- 4.72.6.1 Overview
- 4.72.6.2 SPECIFIC PLAN REQUIREMENTS
- 4.72.6.3 IRC 415(b) Limits
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Guidance is provided for examiners on examining defined benefit plans subject to the limitations of IRC 415(b), as amended under Title VII of the Uruguay Round Agreements Act, Pub. Law 103-465 (GATT), the Small Business Job Protection Act of 1996, Pub. Law 104-188 (SBJPA), and the Taxpayer Relief Act of 1997, Pub. Law 105-34 (TRA '97). (Certain changes enacted under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), Pub. Law 107-16, that affect IRC 415(b) are provided as parentheticals.)
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IRC 415 was added to the Code by the Employee Retirement Income Security Act of 1974 (ERISA) and was generally effective for years beginning after 1975. IRC 401(a)(16) provides that a trust is not a qualified trust under IRC 401 if the plan of which such trust is a part provides for benefits or contributions that exceed the IRC 415 limitations.
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IRC 415(b) limits the annual benefit that can be accrued or paid to a participant under a defined benefit (DB) plan, while IRC 415(c) limits the amount of employer and employee contributions that may be allocated to an individual's account under a defined contribution (DC) plan.
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For limitation years beginning before 2000, where an individual is a participant in both a DC and DB plan maintained by the same employer, the benefits under both plans are subject to the combined plan limitation of IRC 415(e). IRC 415(e) was repealed by SBJPA, effective for limitation years beginning after 1999.
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Reg. 1.415-1(d) provides that the terms of a qualified plan must preclude the possibility that the limitations imposed by IRC 415 will be exceeded. Thus, the terms of a DB plan must not allow a participant to accrue a benefit in excess of the IRC 415(b) limitation. Therefore, a plan may fail to satisfy the IRC 415(b) limitations even though no participant has actually accrued or received a benefit in excess of these limitations. See Reg. 1.415-3(a).
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The Tax Reform Act of 1986 (TRA '86) provided that the limitations of IRC 415 (herein referred to as IRC 415 limits) could be incorporated by reference, but such an incorporation by reference must not violate the definitely determinable requirement of Reg. 1.401(a)-1(b)(1). Thus, the terms of the plan must preclude employer discretion, and any rules that allow optional methods of compliance must be stated in the plan.
For example, more than one definition of "compensation within the meaning of IRC 415(c)(3)" may be used for purposes of applying the IRC 415 limits. A plan that otherwise incorporates IRC 415 by reference must specify which definition of compensation is incorporated.
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The following general definitions and concepts are relevant to IRC 415(b).
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IRC 414(j) defines a DB plan as any plan which is not a DC plan. Under a DB plan, participants accrue a benefit each year under a formula that must be explicitly stated in the plan. See Reg. 1.401-1(b)(1)(i), and Regs. 1.401(a)-1(b)(1)(i) and (iii).
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"Accrued benefit" , generally, refers to pension or retirement benefits and not to ancillary benefits not directly related to retirement benefits. These accruals must be limited as required under IRC 415(b) (and 415(e), as appropriate, for limitation years beginning before 2000).
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IRC 415(f) and Reg. 1.415-8 provide that for purposes of applying the 415(b) limitations, all DB plans (whether or not terminated) ever maintained by an employer are to be treated as one DB plan.
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IRC 414(a) provides that for purposes of that section, in any case in which the employer maintains a plan of a predecessor employer, service for the predecessor is treated as service for the employer. Accordingly, benefits and service for a predecessor employer are taken into account with benefits and service for a successor employer for IRC 415 purposes.
Example 1: Company X maintained a DB plan for 5 years before it terminated the plan in 1992. Company X adopted another DB plan in 1994. For those employees who have participated in both plans, benefits under both plans must be combined for purposes of applying the IRC 415 limits.
