Tax Policy and Public Pensions
Understand the latest policy developments impacting public sector retirement systems.
State and local governmental pension plans are qualified plans under Internal Revenue Code (IRC) section 401(a). As such, the public pension community pays close attention to changes in federal tax law or regulation that could affect this status.
In Congress, this means paying attention to the actions of the House Ways and Means Committee and the Senate Finance Committee, which have exclusive jurisdiction over the federal tax code. In the executive branch, this means monitoring the regulatory activities of the U.S. Department of the Treasury and the Internal Revenue Service (IRS).
Below, you'll find an overview of recent key developments:
The SECURE Act
In 2019, Congress passed and President Trump signed the SECURE Act (Setting Every Community Up for Retirement Enhancement). Among its provisions, the Act raised the age for required minimum distributions (RMDs) from 70½ to 72, affecting IRC section 401(a) qualified retirement plans, 457(b) plans, 403(b) plans, 401(k) plans, and IRAs. It also allowed participants to roll over lifetime income investments into another plan without withdrawal restrictions if the original plan no longer offered that option. Additionally, the law permitted penalty-free withdrawals of up to $5,000 for birth or adoption within 12 months of the event and required nonspousal, inherited retirement accounts now have to be distributed within 10 years of the death of the employee or account owner, subject to the specific rules contained in recently released tax regulations. For IRC section 414(d) governmental plans, this rule applies to distributions with respect to employees who die after December 31, 2021.
The American Miners Act, enacted as part of the same legislative package, lowered the minimum age for in-service distributions from 62 to 59½, provided the plan sponsor allows in-service distributions to plan participants and adopts the lower age for such distributions.
The SECURE 2.0 Act
Building on the original SECURE Act, SECURE Act 2.0 was signed into law by President Biden on December 29, 2022, as part of the Consolidated Appropriations Act of 2023. This legislation raised the RMD age to 73 beginning in 2023 and to 75 starting in 2033. It eliminated pre-death RMDs for in-plan Roth accounts and allowed employer matching contributions based on student loan payments. It also removed the first-day-of-the-month rule for governmental 457(b) plans and expanded early distribution penalty exemptions for public safety employees with 25 years of service, including corrections officers and forensic security employees. SECURE 2.0 contains more than 90 provisions affecting nearly all aspects of retirement and pension plan administration. Governmental plans now have until December 31, 2029, to adopt required amendments, as outlined in Treasury Notice 2024-2.
Recent guidance has clarified several provisions. Treasury Notices 2023-54 and 2024-35 address RMD rules, while Notice 2023-6 and subsequent regulations finalized the Roth catch-up contribution requirement for employees earning more than $145,000 in Social Security wages. This requirement became effective January 1, 2026, with full compliance expected by 2027. Additional guidance on overpayment recoupment and the expansion of the IRS’s Employee Plans Compliance Resolution System (EPCRS) is provided in Notices 2023-43 and 2024-77.
SECURE 2.0: A Desk Reference for Governmental Plans
NCPERS developed the SECURE 2.0: A Desk Reference for Governmental Plans to provide guidance on the provisions most likely to impact its member plan sponsors and trustees. The report includes action steps and amendment deadlines, as well as the latest IRS guidance on relevant provisions.
The changes outlined will require all existing plans to make operational changes in order to administer their plans in compliance with mandatory provisions in the law, some of which took effect in 2022. In addition, employers and pension systems should work with their recordkeepers to carefully consider adopting one or more of the optional provisions to provide employees with new opportunities for savings and flexibility for distributions.