IRS Issues Notice 2024-35 to Provide Relief for Certain RMDs in 2024

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IRS Issues Notice 2024-35 to Provide Relief for Certain RMDs in 2024

On April 16, 2024, the Internal Revenue Service (IRS) issued Notice 2024-35, which provides relief regarding certain Required Minimum Distributions (RMDs) for 2024. The relief is applicable to certain RMDs under Internal Revenue Code section 401(a)(9) in 2021, 2022 and 2023, and is also being extended to certain RMDs in 2024.

Specifically, the Notice provides that if certain requirements are met, a plan will not fail to be qualified for failing to make a specified RMD in 2024, and a taxpayer will not be assessed an excise tax for failing to take the RMD. The relief provided in Notice 2024-35 relates to the required distribution changes under the SECURE Act of 2019. It extends prior relief provided in Notice 2023-54 and Notice 2022-53 for another year.

Essentially, the Notice defines a “specified RMD” identically as previously defined in Notice 2023-54 as follows:

“any distribution that, under the interpretation included in the proposed regulations, would be required to be made pursuant to Section 401(a)(9) in 2024 under a defined contribution plan or IRA that is subject to the rules of Section 401(a)(9)(H) for the year in which the employee (or designated beneficiary) died if that payment would be required to be made to:

  • a designated beneficiary of an employee under the plan (or IRA owner) if: (1) the employee (or IRA owner) died in 2020, 2021, 2022, or 2023, and on or after the employee’s (or IRA owner’s) required beginning date, and (2) the designated beneficiary is not using the lifetime or life expectancy payments exception under Section 401(a)(9)(B)(iii); or
  • a beneficiary of an eligible designated beneficiary (including a designated beneficiary who is treated as an eligible designated beneficiary pursuant to Section 401(b)(5) of the SECURE Act) if: [1] the eligible designated beneficiary died in 2020, 2021, 2022, or 2023, and [2] that eligible designated beneficiary was using the lifetime or life expectancy payments exception under Section 401(a)(9)(B)(iii) of the Code.”

In addition, the notice indicated that the Department of the Treasury and the Internal Revenue Service (IRS) intend to issue final RMD regulations that would apply for purposes of determining RMDs for calendar years beginning on or after January 1, 2025.

The Notice is available here.

American Academy of Actuaries Publishes Issue Brief on ‘Surplus’ Considerations for Public Pension Plans

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American Academy of Actuaries Publishes Issue Brief on ‘Surplus’ Considerations for Public Pension Plans

On April 11, 2024, the American Academy of Actuaries (AAA) published its issue brief, ‘Surplus’ Considerations for Public Pension Plans. The brief was authored by the AAA’s Public Plans Committee and presents the Committee’s perspective regarding a public pension plan’s “surplus” and considerations for plans that are 100% funded or approaching a full funding level in the future. 

The key highlights include:

  • The brief suggests public pension plans use caution when using the term “surplus” or other similar terms such as “overfunded” to define a plan with a funded ratio over 100%;
  • A “surplus” management strategy should be developed and integrated into the plan’s funding policy; and
  • A “surplus” management strategy may include various elements that may be intended to preserve a plan’s current “surplus” and/or decrease the risk of future funded status and contribution volatility, such as benefit improvements, contribution adjustments and risk reduction strategies.

The brief concludes, “Historically, “surplus” often has been used to enhance benefits and reduce contributions. Funding policies should start by considering using “surplus” to manage or reduce risks to the plan. Balancing alternative uses of “surplus” may result in more measured contribution reductions, a more thorough analysis of the risks related to permanent benefit enhancements, and, ultimately, more stable funding of public pension plans.”

Among other members, the AAA’s Public Plans Committee includes Judith Kermans, President, CEO and Senior Consultant at GRS as well as Brian Murphy, a retired Senior Consultant and past President of GRS. 

The brief is available here.

CRS Releases Report on Investment Issues for Pensions and Individual Retirement Accounts (IRAs)

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CRS Releases Report on Investment Issues for Pensions and Individual Retirement Accounts (IRAs)

On April 3, 2024, the Congressional Research Service (CRS) released its report, Pensions and Individual Retirement Accounts (IRAs): Investment Issues. The report summarizes pension investment issues for state and local pensions, federal pensions, private sector pension plans, and IRAs. For each type of pension or retirement accounts, the report explains relevant federal authorities, federal oversight and administrative issues.

