Treasury Department Issues Proposed Section 415 Regulations
PENSION BENEFITS
- Eighth Circuit Reinstates 401(k) Plan Fee Lawsuit Against Wal‑Mart
- IRS Issues 2009 Cumulative List
- Pension Plan Limitations for 2010
- IRS Issues Final Regulations under Code Section 436
- Recent IRS Guidance Addresses Contribution of Unused Paid Time Off, Automatic Enrollment and Tax Notices
- Supreme Court Holds that Pension Plan May Apply a Benefit Formula That Treats Pre-Pregnancy Disability Act Pregnancy Leave Less Favorably Than Other Medical Leave
- IRS Issues Guidance on Suspension of Safe Harbor Nonelective Contributions
- Treasury Department Issues Final Regulations on Automatic Enrollment Plans
- Kennedy v. DuPont: The Supreme Court Makes Life a Little Easier for Plan Administrators
- IRS Issues 2008 Cumulative List
- Pension Plan Limitations for 2009
- Heroes Earning Assistance and Relief Tax Act Adds Benefits for Those in Military Service
- Benefits Quiz
- Supreme Court Rules Defined Contribution Plan Participants Can Sue for Losses to Their Individual Accounts
- IRS Issues Guidance for New Distribution Requirements that Become Effective in 2008
- New Multiemployer Plan Disclosure Requirements — ERISA Section 101(k)
- IRS Issues 2007 Cumulative List
- IRS Proposes Regulations Regarding Automatic Contribution Arrangements
- Final Section 403(b) Regulations: What Plan Sponsors Need to Know
- Pension Plan Limitations for 2008
- IRS Issues Final Regulations Affecting Section 403(b) Plans Covering Employees of Tax-Exempt Organizations, Public Schools and Churches
- Treasury Department Issues Final Regulations under Code Section 415
- IRS Updates Procedures for Opinion, Advisory and Determination Letter Applications
- Contacting Missing Plan Participants — Practical Considerations
- 2007 Final Roth 401(k) Regulations: The Latest Chapter
- Public Safety Employees and the Pension Protection Act of 2006
- DOL Issues Interim Final Rule Relating to the Time and Order of Domestic Relations Orders
- Guidance Issued on Deduction of Contributions to Defined Benefit Plans
- IRS Issues Distribution Guidance in Notice 2007–7
- IRS Issues Transitional Guidance Regarding Divestiture Rights and A Model Notice
- New Notices and Disclosures for Plan Sponsors under the PPA
- Cash Balance Plans — A Clearer Future?
- Pension Plan Limitations for 2007
- IRS Finalizes Anti-Cutback
Regulations: Heinz and Utilization Test Included - Internal Revenue Service Updates and Expands the Employee Plans Compliance Resolution System
- The Internal Revenue Service Issues a Second Set of Final Regulations Regarding the Disclosure of Relative Values of Optional Forms of Benefit
- The Book on the Roth 401(k) and 403(b) and Why Your Business or Organization Must Have One (maybe)
- The Internal Revenue Service Releases 2005 Cumulative List of Changes
- Two Recent Court Decisions Remind Plans to Exercise Caution in Handling Contested Benefit Claims
- Pension Plan Limitations for 2006
- Relative Value Information Required to Be Included in Certain QJSA Explanations As Early As November 3, 2005
- IRS Issues Proposed Roth 401(k) Regulations
- Revenue Procedure 2005–23 — Internal Revenue Service Guidance for Implementing Heinz Decision
- Use of an Administrative Committee to Address Fiduciary Obligations of a Retirement Plan Sponsor
- 401(k) and 401(m): IRS Issues Final Regulations
- Proposed and Temporary Section 403(b) Regulations of Interest to Tax-Exempt Employers
- Missing Participants
- The American Jobs Creation Act of 2004: Employee Benefits Related Issues
- The Automatic Rollover of Mandatory Cash-Outs: The Department of Labor's Safe Harbor Final Regulations
- Pension Plan Limitations for 2005
- IRS Issues Final 401(a)(9) Minimum Distribution Regulations
- Unanimous Supreme Court Decision Determines That Post-Retirement Plan Amendment Violates ERISA's Anti-Cutback Rule
- PBGC Announces New Participant Notice Voluntary Correction Program
- DOL Addresses Modifications Made to Pre-Existing QDROs
- Revenue Procedure 2004–25 Extends Remedial Amendment Period Only for Certain Specified Disqualifying Provisions
- New Requirement for Automatic Rollovers of Small Cash-Outs from Qualified Plans: The Proposed Regulations
- IRS Issues Updated Procedures for Waiver of Minimum Funding Standards
- IRS Issues Guidance Clarifying Allocation of Plan Expenses to Inactive Participants
- New Legislation Clarifies Rule on Plan Loans to Servicemembers
- Proposed 401(k) Regulations Include Interesting ESOP Change
- Pension Plan Limitations for 2004
- Recent Court Cases on Cash Balance Plans
- Internal Revenue Service Simplifies and Streamlines the Employee Plans Compliance Resolution System
General The IRS last issued final comprehensive regulations under Code section 415 in 1981. Since that time numerous public laws have made various changes to Code section 415; however, with a few minor exceptions the statutory changes have not been reflected in the regulations but in various IRS notices, revenue rulings and other guidance. A comprehensive listing of the relevant public laws and IRS guidance appears in the first section of the preamble to the proposed regulations.