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IRC 414(b), (c), and (m) provide that for purposes of IRC 415 all employees of all corporations which are members of a controlled group of corporations (within the meaning of IRC 1563(a), determined without regard to IRC 1563(a)(4) and (e)(3)(c)), all employees of trades or businesses (whether or not incorporated) which are under common control, and all employees of the members of an affiliated service group are treated as employed by a single employer.
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IRC 415(h) provides that for purposes of applying IRC 414(b) and (c), the phrase "more than 50%" shall be substituted for the phrase "at least 80%" each place it appears in IRC 1563(a)(1).
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IRC 414(n) provides that, for purposes of IRC 415, a leased employee is treated as an employee of the recipient of the leased employee's services.
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In particular, benefits or contributions provided by the leasing organization that are attributable to services performed for the recipient are treated as provided by the recipient.
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Where (i) a company is a member of a controlled group or affiliated service group that maintains a plan covering its employees, and (ii) the company subsequently leaves the group and establishes an unrelated new plan, the plan of the prior group is aggregated with the company's new plan for purposes of applying the IRC 415 limits to employees covered by both plans.
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All DB plans ever maintained by an employer are treated as one DB plan, and all DC plans ever maintained by an employer are treated as one DC plan for purposes of applying the limitations of IRC 415(b), (c), and for limitation years beginning before 2000, (e) (and in this case, the company would be treated as maintaining both plans). See IRC 415(f) and Reg. 1.415-8(a).
Example 2: Companies A, B, and C are members of a controlled group of corporations. Employees of all members of the controlled group are eligible to participate in a DB plan, Plan A. The plan year and limitation year of Plan A are both the calendar year.
On 4/30/93, Company B terminates membership in the controlled group, and immediately establishes a new DB plan, Plan X, and a DC plan, Plan Y, for its employees. Both Plan X and Plan Y have a calendar year plan year and limitation year. No transfers of assets and liabilities within the meaning of IRC 414(l) are made from Plan A to the new Plan X.
For the 1993 limitation year and subsequent limitation years, benefits under both DB plans (Plan A and Plan X) must be aggregated for purposes of applying the IRC 415(b) and, for limitation years beginning before 2000, IRC 415(e) limitations. Company B would be treated as maintaining both plans.
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The IRC 415 limits are applied to a limitation year, which is the calendar year unless another consecutive 12 month period is elected by the employer. See Reg. 1.415-2(b) for the definition of limitation year and special rules.
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The election to use any other consecutive 12 month period as the limitation year (other than the calendar year) must be made by the adoption of a written resolution by the employer. This election can also be made in connection with the adoption, by the employer, of the plan or any amendments to such plan. Once the limitation year is established, it may only be changed by one of the election methods described above.
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If a change is made, the new limitation year must be a consecutive 12 month period which begins on any day within the prior limitation year.
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If the employer changes the limitation year, a short limitation "year" or period is created because the new consecutive 12 month period must begin on a day within the current limitation year. The short limitation period begins on the first day of the current limitation year and ends on the day before the first day of the new limitation year. Unlike DC plans, where the dollar limitation applicable to the short limitation period is prorated, the dollar limitation is not prorated in the case of a DB plan. See IRC 415(c) examination guidelines for DC plan proration rules.
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As a general rule, a group of employers which constitute a controlled group of corporations, commonly controlled trades or businesses or affiliated service groups, within the meaning of IRC 414(b), (c), or (m), must all make the same election with respect to the limitation year.
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An employer that maintains more than one qualified plan must generally use the same limitation year for each plan.
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However, an employer that maintains more than one plan, or a group of employers described above, may elect to use different limitation years as prescribed by Rev. Rul. 79-5, 1979-1 C.B. 165. This Rev. Rul. is designed to provide relief in the case of two or more large plans of the same employer with accounting systems based on different plan years and few, if any, participants covered by more than one plan. The rules are complex and somewhat more restrictive than the general case.
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Determine all DC and DB plans currently maintained by the employer (or that have ever been maintained by the employer), along with their effective dates and earliest participation dates.
