Pension & Welfare Plan Limits Cost-Of-Living Adjustments For 2023

 

PENSION & WELFARE PLAN LIMITS
COST-OF-LIVING ADJUSTMENTS FOR 2023

Charles C. Shulman, Esq.  

Teaneck, NJ

 201-357-0577 212-380-3834

cshulman@ebeclaw.com

 

2023 retirement and welfare plan limits are increased to take into account cost-of-living adjustments.

Pension Plan and Related Limits	2022	2023
Pre-tax elective deferral maximum under IRC § 401(k), 403(b), and 457(b) plans (IRC §§ 402(g)(3) & 457 (e)(15))	$20,500	$22,500
Age 50 and older “catch-up” for 401(k), 403(b), and governmental 457(b) plans and SEPs (IRC § 414(v)(2)(B)(i))	$6,500	$7,500
Annual compensation limit under IRC §§ 401(a)(17), 404(l) and 408(k)	$305,000	$330,000
401(a)(17) annual comp. limit - governmental plans grandfathered on 7-1-1993	$450,000	$490,000
Annual benefit limit for defined benefit plans under IRC § 415(b)	$245,000	$265,000
Annual contribution limit for defined contribution plans under IRC § 415(c)	$61,000	$66,000
Highly compensated employee threshold for nondiscrimination testing in the following year under IRC § 414(q)(1)(B)	$135,000	$150,000
Key employee threshold for officers for top heavy plan under IRC § 416(i)(1)(A)(i)	$200,000	$215,000
ESOP account balance for five and one year distributions under IRC § 409(o)(1)(C)(ii)	$1,230,000 / $245,000	$1,330,000 / $265,000
Limit on premiums paid for QLACs (qualified longevity annuity contracts) under Treas. Reg. § 1.401(a)(9)-6 (adopted 2014)	$145,000	$155,000
Minimum earnings level to qualify for SEP under IRC § 408(k)	$650	$750
SIMPLE plan elective deferral limit under IRC § 408(p)(2)(E)	$14,000	$15,500
SIMPLE 401(k) or IRA age 50 catch-up (IRC § 414(v)(2)(B)(ii))	$3,000	$3,500
Basic/Roth IRA contribution limit under IRC §§ 219(b)(5)(A) & 408A. (With age 50 $1,000 IRA catchups that do not have cost-of-living adjustments)	$6,000	$6,500
AGI (adjusted gross income) phase-out of deduction for IRA where participant or spouse contributing to IRA also participates in employer-sponsored retirement plan (IRC § 219(g)). For married joint filers – For single filers –	$109,000 to $129,000   $68,000 to $78,000	$116,000 to $136,000   $73,000 to $83,000
AGI phase-out of deduction for IRA for married persons filing jointly where participant's spouse who is contributing to IRA also participates in employer-sponsored retirement plan (IRC § 219(g)(7))	$204,000 to $214,000	$218,000 to $228,000
AGI Phase-out deduction for contributions to Roth IRA for married persons filing jointly (IRC § 408A(c)(3)(B)). For married joint filers – For single filers –	$204,000 to $214,000 $129,000 to $144,000	$218,00 to $228,000 $138,000 to $153,000
Health Savings Account contribution limits (single and family)	$3,650 and $7,300	$3,850 and $7,750
PBGC guaranteed benefit (annual single life annuity beginning at age 65)	$74,454.60 ($6,204.55 a month)	$81,000 ($6,750 a month)
PBGC flat-rate premium per participant for a single-employer plan	$88	$96
PBGC variable-rate premium per $1,000 for single-employer plans of Unfunded Vested Benefits  – With a Per Participant Cap for variable-rate premium of –	$48 $598	$52 $652
PBGC premium for multiemployer plan per participant	$32	$35
Taxable wage base subject to FICA tax	$147,000	$155,100
DOL Penalties per day -- Failure to file annual report (Form 5500) - ERISA § 502(c)(2) (originally $1,000 a day) -- Failure to provide blackout notices or notices of diversification rights – ERISA § 502(c)(7) (originally $100 a day)	$24,000 $152	TBA TBA
Health FSA (flexible spending account) limit – IRC § 125(i)	$2,850	$3,050
Health FSA carryover amount	$570	$610
HRA maximum employer contribution Treas. Reg. § 54.9831-1(c)(3)(viii)(B)	$1,800	$1,950
HSA (health savings account) (i) Individual limit (ii) Family limit – IRC § 223(b)(2)	$3,650 $7,300	$3,850 $7,750
HDHP minimum deductibles (i) Self-only (ii) Family – IRC § 223(c)	$1,400 $2,800	$1,500 $3,000
HDHP maximum out-of-pocket amounts for (i) self and (ii) family – IRC § 223(c)	$7,050 $14,100	$7,500 $15,000
Qualified transportation fringe benefit and parking program – IRC § 132(f)(2)	$280	$300
Social Security taxable wage base	$147,000	$160,200
Social Security tax up to SS wage base (SS and Medicare taxed both on employer & employee or double for self-employed).	6.2%	6.2%
Medicare Tax no limit  (Plus additional 0.9% Medicare tax for wages in excess of $250,000 for joint filers, $200,000 for singles after 2012)	1.45%	1.45%
Social Security cost of living increase	5.9%	8.7%