The proposed regulations, with some modifications, reflect the previously published guidance. In addition, the proposed regulations include various and potentially quite significant changes, modifications and clarifications of the existing final regulations. The IRS has also included proposed conforming changes to regulations under Sections 401(a)(9), 401(k), 403(b) and 457 of the Code.
On May 25, 2005, the Internal Revenue Service (the "IRS") published comprehensive proposed regulations under Section 415 of the Internal Revenue Code (the "Code") dealing with limitations on benefits and contributions for qualified plans. Code section 415 establishes specific limits on benefits under qualified defined benefit plans and on contributions and other additions under qualified defined contribution plans. These limitations also apply to annuity contracts under Code section 403(b) and to simplified employee pensions under Code section 408(k), as well as to Code section 401(h) individual medical accounts and to key employee medical benefits accounts under Code section 419A(d)(1). The Code section 415 limits also affect the amount of deduction a plan sponsor may take under Code section 404 for contributions to a qualified plan. In addition, the definition of compensation under Code section 415 used for determining plan limits is used for a number of other purposes under the Code.
Analysis
The proposed regulations (including the preamble) extend to over 160 pages and cover a number of different issues. The following analysis focuses on certain key parts of the proposed regulations.
Proposed Regulations Section 1.415(a)–1
Section 1.415(a)–1 of the proposed regulations provides the general rules for the limitations under Code section 415 and provides cross-references to special rules for Code section 403(b) annuity contracts, governmental plans and multiemployer plans. A useful feature of this section is the guidance concerning a plan’s incorporation by reference of the Code section 415 rules, including detailed guidance on incorporating cost-of-living adjustments.
Proposed Regulations Section 1.415(b)–1 Other provisions deal with the exclusion from the annual benefit limitation of that portion of the annual benefit attributable to mandatory employee contributions or rollover contributions and clarify the treatment of benefits transferred among plans.
The provisions described in the preceding paragraph, for the most part, reflect previously enacted statutory changes and relevant guidance. The most significant feature, however, of proposed regulations under Section 1.415(b)–1 is a provision restricting compensation used in determining the average compensation of the participant during the three consecutive years of his or her highest compensation to compensation earned during the period the participant was an active participant in the plan. This provision does not relate to a specific statutory change, or any previous regulatory guidance, since the publication of the current final regulations in 1981. Instead, the provision represents an interpretation or clarification of Code section 415(b)(3) by the IRS. A related restriction arises under the proposed regulations for Section 1.415(c)–2. The IRS states that its intent in the proposed Section 1.415(c)–2 regulations is to clarify the relationship between Code section 401(a)(17) and the proposed definition of compensation that a plan must use for determining a participant’s three consecutive years of highest compensation. Under the IRS interpretation, a plan’s definition of compensation for the purposes of applying the limitations of Code section 415 may not reflect compensation in excess of the limitations under Code section 401(a)(17).
The two interpretations of compensation outlined in the preceding paragraph are likely to have a significant impact on benefits. The restriction of compensation to compensation earned while an active participant in the plan could especially affect plans established by owners of small businesses. Such individuals often significantly reduce their compensation after the establishment of a defined benefit plan in order to fund a benefit which would then be based on compensation earned prior to the establishment of the plan. The IRS itself provides an example of the effect of the imposition of the Code section 401(a)(17) limit on compensation to benefit limits, in the preamble to the proposed regulations. If a participant begins receiving benefits in 2005 at age 75, the adjusted dollar limitation under Code section 415(b)(1)(A) could be as high as $379,783; however, if the participant had compensation in excess of the Code section 401(a)(17) limit for 2002, 2003 and 2004, the participant’s benefit would be limited to the average compensation for the participants highest three years as limited by Code section 401(a)(17): that is, $201,667 (the average of $200,000, $200,000 and $205,000).
