Yesterday, the IRS issued Notice 2023-75, which provides the 2024 cost-of-living adjustments on the dollar limitations for pensions and other benefits like LOSAPs.
The limit on the benefit that can be provided in a LOSAP increased from $7,000 to $7,500 for the 2024 tax year. The historical limitations are as follows:
|up to 2017||$3,000|
New York State law has additional limitations that, generally speaking, would not allow a sponsor to provide a benefit of $7,500. The maximum defined contribution service award that can be provided is $1,200, a mere fraction of the Federal maximum. For defined benefit plans, this limit applies to the actuarial value of the benefit earned during the year. In the significant majority of defined benefit plans in NY, the actuarial value of the benefit provided is a concern only of the sponsor that must fund the benefit – the participant receives a monthly benefit for his or her lifetime. In plans where actuarial equivalent forms of payment are allowed, specifically lump sums, the actuarial value of a $30 monthly benefit payable at age 55 would be around $6,000 using “realistic” assumptions and would only reach $7,500 if a low interest rate was used (2%).
Another interesting observation is that the limit on contributions to an IRA for an individual under age 50 was increased from $6,500 to $7,000. An individual age 50 or older can contribute an extra $1,000 for a total of $8,000 in 2024. Essentially this means that a volunteer that may not have access to a work-provided retirement plan can save about $7,000 in 2024 towards retirement, which is $500 less than the maximum benefit that the IRS allows in a LOSAP. We know many people that choose a job for the retirement – specifically government jobs. A recruitment sign touting “$7,500 annually for retirement” could entice an individual to volunteer. It might not create a line around the building of people signing up to volunteer, but it would be a significant incentive to offer.
That said, if the NY State law were to be amended to allow this large of a benefit in a defined contribution plan, it would likely also have to come with some additional oversight (e.g., more audit requirements) and a re-tooling of the point system or the general structure of how a volunteer would earn that contribution. Given that some defined benefit plans could offer a benefit that is worth around $6,000, those changes may currently be needed.
You can read the news release from the IRS here: https://www.irs.gov/newsroom/401k-limit-increases-to-23000-for-2024-ira-limit-rises-to-7000.
The direct link to Notice 2023-75 is here: https://www.irs.gov/pub/irs-drop/n-23-75.pdf