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Determine whether the employer is a member of a controlled group of corporations, a member of trades or businesses (whether or not incorporated) which are under common control, or a member of an affiliated service group. Taking IRC 415(h) into account, determine whether the employer is treated with other members of these groups as a single employer for purposes of applying the IRC 415 limits. If other members are to be taken into account, determine the same information for their plans as that determined for the employer.
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If an employee currently participating in a DB plan of the employer has also participated in another ongoing or terminated plan(s) of the same employer (or of an employer treated as the same employer for purposes of IRC 415 testing), aggregate benefits, service and participation under these plans for purposes of applying the IRC 415(b) limits.
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What is the limitation year for each plan? If the employer has elected to use a 12-consecutive month period other than the calendar year, was the election effected by one of the three methods discussed under the definition of limitation year (i.e., separate written resolution, adoption of a plan with a limitation year other than a calendar year, or adoption of a plan amendment changing the limitation year)?
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IRC 415(b) provides, in general, that benefits with respect to a participant exceed the IRC 415(b) limits if, when expressed as an annual benefit (within the meaning of IRC 415(b)(2)), such annual benefit is greater than the lesser of:
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$90,000, or
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100% of the participant's average compensation for his/her high-3-years.
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The IRC 415(b)(1)(A) limitation is often referred to as the DB "dollar limitation" while the IRC 415(b)(1)(B) limitation is often called the DB "compensation limitation."
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Under SBJPA, effective for limitation years beginning after December 31, 1994, the DB compensation limitation does not apply to governmental plans (as defined in IRC 414(d)). (EGTRRA increased the DB dollar limitation of IRC 415(b)(1)(A) to $160,000, effective for limitation years ending after December 31, 2001. EGTRRA also provided that the DB compensation limitation does not apply to multiemployer plans (as defined in section 414(f)) for limitation years beginning after December 31, 2001.)
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IRC 415(d) provides that the IRC 415(b)(1)(A) dollar limitation is adjusted annually by the Secretary of the Treasury to take into account increases in the cost-of-living, with the adjusted limitation effective as of January 1 of a calendar year and applicable to limitation years that end with or within that calendar year.
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The adjusted dollar limitation is applicable to participants in a DB plan and to employees who have retired or otherwise terminated their service under the plan with a nonforfeitable right to accrued benefits, regardless of whether they have actually begun to receive such benefits.
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However, the annual benefit payable to a terminated participant that is otherwise limited by the DB dollar limitation may be increased in accordance with COLAs to the DB dollar limitation, but only if the plan specifically provides for such post-retirement adjustments.
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While a DB plan may include a provision that automatically adjusts the maximum dollar limitation for changes in the cost-of-living, the provision may only provide for scheduled increases that become effective as provided in IRC 415(d) no sooner than January of each calendar year. Stated differently, increases in the dollar limitation may not be anticipated. See Reg. 1.415-5(a).
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The DB dollar limitations in effect from ERISA through 2001 are given below. As indicated, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) imposed a 3-year freeze on the COLAs to the DB dollar limitation, beginning in 1983, and the Tax Reform Act of 1984 (TRA '84) extended the freeze on COLAs until 1/1/88. (EGTRRA increased the DB dollar limitation of IRC 415(b)(1)(A) to $160,000, effective for limitation years ending after December 31, 2001.)
IRC 415(b)(1)(A) Dollar Limitations Limitation added by ERISA $ 75,000 1/1/76 $ 80,475 1/1/77 $ 84,525 1/1/78 $ 90,150 1/1/79 $ 98,100 1/1/80 $110,625 1/1/81 $124,500 1/1/82 $136,425 1/1/83 - - 1/1/87 $ 90,000 1/1/88 $ 94,023 1/1/89 $ 98,064 1/1/90 $102,582 1/1/91 $108,963 1/1/92 $112,221 1/1/93 $115,641 1/1/94 $118,800 1/1/95 - - 1/1/96 $120,000 1/1/97 $125,000 1/1/98 - - 1/1/99 $130,000 1/1/2000 $135,000 1/1/2001 $140,000 1/1/2002 - - 1/1/2003 $160,000 -
In certain circumstances the DB compensation limitation applicable to a participant who has separated from service with a nonforfeitable right to an accrued benefit may be adjusted annually to take into account cost-of-living increases.
