TO: HONORABLE MAYOR
AND CITY COUNCIL
FROM: Jennifer Schembri
SUBJECT: SECURE 2.0 Act
Amendments to Deferred
Compensation, PTC and
401(a) Plans
DATE: November 25, 2024
Approved
Date:
12/4/24
COUNCIL DISTRICT: Citywide
RECOMMENDATION
a) Adopt a resolution approving an amendment to the Basic Plan Document for the Deferred Compensation Plan to comply with the mandatory and optional SECURE 2.0 Act and authorizing the City Manager or her designee to execute the amended Basic Plan Document and other documents as necessary to administer the Deferred Compensation Plan set forth in Chapter 3.48 of the San José Municipal Code.
b) Adopt a resolution approving an amendment to the Basic Plan Document for the PTC Plan to comply with the SECURE 2.0 Act and authorizing the City Manager or her designee to execute the amended Basic Plan Document and other documents as necessary to administer the PTC Plan set forth in Chapter 3.50 of the San José Municipal Code.
c) Adopt a resolution approving an amendment to the Basic Plan Document for the Defined Contribution Plan for Unit 99 Employees to comply with the SECURE 2.0 Act and authorizing the City Manager or her designee to execute the amended Basic Plan Document and other documents as necessary to administer the Defined Contribution Plan for Unit 99 Employees set forth in Chapter 3.49 of the San José Municipal Code.
SUMMARY AND OUTCOME
The federal Setting Every Community Up for Retirement Enhancement Act (SECURE
2.0 Act) was signed into law on December 29, 2022. The SECURE 2.0 Act includes many provisions related to retirement plans and individual retirement accounts that COUNCIL AGENDA: 12/17/24
FILE: 24-2333
ITEM: 2.24
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
expand participant coverage, help participants preserve income, and simplify plan rules and administrative procedures.
The SECURE 2.0 Act has mandatory provisions that require amendments to the City’s 457 Deferred Compensation Plan (457 Plan), PTC Deferred Compensation Plan (PTC Plan), and Defined Contribution Plan for Unit 99 Employees Plan (Tier 3 Plan). In addition to the required provisions, the SECURE 2.0 Act provides for optional changes that the Human Resources Department recommends the City implement. The SECURE
2.0 Act requires the amendments to the three plans no later than December 31, 2029.
BACKGROUND
The City of San José established and maintains the following deferred compensation and defined contribution plans outlined below.
• 457 Plan for all employees to voluntarily contribute retirement savings. • PTC Plan for employees who are not eligible to participate in the City’s Police and Fire Department Retirement Plan and Federated City Employees Retirement Plan and City Councilmembers who did not elect membership in the California Public Employees’ Retirement System prior to October 3, 2021. • Tier 3 Plan for executive management and professional employees hired on or after January 20, 2013. Effective October 3, 2021, City Councilmembers who are not members of California Public Employees’ Retirement System shall also become members of this plan.
The City’s 457 Plan is available to all City employees on a voluntary basis. An employee who elects to participate must enter into a participation agreement that specifies the amount of the deferral and the investment options selected by the participant. 457 Plan participants can choose to make contributions on a pre-tax basis to a traditional 457 plan, on an after-tax basis to the Roth 457 plan, or a combination of the two. 457 Plan participants can adjust deferral amounts and investments. As of October 24, 2024, the 457 Plan had 9,059 members and $1,510,957,622.26 in assets.
The City’s PTC Plan is a mandatory plan in lieu of Social Security for certain classifications of employees and City Councilmembers that did not select membership in the California Public Employees’ Retirement System-defined benefit plan prior to October 3, 2021. Current participants of the PTC Plan are required to contribute 3.75% of their salary into the plan and the City makes a matching contribution of 3.75%. As of October 24, 2024, this plan had 7,155 members and $33,687,561.80 in assets.
In 2013, the City began offering a 401(a) defined contribution plan, known as the Tier 3 Plan for Executive Management and Professional Employees (Unit 99), to all new executive management or professional employees in Unit 99 who elect to opt out of the
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
City’s defined benefit Federated Employees Retirement Plan. As of October 3, 2021, City Councilmembers who are not members of the California Public Employees’ Retirement System became members of the Tier 3 Plan. Similar to the PTC Plan, staff participants in the Tier 3 Plan are required to contribute 3.75% of their salary and the City matches their 3.75% contribution. City Councilmembers in the Tier 3 Plan are required to contribute 3.75% of their salary and the City makes a 6.55% contribution into the plan. As of October 24, 2024, this plan had 174 members and $5,169,562.29 in assets.
