OneFinance: IRS Pension Cap Centralization Effective FY25

    May 15, 2024

    Summary

    • Effective FY25 (July 1, 2024)
      • The IRS Pension Cap calculation will be centralized with the Central Controller’s Office starting FY25. Department Business Offices (DBOs) will no longer need to apply the Pension Cap Costing Treatment Worktag to costing allocations in Workday.
      • Workday will charge full fringe on all base salaries. The previous 2% assessment on salaries over the IRS Pension Cap will be discontinued at the costing level.
    • Action Needed
      • In preparation for this change, before the July 2024 payroll run in Workday, DBOs must remove the IRS Pension Cap Costing Treatment Worktags for FY25 costing (starting from July 1, 2024 and onwards) and consolidate effort.
      • Reminder: The deadline for processing PAAs for FY24 costing allocations is Monday, October 7, 2024.
      • Further details will be communicated to Lead Administrators, Operations Managers, and Cost Center Payroll Costing Specialists in the coming weeks.
      • Please share this update with anyone in your department involved in payroll costing allocations for salary over the IRS Pension Cap.
         

    Details

    Background

    The Internal Revenue Service (IRS) limits the benefits and contributions within qualified retirement plans. Each calendar year, the IRS revises the Pension Cap, which affects how internal fringe benefit rates are applied at the University on a fiscal year basis. Since pension benefits cannot be calculated on compensation earned over the IRS Pension Cap, the University adjusts the fringe rate, imposing a 2% assessment on compensation exceeding the cap. Certain salary components are excluded from this calculation.

    The current IRS Pension Cap for calendar year 2023 is $330,000, which applies to FY24 at Yale. IRS Pension Cap calculations are aligned with Yale’s fiscal year schedule. View the Controller’s Office Factsheet.

    Currently, Department Business Offices (DBOs) are responsible for calculating faculty salaries above and below the IRS Pension Cap, capturing the information in Workday, and processing any required Payroll Accounting Adjustments. This process is labor-intensive.

    What’s Changing

    The IRS Pension Salary Cap calculation will be centralized to the Central Controller’s Office starting FY25 as part of ongoing efforts to simplify and streamline processes. DBOs will no longer need to apply the Pension Cap Costing Treatment Worktag to costing allocations in Workday. The Central Controller’s Office will calculate the estimated rebate based on the prior FY actuals (FY24) and create a journal entry in Workday to transfer the rebate to the DBOs (YSM Controller’s Office or designated individuals for the Central Campus planning units/schools):

    • Yale School of Medicine (YSM): Upon receiving the lump sum rebate from the Central Controller’s Office via the journal entry, the YSM Controller’s Office will calculate the monthly rebate and distribute using the Chart of Account (COA) provided by the YSM departments.
    • Central Campus Schools/Planning Units: Designated individuals from each planning unit/school will provide a COA to the Central Controller’s Office for receiving the fringe rebate at the beginning and end of the fiscal year. Upon receiving the projected rebate in July 2024, these individuals will allocate it according to their school/planning unit’s instructions. Note: The process may vary among schools.
    • At FY25 close, the Central Controller’s Office will compare the actuals to the estimate provided in July 2024 and calculate the true-up. That rebate will then be sent to the YSM Controller’s Office for YSM and the designated individuals for Central Campus schools/planning units for further allocation if necessary.

    Additionally, effective FY25 (July 1, 2024), Workday will systematically charge full fringe on all base salaries monthly. The previous 2% assessment on salaries over the IRS Pension Cap will be discontinued at the costing level.

    Action required

    • In preparation for these changes, individuals responsible for payroll costing allocations in their departments must remove all IRS Pension Cap Costing Treatment Worktags for FY25 costing (starting from July 1, 2024 and onwards) and consolidate effort.
    • This must be completed before the July payroll run in Workday.
    • Further details will be communicated to Lead Administrators, Operations Managers, and Cost Center Payroll Costing Specialists in the coming weeks.

    Benefits

    In support of our OneFinance North Star, centralizing the IRS Pension Cap calculation will make life easier for the community by:

    • Efficiency: Consolidating the IRS Pension Cap calculation process under the Central Controller’s Office reduces complexity by eliminating the need for multiple spreadsheets and FY end PAAs, streamlining operations, and minimizing errors associated with decentralized calculations and manual processes.
    • Resource Optimization: DBOs are relieved from the burden of IRS Pension Cap calculations, allowing them to allocate/redirect their time, efforts, and resources to other critical tasks, such as ensuring compliance with the National Institutes of Health (NIH) Salary Cap.
    • Enhanced Oversight: Centralization facilitates better oversight and quality control over the calculation process, increasing accuracy and consistency in determining rebates.

    FY24 PAA Processing Deadline

    The deadline for processing PAAs for FY24 costing allocations is Monday, October 7, 2024. Please ensure that all necessary adjustments are corrected/completed by this date to avoid discrepancies in financial reporting.
     

    Questions?

    If you have questions about the IRS Pension Cap Calculations Centralization process, please contact:

    • Central Campus schools/planning units: Jenna Milman, Associate Controller, Central Controller’s Office.
    • YSM departments: Jess Caponigro, Associate Controller, Yale School of Medicine (YSM).
       

    We are here to support you in navigating these changes to ensure a smooth transition. Thank you for your continued efforts to support the critical missions of the University.