                                                                                                   

 

Actuarial Assumptions for Withdrawal Liability

 Withdrawal Liability and Actuarial Best Estimate Assumptions – Recent Case-Law

Charles C. Shulman, Esq.
Teaneck, NJ
 201-357-0577 212-380-3834
cshulman@ebeclaw.com

Actuarial assumptions for ERISA withdrawal liability must use the actuary’s best estimate of anticipated experience under the plan. Plan actuaries have divergent ways of measuring unfunded vested benefits for purposes of a participating employer withdrawal from a multiemployer pension plan, sometimes using: (i) ongoing minimum funding assumptions of the plan (a higher rate yields lower withdrawal liability), (ii) termination assumptions (e.g., insurance company annuity close-out rates) (a lower rate yields greater withdrawal liability) or (iii) a blend of the two rates (such as the Segal blend).  Withdrawal liability often causes disproportionate liability on companies that remain in the multiemployer plan after most other employers have withdrawn, the "last man standing" problem, particularly if ongoing minimum funding assumptions have been used for earlier withdrawals.  A 2022 D.C. Circuit Court case held that ongoing funding rates should have been used.  A 2021 Sixth Circuit case held that termination assumptions should be used.  Two 2018 cases held that a blended rate would be appropriate.  This issue is likely to continue through the courts.  Also, the PBGC may be issuing guidance on this issue.

Under ERISA, withdrawal liability is imposed on an employer that withdraws from an underfunded multiemployer pension plans based on its allocated share of the plan's unfunded vested benefits.  ERISA § 4201.  Often, withdrawal liability results in disproportionate liability on companies that remain in the union plan after most other employers have withdrawn—the last man standing problem.

Actuary's Best Estimate of Anticipated Experience of the Plan – ERISA § 4213.  Multiemployer plan withdrawal liability is based on the multiemployer plan's unfunded vested benefits (UVBs) which are the value of vested benefits minus the value of plan assets.  ERISA § 4211.  Under ERISA § 4213, the actuarial assumptions used by the plan actuary to calculate withdrawal liability must be reasonable in the aggregate, based on the experience of the plan and reasonable expectations, and are the actuary's "best estimate" of anticipated experience under the plan.  Once the estimated benefits payments and administrative costs are determined, the actuaries must determine the present value of future liabilities, which are a determination of how much the plan needs in assets today in order to pay those liabilities in the future.  ERISA § 4213(b) provides that in determining the unfunded vested benefits of a pension fund for purposes of determining an employer’s withdrawal liability, the plan actuary may (i) rely on the most recent complete actuarial valuation used for purposes of  IRC § 412 and reasonable estimates for the interim years of the unfunded vested benefits, and (ii) in the absence of complete data, rely on the data available or on data secured by a sampling which can reasonably be expected to be representative of the status of the entire plan.    

Methods Used by Plan Actuaries.  In practice, plan actuaries have divergent ways of measuring unfunded vested benefits.  When there is a withdrawal liability of one participating employer and the fund is ongoing, it would appear reasonable to use ongoing plan minimum funding assumptions or other assumption based on expectation of the plan returns, pension plan minimum funding requirements are typically determined at a higher interest rate, thus yielding a lower withdrawal liability and is more favorable to withdrawing employers.  (Of course, if a multiemployer plan is terminating (a mass termination), the PBGC termination rate assumptions would typically be used.) On the other hand, actuaries sometimes use termination assumptions or insurance company annuity close-out rates, which uses a lower interest rate, thus yielding a higher withdrawal liability and is more favorable to the multiemployer pension fund. 

The plan funding requirements are typically determined at a higher interest rate, thus yielding a lower withdrawal liability and is more favorable to withdrawing employers.  On the other hand, the annuity close-out rates use a lower interest rate, thus yielding a higher withdrawal liability which and is more favorable to the multiemployer pension fund. 

