Towards the end of 2022, the IRS released Notice 2022-55, which made cost-of-living adjustments for the benefit limitations provided in certain sections of the Internal Revenue Code.
One of those limitations is the maximum benefit that can be accrued in a Length of Service Award Program. The maximum benefit was increased from $6,500 to $7,000 effective with calendar year 2023.
Long-time followers of this limitation provided for in Section 457(e)(11) recall that the initial benefit limitation was $3,000. Specifically in NY State, this created some challenges for certain defined benefit plans, as the NY State law allowed a sponsoring municipality to provide a benefit that was typically valued in excess of $3,000.
This situation was remedied when the Code was amended to increase the limitation from $3,000 to $6,000 beginning with calendar year 2018. The amending bill, HR 1, which was adopted during the 115th Congress (2017-2018), also included a cost-of-living adjustment provision (to be implemented in $500 increments).
As a result of the recent rise in interest rates, the $6,000 limit was increased to $6,500 in 2022. It was then increased from $6,500 to $7,000 beginning with calendar year 2023.
This change is merely a footnote for municipalities in New York State, as the maximum benefit allowed under State Law is less than $7,000. Specifically for defined contribution LOSAPs, the maximum contribution allowed into a participating volunteers account is $1,200, which is about 17% of the maximum allowed by the IRC. A more valuable benefit can be provided under defined benefit plans, with the actuarial value of those benefits that can approach $6,000 depending on the assumptions used.
For readers of this blog outside of New York State, it is possible that a LOSAP could provide for benefit of up to $7,000 to be accrued in calendar year 2023 and beyond. It is still our desire to see the NY State law amended to allow sponsors of defined contribution plans to contribute a larger amount than the current limit of $1,200 - something more in line with the benefits provided by a defined benefit plan.