​In addition, the report identifies selected pension investment issues, which have been involved in recent legislative or regulatory activity. The intent is to provide information to help Congress understand existing legislative proposals and develop new legislative proposals. The report provides background information on pension investment issues and presents differences across sectors and types of plans. The report states, “Understanding the relevant authorities and administration of different types of pension plans and retirement accounts is crucial to untangling policy proposals to address pension investment issues.”

As an example, the report indicates that state and local pension plans are generally governed by state laws, contract law and/or state constitutions. They are also exempt from many (but not all) requirements under the Employee Retirement Income Security Act of 1974 (ERISA), which covers most private sector pension plans. According to the report, lawmakers have been considering policy proposals to address pension investment issues for state and local pensions related to environmental, social, and governance (ESG) investing, alternative investments, geopolitical considerations, and diverse asset managers.

The report is available here.

MissionSquare Studies Views of Younger Public Service Employees by Occupation

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MissionSquare Studies Views of Younger Public Service Employees by Occupation

Recently, the Center for State and Local Government Excellence at ICMA-RC or SLGE) released its issue brief, 35 and Under in the Public Sector: Comparisons by Industry. The Institute researched the views of public sector employees under age 35 by occupation. It studied employees in various occupations including: education, health care, public safety, among others. The brief compared the views of employees related to finances, employer benefits, morale, job satisfaction and long-term career plans.

According to the brief, education workers expressed the highest levels of financial concerns and public safety workers were the most likely to make their jobs a career.

Some of the key findings include:  

  • Of the respondents, only 26% of K-12 education workers felt they were financially secure as compared to 49% of public safety workers;
  • About 21% of the respondents with occupations in public works, utilities and transportation were very stressed in the last six months with those working in K-12 education feeling the highest level of stress at 42%; and
  • About 58% of public safety workers indicated they were interested in remaining in the public sector until they retire; whereas, only 32% working in public works, utilities, and transportation occupations were likely to spend their entire career in public service.

According to the Institute, “Millennials and GenZ education workers report the highest levels of stress and financial concern, while higher salaries were the top priority across all professions when employees are considering a job change.” 

Further information is available here. 

NASRA Updates Brief on Public Pension Plan Investment Return Assumptions

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NASRA Updates Brief on Public Pension Plan Investment Return Assumptions

On March 20, 2024, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, Public Pension Plan Investment Return Assumptions. NASRA examined public pension investment return data and found that recent changes in economic and financial conditions have caused many public plans to reexamine their investment return assumptions.  

Since fiscal year (FY) 2010, all of the 131 plans measured have reduced their assumed rate of return with 94 of those plans (72%) doing so since FY 2020. For the 131 plans, the average return assumption is 6.91% in FY 2023 down from 7.33% in FY 2018. The brief also provides a table showing the investment return assumptions that are in use, or announced for use, by the 131 plans included in the Public Fund Survey as of March 2024.   

In addition, the brief also discusses how the investment return assumption is established and evaluated. Then, it compares these assumptions with public funds’ actual investment experience and the challenging investment environment for public retirement systems.   

The brief emphasizes that a governmental plan’s investment return assumption is focused on the long-term, typically an investment horizon of 30 to 50 years. Investment returns are important because investment earnings account for a majority of the revenues received by most public pension plans. According to the brief, since 1992, public pension funds have accrued an estimated $10.4 trillion in revenue. Of that amount, investment earnings account for $6.5 trillion (63%), employer contributions account for $2.7 trillion (26%), and employee contributions account for $1.1 trillion (11%).   

Typically, a 25-basis point reduction in the investment return assumption will increase the cost of a plan that has a cost-of-living adjustment (COLA) by 3% of pay (i.e., a reduction from 7.5% to 7.25% will increase the cost from 10% to 13% of pay). For a plan without a COLA, the return assumption will increase the cost by 2% of pay.  