Using Ongoing Plan Assumptions Leads to Backloading – Last Man Standing Problem. Although a multiemployer plan is generally not terminating in a withdrawal liability case, withdrawal liability is different than funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants.  Using ongoing funding rates would likely have the result of backloading withdrawal liability obligations to be largest for those who withdraw from the fund the latest.  This disproportionate liability on companies that remain in the union plan after most other employers have withdrawn (the last man standing) causes uneven backloading of liabilities.

D.C. Circuit Court 2022 Case – Ongoing Minimum Funding Rates Should have been Considered.  In a 2022 case the D.C.  Circuit court held that where the multiemployer fund actuary used termination interest assumption of 2.7-2.8% (yielding a very high withdrawal liability) even though the actuary was using a 7.5% assumption for funding purposes, the valuation assumptions must represent the actuary’s best estimate of anticipated experience under the plan, and therefore the withdrawal liability calculations were not reasonable.  United Mine Workers of America 1974 Pension Plan v. Energy West Mining Company, 39 F.4th 730 (D.C.  Cir. 2022) (a multiemployer pension fund brought action under ERISA against a withdrawing employer seeking to enforce arbitrator's award upholding the pension fund actuary's calculation of withdrawal liability through use of a risk-free discount rate; the Circuit Court overturned the arbitrator's ruling since the termination assumption used by plan actuary, which was not chosen based on the plan's projected performance, was not reasonable and instead the actuary should have considered the pension funding discount rate assumptions taking into account anticipated projected investment returns as is applicable for pension minimum funding).

Segal Blend.  Some actuaries use the blend of insurance company annuity close-out rates and plan funding assumptions.  For example, the "Segal Blend" method determines a plan's unfunded vested benefits for withdrawal liability based on a blend of (i) the lower insurance company annuity purchase rates used by the PBGC at current market rates; and (ii) the actuary's assumption of future investment returns used for determining the plan funding requirements.  Although the multiemployer plan is generally not terminating in a withdrawal liability case, withdrawal liability is different than funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants.   

Cases Upholding Segal Blend.  Some courts have ruled that blended rates are reasonable, so long as it was the actuary, not the plan's trustees, has chosen to use them.  See, e.g., Manhattan Ford Lincoln Inc. v. UAW Local 259 Pension Fund, 331 F. Supp. 3d 365 (D.N.J. 2018) (arbitrator was not incorrect in allowing the reliance on the Segal Blend as a withdrawal liability is different than merely funding an ongoing plan because it represented, not an ongoing funding relationship, but a one-time transfer of risk from the withdrawing employer to the continuing employers and participants), 2018 WL 10759131 (3d Cir. 2018) (appeal dismissed because parties settled). 

Cases Challenging Segal Blend.  Other cases, however, have held that using a blended rate of the minimum funding interest rate and insurance company annuity close-out rates in a case where the multiemployer plan is not terminated could violate ERISA.  In a 2021 case, Sofco Erectors, Inc. v. Trustees of the Ohio Operating Engineers Pension Fund, 15 F.4th 407 (6th Cir. 2021), the Fund's actuary used a 7.25% growth rate on assets for minimum funding purposes, and only for withdrawal-liability purposes used the Segal Blend taking the interest rate used for minimum-funding purposes (7.25%) and blending it with the PBGC's published interest rates on annuities (2–3%), even though the actuary conceded that the PBGC annuity close-out rates would be what is used in settling up a multiemployer plan.  The court ruled that this blended formula violated ERISA in this case, as using the Segal Blend in an ongoing plan violated ERISA's mandate under ERISA § 4213(a)(1) that the interest rate for withdrawal liability calculations be based on the anticipated experience under the plan). 

Likewise, a 2018 Southern District of New York district court case invalidated the use of the Segal Blend.  New York Times Company v. Newspaper and Mail Delivers’ Publishers Pension Fund, 303 F. Supp. 3d 236 (S.D.N.Y. 2018) (in a withdrawal from an ongoing plan where the minimum funding rate would be the actuary's best estimate, blending with a lower no-risk PBGC bond rates should not be accepted as the anticipated plan experience).

Watch for Future Cases and Future PBGC Guidance.  As shown above, courts are split on whether to use ongoing funding assumptions or termination assumptions or a blend of the two.  This issue is worth following to see how other Circuit Courts or the Supreme Court will rule.  Also, the PBGC has not yet issued regulations or other guidance on what the actuary's best estimate of anticipated experience should be based on, and if the PBGC issues guidance this may change the direction of the courts.

If you have any questions, please contact me at cshulman@ebeclaw.com or 201-357-0577.