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Specifically, where the annual benefit payable to a terminated participant is limited by the compensation limitation and where the plan specifically provides for such post-termination adjustments, the compensation limitation applicable to the participant in the limitation year he/she separated from service may be adjusted. See Reg. 1.415-5.
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GATT provided that, for participants who have separated from service, the amount taken into account under IRB 415(b)(1)(B) (the DB compensation limitation) is adjusted annually for increases in the cost-of-living by the Secretary. The factors used to adjust the DB compensation limitation applicable to such separated participants are published by the Service as part of the cost-of-living adjustments under IRC 415(d). (The first factor provided by the Service was included in Rev. Rul. 95-29.) The compensation limitation applicable to such an individual for a calendar year is calculated by multiplying the compensation limitation applicable to the individual, as adjusted under prior law through the prior calendar year, by the factor provided by the Service for that year.
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The factors used to adjust the DB compensation limitation applicable to a participant who separated from service before January 1 of the calendar years from 1995 through 2001 are given below.
1995 1.0217 1996 1.0264 1997 1.0294 1998 1.0220 1999 1.0160 2000 1.0235 2001 1.0351 2002 1.0270 2003 1.0159 -
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For individuals whose benefits under a plan are limited by IRC 415(b) and the plan provides for the escalation of benefits as the IRC 415(b) DB dollar limitation is increased, benefits may only be increased beginning in the year the increased IRC 415(b) limit becomes effective, and benefits for prior years are not retroactively increased because of benefit increases in the current year.
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For purposes of calculating a single-sum distribution of a participant's benefit, COLA increases in the dollar limitation and the compensation limitation must not be anticipated.
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Where a plan formula provides that a participant's benefit is increased each year by a COLA which is a function of the Consumer Price Index (CPI), a participant receiving their benefit in the form of a single sum must receive projections of the CPI increases (based on reasonable actuarial assumptions) as part of their single sum, but only to the extent the single sum does not exceed the actuarial present value of the lesser of the current dollar limitation or current compensation limitation applicable to the participant.
Example 3: Company A has a DB plan, Plan Z, with a plan year and limitation year that both end on 6/30. What is the DB dollar limitation applicable to a participant in Plan Z for the limitation year ending 6/30/98?
Solution. The dollar limitation applicable to the 7/1/97 - 6/30/98 limitation year is $130,000. The adjusted dollar limitation effective 1/1/98, is applicable to limitation years that end during the calendar year 1998. See Reg. 1.415-3(a)(2).
Example 4: A DB plan, Plan Y, with a calendar year plan year and limitation year was terminated on 8/10/96, but was not able to make single-sum distributions to participants until February 1997. Which adjusted dollar limitation will be used for purposes of calculating the maximum single sum-distribution that can be distributed to a Plan Y participant?
Solution. The dollar limitation in effect on the date of termination ($120,000) would be used for calculating the maximum accrued benefit under the plan in an optional form, i.e., the maximum single sum which can be distributed. If the plan provides for interest on late distributions, the amount may be increased accordingly.
Example 5: In 1997, Mr. Burton retired from Plan K, a DB plan, at his social security retirement age (SSRA) of 65. His benefit at retirement age, prior to limitation for IRC 415(b), was $150,000 per year, payable as a joint and 50% survivor annuity. Mr. Burton's benefit in 1997 was limited by the IRC 415(b) dollar limitation to $125,000. The terms of Mr. Burton's plan provide for the use of the adjusted dollar limitation under IRC 415(b) and (d), but do not provide for automatic post-retirement benefit increases as the IRC 415 dollar limitation increases. However, in 1998, the plan is amended to provide for a 2% COLA adjustment for retiree benefits. Under the terms of the plan, ad hoc COLA adjustments for retirees are calculated using benefits under the plan formula, prior to limitation for IRC 415. How will this affect Mr. Burton's benefit in 1998?