The brief concludes, “In terms of its effect on a pension plan’s finances and funding levels, the investment return assumption is the single most consequential of all actuarial assumptions. The sustained period of historically low interest rates, which lasted for over a decade beginning in 2009, combined with lower projected returns for most asset classes, caused many public pension plans to reduce their long-term expected investment returns.”   

In addition, the brief contains two appendices with: 1) the current nominal investment return assumption used in the 131 public pension plans in NASRA’s dataset; and 2) the entity responsible for setting the investment return assumption for each plan. 

The brief is available here. 

CRS Reports on Social Security Coverage of State and Local Government Employees 

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CRS Reports on Social Security Coverage of State and Local Government Employees

On March 19, 2024, the Congressional Research Service (CRS) released its report, Social Security Coverage of State and Local Government Employees. The report focuses on Social Security coverage provided under current law for state and local government employees and also discusses issues related to proposals for mandatory coverage for newly hired governmental employees.

Over the years, there have been many proposals to make Social Security coverage mandatory for newly hired state and local government employees. As of 2021, there were nearly 21.9 million state and local government employees with about 15.9 million (73%) that participated in Social Security; however, about 5.9 million (27%) of these workers are not covered by Social Security through their government employment. The majority of noncovered state and local government employees work at the local level with the largest share being police officers, firefighters and teachers.

Every state has a combination of state and local government employees with and without Social Security coverage. As a result, every state would be affected by a Social Security coverage mandate. The impact on state and local plans and the net effect on total benefits would vary across plans as well as among individuals. 

Overall, in 2021, eight states accounted for about 76% of noncovered state and local government employees (California, Colorado, Georgia, Illinois, Louisiana, Massachusetts, Ohio and Texas) and three states accounted for about 49% of noncovered state and local government employees (California, Ohio and Texas). 

The report is available here.

CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

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CRS Updates Report on Social Security’s Windfall Elimination Provision (WEP) and Government Pension Offset (GPO)

On February 28, 2024, the Congressional Research Service (CRS) published its updated report, Social Security: The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). The report provides an overview of the WEP and the GPO, which are two separate provisions that reduce regular Social Security benefits for workers and their eligible family members if the worker receives (or is entitled to) a pension based on earnings from employment not covered by Social Security. 

The WEP affects Social Security benefits paid to individuals who earn Social Security benefits from Social Security covered employment, but who also earn pension benefits from state or local government employment not covered by Social Security.  In these cases, Social Security benefits are lowered by the WEP.  

Social Security benefits are designed to replace a larger percent of pre-retirement income for lower-paid workers than for higher-paid workers. This is done by: 1) calculating an employee’s average indexed monthly earnings (AIME) from employment covered by Social Security; and 2) calculating the employee’s primary insurance amount (PIA) using a formula that applies a higher replacement percentage to lower earnings than to higher earnings. 

In 2024, the PIA formula is: 

  • 90% for the first $1,174 of AIME; plus
  • 32% of AIME over $1,174 and through $7,078 (if any); plus
  • 15% of AIME over $7,078 (if any).    

Before the WEP was established, for those who split their careers between covered and non-covered Social Security employment, the PIA formula resulted in a higher proportion of covered earnings being subject to the 90% rate. This resulted in what some perceived as a “windfall.” In 1983, Congress passed the WEP to eliminate this perceived advantage by lowering the 90% rate to 40% for those subject to the WEP. As of December 2023, Social Security Administration data indicated that about 2.1 million individuals (or about 3% of all Social Security beneficiaries) were affected by the WEP, with about 2.0 million of those being retired-worker beneficiaries (or about 4% of the entire retired-worker beneficiary population).  

Under the GPO, an individual’s Social Security spousal or survivor’s benefit is reduced (“offset”) by two-thirds of the pension benefits received from federal, state, or local government employment that is not covered by Social Security. According to the report, about 746,000 Social Security beneficiaries (or about 1% of all beneficiaries) had spousal or survivor benefits reduced by the GPO as of December 2023. Of those, 51% were spouses and 49% were widows and widowers, with about 68% of all GPO-affected beneficiaries had their benefits fully offset and about 32% had their benefits partially offset.  

The report is available here.