Although a literal reading of current Code section 415(b)(3) supports the proposed restriction to compensation earned while an active participant in the plan, the current regulations (Treas. Reg. Section 1.415–3(a)(3)) provide, certainly at least on an initial reading, a definition based on total service with the employer. In contrast, the limitation on benefits to Code section 401(a)(17) compensation does not appear to have a statutory justification.
Section 1.415(b)–1 of the proposed regulations establishes the rules for applying limitations on benefits under a qualified defined benefit plan. Specifically, the proposed regulations reflect the current statutory limitation under Code section 415(b)(1): the lesser of $160,000 (as adjusted) or 100% of the participant’s average compensation during the three consecutive years of his or her highest compensation. In addition, proposed regulations under Section 1.415(b)–1 provide:
Proposed Regulations Section 1.415(b)–2
The IRS has added a new section to the regulations. Section 1.415(b)–2 provides rules that apply for determining an annual benefit under one or more qualified defined benefit plans when there are multiple annuity starting dates. These rules are most likely to apply when distributions to a participant have commenced under one plan and that plan is then aggregated with a plan from which the participant receives current accruals. Another typical situation in which these rules would apply is when a new distribution election by a participant is effective during the current limitation year for a distribution that began in a preceding limitation year.
Proposed Regulations Section 1.415(c)–1 In addition, the proposed regulations under Section 1.415(c)–1 clarify the rules relating to the deadline for making a contribution to the plan to be credited to a participant’s account for a specific limitation year. For taxable employers, the proposed regulations retain the current rule: no later than 30 days after the end of the period described in Section 404(a)(6) of the Code. For taxexempt employers, however, the proposed regulations extend the deadline to the 15th day of the tenth calendar month following the close of the taxable year within which the limitation year ends. (In those instances where the employer’s taxable year coincides with the plan year, this date is the due date for the Form 5500 with extensions.)
Section 1.415(c)–1 of the proposed regulations establishes the rules for applying limitations on contributions and other additions under a qualified defined contribution plan. In this regard, the proposed regulations reflect the current statutory limitation under Code section 415(c)(1): the lesser of $40,000 (as adjusted) or 100% of the participant’s compensation. The proposed Section 1.415(c)–1 regulations also reflect a number of other statutory changes and previously issued guidance, including, among other items:
Proposed Regulations Section 1.415(c)–2 In addition to reflecting statutory changes, the proposed regulations dealing with the definition of compensation also provide significant new guidance in several different areas. As discussed in the section on the proposed Section 415(c)–1 regulations, the proposed regulations under Section 1.415(c)–2 set forth a relation between the limitations on compensation imposed under the Code section 401(a)(17) and compensation as it is defined for various purposes under Code section 415. While this particular clarification may cause certain problems and unexpected restrictions on benefits, new guidance on when payments made after severance from employment are considered compensation for purposes of Code section 415 is likely to prove useful in resolving a previously ambiguous issue. Specifically, payments after severance from employment are included in compensation if they are paid within 2½ months following severance from employment and if: Aside from this exception, severance pay is not includible in compensation for purposes of Code section 415. The proposed regulations also clarify that compensation received by an individual who does not currently perform services for the employer because of qualified military service is included in the definition of compensation for purposes of Code section 415 to the extent the payment does not exceed the amounts the individual would have received if he or she had continued to perform services for the employer.
Section 1.415(c)–2 provides detailed rules concerning the definition of compensation which is used for purposes of applying the limitations of Code section 415 as well as for various other purposes of the Code. As with other sections of the proposed regulations, the rules under Section 1.415(c)–2 reflect a number of statutory changes, the most significant of which is the inclusion in compensation of certain nontaxable elective deferrals under Code sections 125, 132(f)(4), 401(k), 403(b) and 457.
Miscellaneous Provisions
Remaining sections of the proposed regulations deal with cost of living adjustments (including a safe harbor following such an adjustment), combining and aggregating plans, disqualification of plans and trusts, and the limitation year.
Comments; Effective Date This article was originally published as an ASPPA asap 05–17
Written or electronic comments on the proposed regulations must be received by July 25, 2005. The IRS has scheduled a public hearing for August 17, 2005. The proposed effective date for the regulations is the plan’s limitation year beginning on or after January 1, 2007. Certain limited exceptions are provided relating to post-severance compensation and other compensation timing rules, certain changes in form of payment and certain corrective and clarifying changes in the regulations under Code section 457.
Copyright © 2006 Trucker Huss. All rights reserved. This article is published as an information source for our clients and colleagues. The article is current as of the date shown above, is general in nature and is not the substitute for legal advice or opinion in a particular case. In response to new IRS rules of practice, we inform you that any federal tax information contained in this writing cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters in this writing.