Solution. In 1998, Mr. Burton can receive a 2% increase in his benefit, provided the increase will not cause the 1998 IRC 415(b) limitation to be exceeded. Therefore, in 1998 Mr. Burton's benefit would be computed as $153,000 (1.02 x $150,000) which would then be limited to $130,000, the 1998 IRC 415(b) dollar limitation. (Note that, keeping all other plan terms the same, without the ad hoc COLA adjustment Mr. Burton's benefit would remain at $125,000.)
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Is the correct IRC 415(b) dollar limitation being used for purposes of applying the IRC 415 limits? Where a DB plan is terminated in one limitation year and benefits in the form of a single sum are not distributed until the following limitation year, is the correct IRC 415(b) limit (the limitation in effect at the time of termination) used for demonstrating that IRC 415 limits are satisfied?
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Where benefits of retired participants (with benefits limited by either the DB dollar limitation or the DB compensation limitation) are increased as the IRC 415(b) limitation increases, do the terms of the plan specifically provide for such post-retirement increases?
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The IRC 415(b)(1)(B) compensation limitation uses a participant's average compensation for his/her high-3-years, with a participant's "high-3-years" described in IRC 415(b)(3) as the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer.
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Reg. 1.415-3(a)(3) provides that a participant's high-3-years of service is the period of 3 consecutive calendar years (or, the actual number of consecutive years of employment for those employees who are employed for less than 3 consecutive years with the employer) during which the employee had the greatest aggregate compensation (as defined in Reg. 1.415-2(d)) from the employer.
Note:
Because the regulations allow the use of a participant's high-3-consecutive years of service (rather than participation), if such high-3-years occur before the plan's effective date or before the employee becomes an active participant in the plan, use of such high-3-years will not cause the plan to fail to satisfy the requirements of IRC 415(b). In determining a participant's high-3-years, the plan may use any 12-month period instead of the calendar year provided it is uniformly and consistently applied.
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While the terms of a plan may provide a different definition of compensation for purposes of calculating the rate of employer contributions or the benefit accrual, a definition of compensation within the meaning of IRC 415(c)(3) must be used to determine whether the maximum permissible contributions or benefits have been exceeded.
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A plan that incorporates IRC 415 by reference must specify which definition of compensation is incorporated. Compensation used for IRC 415 purposes is defined in Reg. 1.415-2(d) and discussed in detail in the IRC 415(c) Examination Guideline.
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SBJPA amended IRC 415(c)(3) to provide that, for years beginning after December 31, 1997, compensation for IRC 415 purposes includes any elective deferral (as defined in section 402(g)(3)), and any amount that is contributed or deferred by the employer at the election of the employee and that is not includible in the gross income of the employee by reason of IRC 125 or IRC 457. For limitation years beginning after December 31, 2000, compensation for IRC 415 purposes also includes any elective amounts that are not includible in the gross income of the employee by reason of IRC 132(f)(4). Reg. 1.415-2(d) has not yet been updated to reflect these changes in IRC 415(c)(3).
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IRC 401(a)(17), added by TRA '86, imposes an annual compensation limit on the amount of compensation a qualified plan can take into account in determining allocations in a DC plan, or benefit accruals in the case of a DB plan.
Note:
The percentage of compensation limitations of IRC 415(b) and IRC 415(c) are based upon the actual IRC 415(c)(3) compensation, without regard to the IRC 401(a)(17) compensation limit. However, the benefits and contributions to which the IRC 415 limits are applied cannot be based on compensation in excess of the IRC 401(a)(17) compensation limit. [Note that where a plan does not incorporate IRC 415 by reference and defines compensation for all purposes under the plan as compensation not in excess of the IRC 401(a)(17) compensation limit, the 100 percent of high three-year average compensation limitation used under the plan will use compensation as defined under the plan, and the plan's compensation limitation will be more restrictive than the IRC 415(b) and 415(c) compensation limitations.]