The City Manager or her designee is the administrator of the three plans and is responsible for the operation of each plan in accordance with its terms, including determining all the questions arising out of the administration, interpretation, and application of each plan.
ANALYSIS
The Human Resources Department worked closely with the plans’ consultant and providers, the City Manager’s Office, and the Deferred Compensation Advisory Committee to understand and implement all required provisions of the SECURE 2.0 Act, as well as to review the optional provisions.
The charts below outline the mandatory and optional provisions, including which optional provisions are recommended for adoption for each specific plan.
MANDATORY CHANGES WHERE PLAN AMENDMENT IS NOT NECESSARY
SECURE 2.0 Act § 302
Reduction in Excise Tax on Late Required Minimum Distributions (RMD) Description City Plans
Impacted
Effective
• SECURE 2.0 Act reduces the excise tax for
late RMDs to 25%.
• The excise tax is further reduced to 10% if the
failure to take the RMD is corrected by the last
day of the second taxable year that begins
after the end of the taxable year in which the
excise tax is imposed (or the earlier date that
the Internal Revenue Service (IRS) notifies the
taxpayer of or assesses the tax).
• 457 Plan
• PTC Plan
• Tier 3 Plan
For taxable
years
beginning
after
December
29, 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 337
Modification of RMD Rules for Special Needs Trusts
Description City Plans
Impacted
Effective
• SECURE 2.0 Act provides that, in the case of
a special needs trust established by a
beneficiary with a disability, if the trust names
a charitable organization as a beneficiary,
such organization will be treated as a
designated beneficiary for purposes of these
rules.
• This change will enable RMDs to a disabled
beneficiary to be made over a longer period of
time.
• 457 Plan
• PTC Plan
• Tier 3 Plan
For calendar
years
beginning
after
December
29, 2022.
SECURE 2.0 Act §§ 308, 329, 330
Exception to 10% Early Distribution Penalty Tax for Public Safety Officers Description City Plans
Impacted
Effective
SECURE 2.0 Act expanded this exception to the
10% early distribution penalty tax as outlined
below.
• It applies to a distribution to a qualified public
safety employee who separates from service
on or after age 50 or 25 years of service under
the plan.
• For a qualified public safety employee
providing firefighting services, in addition to
distributions from governmental plans, it
applies to distributions from a non-
governmental defined contribution 401(a)
plan, defined benefit 401(a) plan, or 403(b)
plan.
• The definition of a qualified public safety
officer is expanded to include an employee of
a state or political subdivision thereof who
provides services as a correction officer or
services as a forensic security employee.
• 457 Plan
• PTC Plan
• Tier 3 Plan
For
distributions
made after
December
29, 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 326
Exception to 10% Early Distribution Penalty Tax for Terminal Illness Distribution Description City Plans
Impacted
Effective
SECURE 2.0 Act permits distributions from all
retirement plans to terminally ill individuals who
are otherwise eligible for a distribution under the
following criteria.
• This provision does not create a new
distribution right under retirement plans, so
participants must otherwise be eligible for a
distribution to receive the tax benefits under
this provision.
• A terminally ill individual means an individual
who has been certified by a physician as
having an illness or physical condition that can
reasonably be expected to result in death in
84 months or less after the date of the
certification.
• The employee must furnish sufficient proof to
the plan administrator that the employee
qualifies under this standard (self-certification
not permitted).
• The distribution is not subject to the 10% early
withdrawal penalty tax.
• The distributions can be repaid within three
years.
• 457 Plan
• PTC Plan
• Tier 3 Plan
For
distributions
made after
December 29,
2022.
SECURE 2.0 Act § 107
Increase in Age for Required Beginning Date for RMDs
Description City Plans
Impacted
Effective
SECURE 2.0 Act replaces "age 72" with the
"applicable age," which is determined as follows:
• For participants who turned age 72 before
2023, the applicable age is still age 72;
• For participants who will turn age 72 after
2022 and age 73 before 2033, the applicable
age is now age 73;
• F or participants who will turn age 74 after
2032, the applicable age is now age 75.