Carried Interest Holding Periods

Carried Interest Holding Periods

Charles C. Shulman, Esq.
Teaneck, NJ, 201-357-0577
cshulman@ebeclaw.com

 As discussed in my earlier post on Profits Interest at https://ebeclaw.blogspot.com/2022/03/profits-interests.html , profits interests have become an increasingly popular type of equity-based award if the entity is taxed as a partnership, as they avoid income tax or FICA tax on grant and vesting, and yield long-term capital gains on sale if certain requirements are met. However, in 2017 this was limited in the case of profits interests (carried interest) for professional investors and real estate development for rental or investment to where the holding period is three years. A 2020 legislative proposal in the pending Inflation Reduction Act to increase the holding period for such carried interest from three years to five years and to only begin only once substantially all the partnership interest subject to IRC § 1061 are acquired by the partnership. However, in further negotiations this proposal was taken out of the final bill. 

Pre-2017 Holding Period for Profits Interests – Two Years from Grant and One Year from Vesting. Prior to the enactment of the Tax Cuts & Jobs Act of 2017, generally long-term capital gain treatment for profits interest would require the general one-year holding period requirement (from the date the profits interests are vested). In addition, Rev. Proc. 93-27 would require that the profits interests be held for at least two-years after the date of grant.

Extended Holding Period for Professional Investors and Real Estate Investment to Three Years Under TCJA of 2017. Legislative changes imposed by the Tax Cuts & Jobs Act of 2017 (effective January 1, 2018) enacted a new IRC § 1061, which imposes a three-year holding period (instead of one year for ordinary capital gains) for an "applicable trade or business," if the partnership owns real estate for rental or investments, since IRC § 1061, enacted by the Tax Cuts & Jobs Act of 2017 and effective in 2018, in an effort to clamp down on "carried interest" use of long-term capital gains tax rates for fund managers, provides that "applicable partnership interests" which includes professional investors as well as those developing real estate for rental or investment (IRC § 1061(c)(2)), have an increased holding period for long-term capital gains treatment for three years instead of one year. IRC § 1061(a).

2022 Proposed Legislation to Further Extend Holding Period for Such Carried Interest to Five Years, was Removed from the Bill to Win Approval from Sen. Krysten Sinema. Further legislative changes had been proposed in the Inflation Reduction Act in July 2022, H.R. 5376, as agreed to by Senator Charles Schumer and Senator Joe Manchin to amend IRC § 1061 in the following ways: (i) the holding period for "applicable partnership interests" which, under IRC § 1061(c)(2), includes carried interest for professional investors (e.g., private equity firms and hedge funds) and real estate development for rental or investment, would be increased from three years to five years (except with respect to taxpayers with adjusted gross income of less than $400,000); (ii) the five-year holding period would begin only once substantially all the partnership interest subject to § 1061 are acquired by the partnership; and (iii) the holding period would now apply not just to profits interest but also to other income taxed as long-term capital gains, including qualified dividend income included in net capital gain for purposes of IRC § 1(h)(11), gain from the sale of active business assets under IRC § 1231 and regulated futures contracts subject to IRC § 1256. However, it has now been reported on August 4, 2022 that Democrats are revising their Inflation Reduction Act in order to will approval from Senator Kyrsten Sinema (D. Arizona), which, among other things, would drop the proposed tax increase on carried-interest income. However, the carried interest tax change may appear in future legislation.

If you have any questions, please contact me at cshulman@ebeclaw.com or 201-357-0577.

 

Cryptocurrency – An Imprudent 401(k) Investment?

 Cryptocurrency – An Imprudent 401(k) Investment?

 Charles C. Shulman, Esq.

Teaneck, NJ
201-357-0577
cshulman@ebeclaw.com

CAR No. 2022-01: Presumption of Imprudence on Cryptocurrency for 401(k) Plans. On March 10, 2022, the Department of Labor ("DOL") issued Compliance Assistance Release ("CAR") No. 2022-01, cautioning plan fiduciaries to exercise extreme care before they consider adding a "cryptocurrency" option to a 401(k) plan's investment menu for plan participants, and if they do add the cryptocurrency option, they should be prepared for a possible DOL investigation. CAR No. 2022-01 noted that when a 401(k) plan offers a menu of investment options to plan participants, the responsible fiduciaries have an obligation to ensure the prudence of "each" options on an ongoing basis.[1]

CAR No. 2022-01 cited the recent Supreme Court case of Hughes v. Northwestern University, 142 S.Ct. 737, 742 (2022), which held that even in a participant directed plan where participants choose their investments, plan fiduciaries are required to conduct their own independent evaluation to determine whether "each" investment should be prudently included in the plan's menu of options.