NIRS Updates Report on Americans’ Views on Retirement Insecurity in 2024

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NIRS Updates Report on Americans’ Views on Retirement Insecurity in 2024

Recently, the National Institute on Retirement Security (NIRS) released its report, Retirement Insecurity 2024: Americans’ Views of Retirement. The report findings are based on a national opinion survey of working-age Americans on numerous retirement security issues related to restoring the “American Dream” of retirement. The survey was conducted by Greenwald Research in October 2023 with a total of over 1,200 individuals aged 25 and over. 

The key findings include: 

  • ​About 75% of survey respondents expressed strong support for pensions to provide financial security in retirement with 83% expressing that all workers should have a pension to be independent and self-reliant in retirement;
  • 79% of respondents feel there is a retirement crisis, up from 67% in 2020 while 55% are concerned about financial security and 73% are concerned about inflation;
  • 87% of Americans are highly supportive of Social Security regardless of the status of federal budget deficits while 52% support expanding the program and 90% reported that Social Security’s funding shortfall should be a priority for the next President and Congress; and
  • 87% of Americans are concerned about rising costs while 80% are worried about increasing costs of long-term nursing care in retirement. 

The report is available here.

NASRA Releases Infographic on State and Local Government Retirement Systems

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NASRA Releases Infographic on State and Local Government Retirement Systems

On February 21, 2024, the National Association of State Retirement Administrators (NASRA) released an infographic, Fast Facts & Helpful Resources on State and Local Government Retirement Systems. The infographic presents key facts on state and local government retirement systems. It provides information on public pension benefits, assets and investments, public pension governance, pension plan reforms by state, risk-sharing in public retirement plans, state hybrid retirement plans, as well as other pertinent topics.

The infographic states that public pensions have “over $5.5 trillion in trust and pay over $300 billion annually to retirees nationwide.” In addition, it provides links to previously published issue briefs and other publications for each of the topics included in the infographic.

The infographic is available here.

NASRA Updates Issue Brief on State and Local Government Spending on Public Employee Retirement Systems

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NASRA Updates Issue Brief on State and Local Government Spending on Public Employee Retirement Systems

On February 13, 2024, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, State and Local Government Spending on Public Employee Retirement Systems. The brief examines the cost of pension benefits for state and local governments. Based on U.S. Census Bureau data, about 5.1% of all state and local government direct general spending (which includes all government expenditures except intergovernmental transfers) was used to fund pension benefits in Fiscal Year (FY) 2021.  

Furthermore, state and local government direct general spending on public pensions has remained relatively stable over the past 30 years, declining from 3.4% in FY 1993 to about 2.3% in FY 2002. It increased to 5.0% in FY 2017 where it remained until rising to 5.2% in FY 2020 and declining to 5.1% in FY 2021. 

In aggregate, state and local governments contributed $221 billion to pension funds in FY 2022, which represents an increase of nearly 20% from FY 2021. This change is projected to be about 5.8% of projected state and local government direct general spending. According to the brief, “While some of this increase may be attributable to improved pension funding discipline among state and local governments, much of the sharp increase in the percentage of spending projected for FY 2022 is driven by extraordinary contributions above actuarial requirements.”

The brief also finds that across state and local governments in 2022, spending on pensions varied from less than 2.0% of total spending to nearly 10.0%. This variation was mainly due to: 1) differences in benefit levels; 2) differences in the magnitude of unfunded pension liabilities; 3) level of commitment by plan sponsors to make required pension contributions; 4) portion of the state’s population that lives in an urban area; and 5) fiscal condition of government plan sponsors. 

In FY 2022, state and local government employer contributions to statewide retirement systems were 77% of total pension contributions and 23% were for locally administered systems. As a percentage of total spending, pension costs were about 31% higher for cities than for state governments over the period from 1988-2017. This is primarily attributable to the types of services delivered at the local level which results in a larger portion of local government spending on salaries and related benefits compared to state government spending.  

In addition, the brief clarifies that public pensions are financed from the combination of employee contributions, employer contributions, and investment returns. Since 1993, investment earnings amounted to about 63% of all public pension plan revenues, with an additional 26% from employer contributions, and 11% from employee contributions.   

The brief also includes a table showing state and local government pension contributions in 2021 as a percentage of state and local government direct general spending on a state-by-state basis. 

​The brief is available here.