• 457 Plan
• PTC Plan
For RMDs
made after
2022 for
employees
who turn age
72 after 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
MANDATORY CHANGES WHERE PLAN AMENDMENT IS NECESSARY
SECURE 2.0 Act § 311
Repayment of Qualified Birth or Adoption Distributions Limited to Three Years Description City Plans
Impacted
Effective
• SECURE 2.0 Act amends the Qualified Birth or
Adoption Distributions provisions to limit the
recontribution period to three years from the
date the distribution was received
• 457 Plan
For
distributions
made after
December 29,
2022
(retroactive
effective date
applies to
distributions
already
made).
SECURE 2.0 Act § 107
Increase in Age for Required Beginning Date for RMDs
Description City Plans
Impacted
Effective
SECURE 2.0 Act replaces "age 72" with the
"applicable age," which is determined as follows:
• For participants who turned age 72 before
2023, the applicable age is still age 72;
• For participants who will turn age 72 after
2022 and age 73 before 2033, the applicable
age is now age 73;
• F or participants who will turn age 74 after
2032, the applicable age is now age 75.
• Tier 3 Plan For RMDs
made after
2022 for
employees
who turn age
72 after 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 325
Pre-death RMDs Not Required from Designated Roth Accounts Description City Plans
Impacted
Effective
• To align with the rules for Roth individual
retirement accounts, SECURE 2.0 Act
eliminates the requirement that RMDs be
taken from designated Roth accounts under a
401(k), 403(b), or governmental 457(b) plan
during the participant's lifetime.
• Retired participants who want to minimize
RMDs will no longer need to roll over their
retirement plan Roth accounts to an outside
Roth individual retirement accounts to avoid
lifetime payments from those accounts.
• This may result in more participants keeping
their accounts with their former
employers/plans post-retirement.
• This change also is likely to increase the
popularity of Roth accounts and in-plan Roth
rollovers in retirement plans.
• 457 Plan For taxable
years
beginning
after
December
31, 2023,
except that
initial RMDs
for 2023 that
are delayed
to 2024 must
still be made.
SECURE 2.0 Act § 327
Surviving Spouse Election to Be Treated As Employee for RMDs Description City Plans
Impacted
Effective
• Under SECURE 2.0 Act, if a participant dies
before his/her required beginning date and the
participant's designated beneficiary is his/her
surviving spouse, the surviving spouse has
the right to make an irrevocable election to be
treated as the deceased employee for
purposes of the RMD rules.
• If the surviving spouse makes such an
election, then RMDs will begin on the later
date that the participant or the surviving
spouse would have turned the applicable age
for RMDs (e.g., age 73), and the distribution
period for RMDs will be determined applying
the uniform life table (which will provide for a
longer distribution period).
• 457 Plan
• PTC Plan
• Tier 3 Plan
For calendar
years
beginning
after
December
31, 2023.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 603
Catch-Up Contributions Required to Be Made on a Roth Basis for Higher Income Earners
Description City Plans
Impacted
Effective
• SECURE 2.0 Act requires age 50 catch-up
contributions to be made on a Roth basis for
all participants whose wages (as defined for
Social Security FICA tax purposes) from the
employer sponsoring the plan exceed
$145,000 (indexed after 2024) for the
preceding calendar year.
• Participants with wages below $145,000 for
the preceding calendar year must be given the
option (but are not required) to make age 50
catch-up contributions on a Roth basis.
• SECURE 2.0 Act authorizes the Treasury
Department to issue regulations that address
circumstances where a participant is
contributing age 50 catch-up contributions on
a pre-tax basis for a year, but his/her wages
change so that the contributions should have
been made on a Roth basis.
• These regulations are necessary since
elections are irrevocable as to compensation
already paid.
• 457 Plan For taxable
years
beginning
after
December
31, 2023.
(Deadline
extended to
January 1,
2026.)
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
OPTIONAL CHANGES WHERE PLAN AMENDMENT IS NOT NECESSARY
SECURE 2.0 Act § 301
Recovery of Retirement Plan Overpayments
Description City Plans
Impacted
Effective
• SECURE 2.0 Act amends Employee
Retirement Income Act and the Internal
Revenue Code to allow a fiduciary the
discretion to not seek recovery of inadvertent
overpayments from participants, beneficiaries,
or the employer, assuming that the plan
complies with the applicable IRS’s limits and
minimum funding rules (for Employee
Retirement Income Act plans). Depending on
the nature of the overpayment, the fiduciary
may still need to make the plan whole for the
overpayment.
