FOR PLAN SPONSORS

Plan sponsors who receive a pre-examination notice should immediately begin working with their lawyers and other advisors to determine the best ways to respond to the IRS notice. If you receive an initial letter or have questions about the IRS compliance and correction programs, please contact your McDermott lawyer or the authors listed below.

When Are Cryptocurrencies Appropriate Investments for Retirement Plans and IRAs?

by Brian Tiemann and McDermott Will & Emery | Jun 7, 2022 | Employee Benefits, Fiduciary and Investment Issues, Privacy and Data Security, Retirement Plans

The US Department of Labor (DOL) recently issued guidance for the first time on the investment of retirement plan assets in cryptocurrencies. Compliance Assistance Release No. 2022-01 cautions 401(k) plan fiduciaries to “exercise extreme care” before allowing participants to invest plan assets in cryptocurrencies because cryptocurrencies “present significant risks and challenges to participants’ retirement accounts, including significant risks of fraud, theft, and loss.” In this Intellectual Property & Technology Law Journal article, McDermott Partners Andrea S. Kramer and Brian J. Tiemann outline what retirement plan fiduciaries need to know about cryptocurrency investments in the current market.

Access the article.

The Fiduciary Duties of 457(b) Plans and How to Mitigate Potential Risks

by Todd Solomon | May 19, 2022 | Employee Benefits, Executive Compensation, Fiduciary and Investment Issues, Retirement Plans

Fiduciaries of 403(b), 401(a) and 457(b) retirement plans have come under increased scrutiny in recent years, in part due to participant lawsuits filed against plan sponsors and the resulting media attention. In this presentation with the 457 Consulting Group, McDermott Partner Todd Solomon discusses the fiduciary duties of plan sponsors and how to mitigate potential risks. The content in these slides applies to governmental 457(b) plans.

Access the slides.

Cryptocurrency for Employee Benefits Lawyers: What You Need to Know

by Andrew Liazos and Brian Tiemann | Apr 14, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

As the popularity of cryptocurrency continues to grow, what do employee benefits lawyers need to know about this emerging investment option? McDermott Partners Andrew Liazos, Andrea Kramer and Brian Tiemann recently offered their perspectives about cryptocurrencies and how they relate to Employee Retirement Income Security Act of 1974 (ERISA) plans, individual retirement accounts (IRAs) and incentive awards in an American Bar Association virtual event.

Access the slides.

Proposed IRS RMD Regulations Present Challenges, Risks for 403(b) Plans

by Teal Trujillo and Todd Solomon | Apr 12, 2022 | Employee Benefits, Employment, Fiduciary and Investment Issues, Retirement Plans

The Internal Revenue Service (IRS) is strategically working to execute the statutory changes that were outlined by the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019. However, the IRS’s efforts to streamline the required minimum distribution (RMD) requirements for Internal Revenue Code (IRC) Section 403(b) plans with Section 401(a) qualified plans, such as 401(k) plans, may have unforeseen challenges and risks.

A proposed rule was published on February 24, 2022, in the Federal Register. The preamble of the rule indicates that the IRS and US Department of the Treasury are considering changes to conform the treatment of Section 403(b) plans more closely with that of Section 401(a) qualified plans for RMDs. Section 403(b) plans are currently treated the same as individual retirement accounts (IRAs) for purposes of applying the RMD rules. As a result, RMDs are not required to be automatically made from Section 403(b) plans like they are from Section 401(a) retirement plans. The IRS’s proposed rule would require any nonprofit organized under IRC Section 501(c)(3) (i.e., hospitals, public schools and churches) with retirement plans to make RMDs going forward.

Though the proposed rule presents the opportunity to simplify and align the treatment of Section 403(b) plans and Section 401(a) qualified plans, it poses administrative difficulties and potential conflicts with state law. Section 403(b) plans can be invested in a variety of funds, including annuity contracts—group and individual contracts—with insurance companies, custodial accounts or retirement income accounts for certain church workers. For individual annuity contracts, this could create a contractual issue. Employers are not a party to individual contracts between plan participants and investment firms, which would limit the ability of employers to compel RMDs. (Note that distributions could still be forced from group annuity contracts between employers and investment firms.) Regardless of the type of annuity contract, every contract will have to be reviewed to ensure it can comply with the proposed rule. To the extent any changes need to be made to these contracts, state-level approval may be required as insurance companies are governed by state law requirements.

In addition, the proposed rule does not take into consideration the effect of the prospective changes on Section 403(b) plans that are exempt from ERISA because of the safe harbor offered by the US Department of Labor (DOL) in 1979 (29 C.F.R. § 2510.3-2(f)). One of the conditions for meeting the safe harbor is that the employer involvement be limited to certain specific activities. If an employer is required to actively negotiate with insurance providers or choose a provider to administer the RMD requirement for participants, it might be violating this restriction and inadvertently subject its program to ERISA. The IRS and DOL will need to coordinate on the impact of this rule in such cases.

The IRS is taking this proposed rule under review and has asked for feedback specifically related to administrative concerns, notable differences in the structure or administration of Section 403(b) plans compared to qualified plans that might affect RMDs, and [...]

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Cryptocurrency for Employee Benefits Lawyers: What You Need to Know

by Andrew Liazos and Brian Tiemann | Feb 3, 2022 | Employee Benefits, Fiduciary and Investment Issues, Retirement Plans

As cryptocurrencies gain popularity, employers are considering how they can be used as part of compensation arrangements and benefit plans to attract and retain talent. McDermott Partners Andrew Liazos, Andrea Kramer and Brian Tiemann recently offered their perspectives about cryptocurrency, Internal Revenue Service (IRS) taxation guidance of convertible virtual currencies and other cryptocurrency-related compensation issues in an American Bar Association virtual event.

Access the event’s slides here.

New IRS Guidance for Tax-Qualified Pension Plans with Rehired Retirees Due to COVID-19

by Diane Morgenthaler | Dec 9, 2021 | Employee Benefits, Employment, Fiduciary and Investment Issues, Retirement Plans

The Internal Revenue Service (IRS) recently updated its guidance for retiree distributions under a defined benefit plan. Specifically, the new IRS guidance addresses rehires following a bona fide retirement due to COVID-19.

As a background, a defined benefit plan may make distributions to a retiree only in the case of a “bona fide retirement,” which is a facts and circumstances analysis. In prior rulings, the IRS indicated that retiree distributions without a bona fide retirement can cause a defined benefit plan to lose its tax-qualified status, where both all contributions and earnings become immediately taxable.

According to the IRS, a rehire due to COVID-19-related “unforeseen circumstances” generally would not disqualify an individual’s prior retirement from being considered a bona fide retirement under a defined benefit plan. However, the IRS cautioned that such a rehire cannot include any prearrangement to rehire the individual prior to the individual’s retirement. Such a prearrangement still yields a retirement that is not “bona fide.”

Finally, although the IRS issued this guidance in question and answer format primarily for defined benefit plans, plan sponsors should be able to apply the same rationale to distributions from defined contribution plans. In short, the new IRS guidance provides welcome relief to plan sponsors and employers who are looking to rehire retirees in a tight job market.

IRS Announces 2022 Employee Benefit Plan Limits

by Jacob Mattinson and Brian Tiemann | Nov 10, 2021 | Employee Benefits, Employment, Health and Welfare Plans, Retirement Plans

The Internal Revenue Service (IRS) recently announced the cost-of-living adjustments to the applicable dollar limits for various employer-sponsored retirement and welfare plans for 2022. Most of the dollar limits currently in effect for 2021 will increase.

View the adjustments here.

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