Can ChatGPT be Your ERISA Counsel?

Is ChatGPT sufficiently reliable to provide advice on employee benefits matters? Not yet, but ChatGPT and generative Artificial Intelligence may likely be useful tools for employee benefits attorneys in the future.[1]

As it is late March, we asked ChatGPT 3.5 to solve a common issue: an individual made deferrals above the Internal Revenue Code § 402(g) limit (although typically these are referred to as “excess deferrals,” in the ChatGPT 3.5 reply it uses both “excess contribution” or “excess deferral” interchangeably. In the Faegre comments, we use the term “excess deferral.”). As background, the Internal Revenue Code limits the amount of employee deferrals that can be made within a participant’s taxable year (almost always the calendar year). In 2023, that limit was $22,500. An individual who participates in more than one 401(k)/403(b) plan is responsible for monitoring whether they exceed the limit with respect to all plans in which the individual participates.

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Roth Employer Contributions

On December 20, 2023, the IRS issued Notice 2024-2, which provides question-and-answer guidance on various aspects of the SECURE 2.0 Act. This post focuses on the ability to make employer contributions (match or nonelective) as Roth contributions under SECURE 2.0 Act Section 604.  (For an overview of SECURE 2.0 for defined contribution plan sponsors, click here.)

Overview of SECURE 2.0 Language on Employer Roth Contributions

Section 604 SECURE 2.0 Act permits employers to make employer contributions, both matching and nonelective contributions, as Roth contributions to a 401(k), 403(b), or 457(b) plan. To be designated as a Roth contribution, the employer contribution must be fully vested (nonforfeitable) when made. The Roth contribution is not excluded from gross income. The ability to make Roth employer contributions was effective with respect to employer contributions made after December 29, 2022, the date of enactment of the SECURE 2.0 Act.

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SECURE Act 2.0: What Defined Contribution Plan Sponsors Need to Know

Congress included “SECURE 2.0 of 2022” in the Consolidated Appropriations Act, 2023, the $1.7-trillion omnibus spending bill, which was signed by President Biden on December 29, 2022 (the date of enactment). Secure 2.0 is a follow-up to the Setting Every Community Up for Retirement Enhancement Act passed in 2019, now known as “SECURE 1.0.”

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IRS Announces 2022 Cost-of-Living Adjustments for Retirement Plans

The IRS recently announced the 2022 cost-of-living adjustments to various benefit and contribution limits applicable to retirement plans. Generally, the IRS increased the applicable limits for 2022, although certain limits remained unchanged. The following limits apply to retirement plans in 2022:

  • The limit on elective deferrals under 401(k), 403(b), and eligible 457(b) plans increased to $20,500.
  • The limit on additional catch-up contributions by participants age 50 or older remains unchanged at $6,500. This means that the maximum amount of elective deferral contributions for those participants in 2022 is $27,000.
  • The Internal Revenue Code (“Code”) Section 415 annual addition limit is increased to $61,000 for 401(k) and other defined contribution plans, and the annual benefit limit is increased to $245,000 for defined benefit plans.
  • The limit on the annual compensation that can be taken into account by qualified plans under Code Section 417 is increased to $305,000.
  • The dollar level threshold for becoming a highly compensated employee under Code Section 414(q) increased to $135,000 (which based on the look-back rule is applicable for HCE determinations in 2023 based on compensation in 2022).
  • The dollar level threshold for becoming a “key employee” in a top-heavy plan under Code Section 416(i)(1) is increased to $200,000.

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COVID-19 Layoffs Could Trigger Partial Plan Terminations

Employers considering layoffs during this period of economic uncertainty should be aware that extensive layoffs could inadvertently cause a partial termination of their company’s qualified retirement plan. Employers should monitor their employee turnover rate and consult with benefits counsel to determine the potential impact on their retirement plans.

Partial plan terminations can occur where a significant change to the plan or a significant event affects the rights of employees to vest in their plan benefits, such as termination of a large group of employees.

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