• Significantly, rollovers of overpayments remain
valid, but if the fiduciary chooses to recoup
rolled over amounts, SECURE 2.0 Act permits
the return of those amounts.
• SECURE 2.0 Act also permits the plan to be
amended to increase past or decrease future
benefits to adjust for overpayments.
• For Employee Retirement Income Security Act
plans, the amendments also include
protections to safeguard retirees who were not
at fault for the overpayment, such as
prohibiting the collection of interest, limiting the
amount by which ongoing benefit payments
may be reduced, limiting the number of years
for which recoupment can be sought, and
prohibiting the recoupment of overpayments
from a beneficiary of the participant.
• 457 Plan
• PTC Plan
• Tier 3 Plan
December
29, 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 305
Expansion of Employee Plans Compliance Resolution System Description City Plans
Impacted
Effective
• SECURE 2.0 Act expands the Employee Plans
Compliance Resolution System to allow most
inadvertent errors to be self-corrected so long
as the error is (i) substantially corrected before
the error is identified by an IRS on audit and (ii)
corrected within a reasonable period of time
after the failure is identified. All corrections
must be made in accordance with general
Employee Plans Compliance Resolution
System principles.
• The IRS issued interim guidance on the
expanded self-correction provisions in Notice
2023-43.
• 457 Plan
• PTC Plan
• Tier 3 Plan
December
29, 2022.
The IRS is
directed to
update the
Employee
Plans
Compliance
Resolution
System
consistently
with
SECURE
2.0 Act by
December
29, 2024.
OPTIONAL CHANGES WHERE PLAN AMENDMENT IS NECESSARY
SECURE 2.0 Act § 204
Eliminating RMD Penalty on Partial Annuitization of Accounts Description City Plans
Impacted
Effective
• SECURE 2.0 Act provides that a defined
contribution plan may allow a participant to
elect to have the RMD for the non-annuitized
portion of the account be equal to the excess
of the total annual RMD for the account
(calculated under the defined contribution plan
RMD rules and including the value of the
annuity contract from which payments are
being made under defined benefit plan RMD
rules) over the annuity payment for the year.
• SECURE 2.0 Act requires the Secretary of the
Treasury to amend the RMD regulations to
address this change.
• 457 Plan
• PTC Plan
• Tier 3 Plan
December
29, 2022.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 331
Qualified Federally Declared Disaster Distribution
Description City Plans
Impacted
Effective
SECURE 2.0 Act creates a new distribution right
from a defined contribution plan (including a money
purchase pension plan) on account of a qualified
federally declared disaster under the following
criteria.
• The distribution must be made within 180 days
after the first day of the incident period or the
date of the disaster declaration applicable to a
qualified disaster, if the individual's principal
place of residence is within the qualified
disaster area and the individual has sustained
economic loss due to the qualified disaster.
The plan administrator may rely on the
individual's written certification that the
distribution qualifies under this standard.
• The aggregate distributions for a qualified
disaster for all taxable years cannot exceed
$22,000.
• The distribution is not subject to the 10% early
distribution penalty tax.
• An amount distributed on this basis is not
eligible for rollover.
• The distribution is taxed over three years and
can be repaid within three years.
• This provision also permits (i) recontribution of
qualified first-time homebuyer distributions, (ii)
an increase in loans, and (iii) delayed
repayment of loans during the 180-day period
following the first day of the incident period.
• 457 Plan
For disasters
occurring on
or after
January 26,
2021.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 201 (p. 872)
Remove RMD Barriers for Life Annuities
Description City Plans
Impacted
Effective
SECURE 2.0 Act amends the RMD rules to permit
defined contribution plans to offer commercial
annuity products that provide for:
• Increasing level annual payments of less than
5%;
• Certain lump sum payments that accelerate
benefits;
• Dividends and similar distributions;
• A final payment on death that does not exceed
the total purchase price of the annuity, less
prior distributions.
• 457 Plan
• PTC Plan
• Tier 3 Plan
For calendar
years ending
after
December
29, 2022.
SECURE 2.0 Act § 314 (p. 891)
Domestic Abuse Victim Distribution
Description City Plans
Impacted
Effective
SECURE 2.0 Act permits a new in-service
distribution right from a defined contribution plan
(except a money purchase pension plan) to
domestic abuse victims under the following criteria.