CAR No. 2022-01 states that in this early stage in the history of cryptocurrencies, the DOL has serious concerns about the prudence of a fiduciary's decision to expose 401(k) plan participants to direct investments in cryptocurrencies, or other products whose value is tied to cryptocurrencies, as these are speculative and volatile investments and they present significant risks and challenges to participants' retirement accounts, including significant risks of fraud, theft, and loss, and also raise custodial and recordkeeping concerns. 

DOL Expecting to Investigate Plans that Offer Cryptocurrency – CAR No. 2022-01 noted that the DOL expects to conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments. Plan fiduciaries responsible for overseeing such investment options or allowing such investments through "brokerage windows" should expect to be questioned about how they can square their actions with their duties of prudence and loyalty in light of the risks described above, according to CAR No. 2022-01.[2]

Fidelity April 2022 Introduction of a Bitcoin Fund in its Core Lineup of 401(k) Investments – Less than two months after the issuance of CAR No. 2022-01, on April 26, 2022 Fidelity Investments announced that it is adding a digital asset fund holding Bitcoin to their core investment lineup for 401(k) funds (although it had been available under its brokerage account for a number of years), and if agreed to by employers for their individual plans, participants will be able to invest up to 20 percent or more of their 401(k) contributions in the Bitcoin fund. This is certainly not congruous with CAR No. 2022-01. However, a DOL official commented on May 23, 2022 that in his view retirement plans that are clients of financial institutions marketing cryptocurrency products will not automatically be subjected to a Department of Labor audit. Reported in Bloomberg Daily Labor Report (May 24, 2022).

Lawsuit Alleging DOL Had no Authority to Issue These New Rules without Administrative Rulemaking and Review – On June 2, 2022, the DOL was sued by ForUsAll, Inc., which was the first 401(k) platform to provide access to cryptocurrency, in the District Court in Washington, D.C., alleging that the DOL violated the Administrative Procedure Act by issuing new fiduciary rules in CAR No. 2022-01 without following the correct procedures.[3] Perhaps in response to this litigation and other pushback on CAR No. 2022-01, DOL Secretary Marty Walsh told a House panel on June 14, 2022 that the DOL is looking at potentially going through a rulemaking process on the cryptocurrency industry as a whole. See Bloomberg Daily Labor Report, June 15, 2022.

Surprises in CAR No. 2021 – CAR No. 2022-01 surprised many practitioners for a number of reasons: (i) CAR No. 2022-01 appears extreme in labeling a cryptocurrency fund from amongst other diverse 401(k) funds as having a presumption of "imprudence;" even if cryptocurrency is volatile and speculative, that contributes not only on the downside but also on the upside; (ii) one would have expected that offering, e.g., a Bitcoin fund as part of a wide variety of diversified funds, and limiting the Bitcoin fund to for example not more than 20% of the account balance, as Fidelity did, should NOT be deemed to be imprudent as a rule or giving rise to an audit for that reason alone; (iii) CAR No. 2022-01 also stated that fiduciaries allowing cryptocurrencies in 401(k) plans even if just though "brokerage windows" should expect to be questioned about how they can square their actions with their ERISA fiduciary duties. Many practitioners were surprised with this added statement, because brokerage windows (which have been around for at least 20 years)[4] have been and continue to be offered in many 401(k) plans, and fiduciaries cannot possibly evaluate each trade in the brokerage accounts.[5]

If you have any questions on this or any other matters, please call me know at 201-357-0577.

Charlie

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[1]       DOL EBSA Compliance Assistance Release No. 2022-01 - 401(k) Plan Investments in "Cryptocurrencies" (March 10, 2022), https://tinyurl.com/DOL-2022-01.  

[2]       DOL EBSA Compliance Assistance Release No. 2022-01.

[3]       ForUsAll, Inc. v U.S. Department of Labor and Martin J Walsh Secretary of Labor Complaint, filed with U.S. Dist. Ct. for D.C. (June 2, 2022), resources.forusall.com/Dkt.%20001%20ForUsAll%20Complaint.pdf

[4]           Field Assistance Bulletin No. 2012-02R (July 30, 2012) in FAB No. 39 notes that the DOL does not prohibit the use of a platform or a brokerage window, self-directed brokerage account, or similar plan arrangement in an individual account plan. In 2014 the DOL solicited comments regarding standards for brokerage windows in participant directed account plans, although no regulations were issued to date. On occasion, an employer might have to file a Form S-8 registration statement for employer stock if the stock may be purchased by 401(k) plan participants through a brokerage account window. 

[5]       It is true, though, that some plans have shied away from brokerage windows because of the increased investment risk and the inability to monitor the investments.