Example 6: Mr. Holler commenced employment on 1/1/95, at age 55, and began participating immediately in his employer's DB plan (Plan M). The benefit at normal retirement age (65) under Plan M (before limitation for IRC 415(b)) is years of service (not to exceed 10) times 10% times final average compensation, where final average compensation is calculated using the participant's high-3 consecutive years average compensation. Mr. Holler's 1995 compensation is $200,000. What compensation amounts would be taken into account in 1995 in determining Mr. Holler's benefit and the IRC 415(b)(1)(B) compensation limitation applicable to this benefit?
Solution. In calculating the benefit under the plan formula in 1995, the compensation would be limited by the 1995 IRC 401(a)(17) compensation limit to $150,000. Thus, after 1 year of service, Mr. Holler's benefit under the plan formula, payable at normal retirement age, prior to limitation for IRC 415, would be $15,000 [1 x 10% x $150,000]. The IRC 415(b)(1) limitation applicable to Mr. Holler's benefit would be the lesser of the IRC 415(b)(1)(A) dollar limitation or the IRC 415(b)(1)(B) compensation limitation. The compensation limitation applicable to Mr. Holler would be calculated taking his actual compensation ($200,000) into account.
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Is an IRC 415(c)(3) definition of compensation used under the plan for purposes of determining whether the limitations of IRC 415 have been exceeded? Does the plan specify which definition is used for purposes of determining the IRC 415(c)(3) compensation?
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Are elective deferrals treated appropriately in determining the compensation used for IRC 415 testing (i.e. IRC 415(c)(3) compensation)?
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Are amounts which are deferred and not includible in gross income under IRC 125 plans, 401(k) plans, 403(b) plans, 408(k) plans, and 457 plans excluded from compensation for IRC 415 testing for limitation years beginning before 1998?
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For limitation years beginning after December 31, 1997, does compensation for IRC 415 purposes include any elective deferral as defined in section 402(g)(3) (which includes elective deferrals under 401(k), 403(b), and 408(k) plans), and any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of IRC 125 or IRC 457?
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For limitation years beginning after December 31, 2000, does compensation for IRC 415 purposes include any elective amounts that are not includible in the gross income of the employee by reason of IRC 132(f)(4)?
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Is the employee's compensation from all members of a controlled group (or from all members of an affiliated service group) taken into account?
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For the IRC 415(b) percentage of compensation limitation, is average compensation for a participant's high-3 years calculated correctly? Remember, while a participant's benefits cannot be based on compensation in excess of the IRC 401(a)(17) compensation limit, the IRC 415(b) compensation limitation is based on actual IRC 415(c)(3) compensation.
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IRC 415(b)(1) limits the "annual benefit" which may be provided by a qualified plan. Annual benefit is further defined in IRC 415(b)(2)(A) as a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in IRC 402(a)(5), 403(a)(4) and 408(d)(3)) are made.
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Unlike a DC plan which limits the amount of annual additions which may be made to the account of a participant in any given year, a DB plan must limit the annual benefit that may accrue or be paid at any time to a participant. In determining the annual benefit, benefits attributable to certain amounts are not taken into account:
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Mandatory or voluntary employee contributions;
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Rollover contributions (as defined in IRC 402(a)(5), 403(a)(4), and 408(d)(3)); and
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Assets or liabilities transferred from one qualified plan to another. See Reg. 1.415-3(b).
Note:
The limitation on benefits is a maximum against which the plan's annual benefit is compared, and annual benefit refers to a retirement income benefit payable annually in the form of a straight life annuity. The test is applied by comparing the participant's retirement benefit under the plan to the maximum annual benefit that could be paid to the participant under IRC 415(b). Where a DB plan provides a retirement benefit in any form other than a straight life annuity, the plan benefit is adjusted to a straight life annuity that is the actuarial equivalent of such benefit under rules provided in IRC 415(b)(2), Reg. 1.415-3, and Rev. Rul. 98-1, 1998-1 C.B. 249 (for limitation years ending after December 31, 2001, see also Q&A-3 of Rev. Rul. 2001-51, 2001-45 I.R.B. 427). Therefore, to test a DB plan under IRC 415, the plan's retirement benefit is actuarially adjusted to the same form as the annual benefit described in IRC 415, and the annual benefit limitation must be adjusted such that it commences at the same time as the retirement benefit.