• The distribution must be made within the
one-year period beginning on the date on
which the individual is a victim of domestic
abuse by a spouse or domestic partner. The
plan administrator may rely on the
individual's written certification that the
distribution qualifies under this standard.
• Aggregate distributions to a domestic abuse
victim cannot exceed the lesser of (i)
$10,000 (indexed) or (ii) 50% of the present
value of the participant's accrued benefit
under the plan.
• The distribution is not subject to the 10%
early distribution penalty tax.
• 457 Plan
For
distributions
made after
December
29, 2023.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
SECURE 2.0 Act § 109
Higher Catch-Up Limit to Apply at Ages 60, 61, 62, and 63 Description City Plans
Impacted
Effective
• SECURE 2.0 Act increases the age 50 catch-
up limit for the years in which the participant
attains ages 60, 61, 62, and 63. The increased
limit is the greater of (i) $10,000 (indexed after
2025) or (ii) an amount equal to 150% of the
normal catch-up limit for 2024 (for example,
this would be 1.5 x $7,500 = $11,250 if it
applied in 2023).
• Note that some clarification is needed with
respect to this catch-up because the statute
appears to tie the amount under item (ii) above
to the normal catch-up limit for 2024, such that
it would never increase after that date. For
example, if the normal catch-up for 2024 is
$8,000, then item (ii) would be fixed at $12,000
(1.5 x 8,000), and after a few years, the
amount in item (i) would always apply.
• Additionally, starting January 1, 2024, age 50
catch-up contributions are required to be made
on a Roth basis for all participants whose
wages (as defined for Social Security FICA tax
purposes) from the employer sponsoring the
plan exceed $145,000 (indexed after 2024) for
the preceding calendar year. Thus, these
additional contributions would presumably
need to be made on an after-tax Roth basis.
• 457 Plan For taxable
years
beginning
after
December
31, 2024.
The following SECURE 2.0 Act’s mandatory provisions were implemented for the 457 Plan, PTC Plan, and Tier 3 Plan as applicable by the plans’ recordkeeper and administrator, VOYA, on December 29, 2022.
• Exception to 10% Early Distribution Penalty Tax for Public Safety Officers. • Repayment of Qualified Birth or Adoption Distributions Limited to Three Years. • Exception to 10% Early Distribution Penalty Tax for Terminal Illness Distribution. • Increase in Age for Required Beginning Date for RMDs. • Reduction in Excise Tax on Late RMDs.
• M odification of RMD Rules for Special Needs Trusts.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
The following SECURE 2.0 Act’s mandatory provisions were implemented for the 457 Plan, PTC Plan, and Tier 3 Plan as applicable by the plans’ recordkeeper and administrator, VOYA, on January 1, 2024.
• Pre-death RMDs Not Required from Designated Roth Accounts. • Surviving Spouse Election to Be Treated As Employee for RMDs.
City Manager’s designee recommends the adoption of the resolutions to amend the plans to incorporate the mandatory and optional provisions of the SECURE 2.0 Act as set forth above, and authorization for the City Manager or her designee to execute the amended and restated Basic Plan Document and other documents as necessary to administer the Deferred Compensation Plans set forth in Chapter 3.48, Chapter 3.50, and Chapter 3.49 of the San José Municipal Code
EVALUATION AND FOLLOW-UP
If the City Council adopts the resolutions to implement the mandatory and recommended optional provisions, the amended and restated Basic Plan Document for each plan will become effective on December 17, 2024.
COORDINATION
This memorandum has been coordinated with the City Attorney’s Office and the City Manager’s Budget Office.
PUBLIC OUTREACH
This memorandum will be posted on the City’s Council Agenda website for the December 17, 2024 City Council meeting.
COMMISSION RECOMMENDATION AND INPUT
The Deferred Compensation Advisory Committee was presented with all required and optional provisions, as provided above.
CEQA
Not a Project, File No. PP17-010, City Organizational and Administrative Activities resulting in no changes to the physical environment.
HONORABLE MAYOR AND CITY COUNCIL
November 25, 2024
Subject: SECURE 2.0 Act Amendments to Deferred Compensation, PTC and 401(a) Plans
PUBLIC SUBSIDY REPORTING
This item does not include a public subsidy as defined in section 53083 or 53083.1 of the California Government Code or the City’s Open Government Resolution.
/s/
JENNIFER SCHEMBRI
D eputy City Manager
For questions, please contact Amy Morton, Senior Analyst, at [email protected]
or (408) 975-1425.