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Following are examples of plan benefits payable in a form other than a straight life annuity and indicate whether all or a portion of each benefit is taken into account when determining the "annual benefit" limited by IRC 415(b). Also provided are examples demonstrating--
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adjustments to the DB dollar limitation where benefits commence before or after a participant's SSRA (for limitation years ending before 2002), and
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certain other adjustments.
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Benefits for which no adjustments are required include--
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Ancillary benefits;
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Qualified joint and survivor annuities; and
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Post-Retirement Cost-of-Living Increases.
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IRC 415(b)(2)(B) provides in part that any ancillary benefit that is not directly related to retirement income benefits is not taken into account when adjusting the plan benefit for other forms of benefit for purposes of complying with the DB plan limitations. See also Reg. 1.415-3(b)(2).
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Examples of ancillary benefits not directly related to retirement benefits. See Reg. 1.415-3(c)(2).
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Payment of medical expenses (or insurance premiums for such expenses).
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Pre-retirement life insurance protection and lump-sum death benefits.
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Sickness, accident, hospitalization and medical expenses for retired employees, their spouses and dependents under IRC 401(h).
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Disability benefits not in excess of the qualified disability benefit. (A qualified disability benefit is defined in IRC 411(a)(9) as a disability benefit that does not exceed the benefit that would be provided for the participant if he/she separated from service at normal retirement age.)
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Note: A plan providing such benefits will not be required to take them into account when determining whether the IRC 415(b) limits have been exceeded.
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No adjustment is required for a benefit payable as a qualified joint and survivor annuity (QJSA) to the extent the value of such annuity exceeds the sum of the values of:
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A straight life annuity beginning on the same date, and
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Any post-retirement death benefits that would be payable even if the annuity was not in the form of a joint and survivor annuity.
Example 7: A DB plan (Plan A) provides for an annual benefit of 100% of final average compensation, not to exceed the lesser of the IRC 415(b) dollar or compensation limitations. A participant of Plan A, Mrs. Jones, retires in 1999 at her SSRA and has her benefit limited by IRC 415(b)(1) to $130,000. This participant is married at the time benefits commence, and the plan will pay an annuity of 100% of compensation (up to $130,000) during her lifetime, and should she die, a qualified survivor annuity of the same amount will be provided during her spouse's lifetime. This plan formula would meet the IRC 415(b) limits because the spouse's benefit is not considered an additional benefit for IRC 415 purposes, since it is a QJSA.
(If, however, the plan included a 10-year certain feature providing that 100% of compensation was payable during the participant's lifetime and her spouse's lifetime, should she die--but in no event, for a period shorter than 10 years--the formula would not satisfy IRC 415(b). The 10-year certain feature would make this benefit more valuable than a simple joint and survivor annuity, and the full dollar limitation of $130,000 could not be provided.)
Note:
Where a plan provides that the normal form of benefit distribution is a straight life annuity, married participants automatically receive a QJSA option (which may or may not be subsidized), and also provides for elective single-sum distributions, the maximum single sum which may be distributed to any married participant who elects a single sum is the actuarial equivalent of the maximum allowable straight life annuity, not the actuarial equivalent of the maximum allowable joint and survivor annuity. The increased benefit provided by a joint and survivor annuity for which no adjustments are made is available only if such benefit is paid as a joint and survivor annuity. All other forms of benefit are limited to the actuarial equivalent of the maximum allowable straight life annuity benefit. Note, however, that if the normal form under the plan is a qualified joint and 100 percent survivor annuity and the participant elects to receive a single sum, a forfeiture under IRC 411 will occur because the participant would be limited under IRC 415 to the single-sum equivalent of the maximum allowable straight life annuity. Conversely, if the plan provides the single-sum equivalent of the maximum allowable joint and 100 percent survivor annuity in order to avoid a forfeiture under IRC 411, the benefit would exceed the limitations of IRC 415. Therefore, a plan must be drafted to avoid these possibilities.
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Where a plan provides that the amount of a participant's benefit to be paid in the form of a joint and survivor annuity is calculated by applying a reduction factor to the participant's single life annuity benefit under the plan formula, the terms of the plan may provide that the reduction factor is applied before the IRC 415 limit is applied.
Example 8: Mr. Jones, after 25 years of participation in a DB plan, Plan Z, will retire and commence receiving benefits in 1997 at his SSRA of 65. Under Plan Z, Mr. Jones' benefit, paid as a single life annuity, is $150,000 before the application of IRC 415(b). If Mr. Jones' benefit is paid as a joint and 50% survivor annuity, the plan provides that an 85% reduction factor is applied to the single life annuity benefit, before limitation for IRC 415(b). The plan further provides that the survivor portion of a participant's benefit, when in the form of a joint and 50% survivor annuity, is computed using the participant's benefit, reduced for the joint and survivor form, but prior to the application of IRC 415(b), provided the survivor portion does not exceed the benefit payable to Mr. Jones, after limitation for IRC 415(b).
Mr. Jones' benefit in the form of a joint and 50% survivor annuity would be calculated as $127,500 ($150,000 x 85% = $127,500), which would then be limited by IRC 415(b) to a $125,000 joint and survivor annuity. The survivor portion of the annuity will be computed as 50% of $127,500, or $63,750.
Note:
Of course, under the top-heavy rules this is a nonproportional subsidy (unless the group to which the subsidy applies would independently satisfy the requirements of IRC 410(b)). See Q&A T-26 and T-27 of Reg. 1.416-1, and also the examination guidelines on top-heavy plans.
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Benefits for which adjustments are required include--
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Other forms of benefit; and
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Employee contributions.
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Where a DB plan provides a benefit other than in the form of a straight life annuity an adjustment is required (except for those benefits previously discussed for which no adjustment is required). Such form of benefit must be adjusted to an actuarially equivalent straight life annuity beginning at the same age at which the plan benefit is to be received.
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Prior to amendment by the Uruguay Round Agreements Act, Public Law 103-465 (GATT), as amended by the Small Business Job Protection Act of 1996, Public Law 104-188 (SBJPA), IRC 415(b)(2)(E)(i) provided that the interest rate assumption used for purposes of adjusting the benefit where the benefit is payable other than in the form of a straight life annuity must not be less than the greater of 5% or the rate specified in the plan. The specified plan rate is the rate used under the plan for actuarial equivalence for that specific benefit form. (The mortality table used for adjustments under IRC 415(b)(2) is generally the table used for actuarial equivalence for the specific benefit form under the plan, but the plan is permitted to specify another reasonable mortality table for this purpose.)
Note:
Some plans may specify different interest rates (or mortality tables) for different benefit forms.
Example 9: Mr. Burns will retire in 1994 at age 65, his SSRA, after 20 years of participation in a DB plan, Plan W. Plan W provides that participants may elect to receive their benefit in the form of a single sum which is the actuarial equivalent of their annual benefit under the Plan, calculated using the UP-1984 Mortality Table and 4%. Using these assumptions, Mr. Burns' benefit in the form of a single sum, before limitation for IRC 415, is $750,000. Mr. Burns' high-3 average compensation is $135,000.
How is the IRC 415(b) limit applied to his single sum benefit? (This is an example of an adjustment for form of benefit.)
Solution. Mr. Burns' high-3 average compensation exceeds the 1994 dollar limitation ($118,800), so the dollar limitation is the limitation that will apply to Mr. Burns' benefit. Because a single sum is a form of benefit other than a straight life annuity for which an adjustment is required, the single sum must be converted to an equivalent single life annuity commencing at the same age for purposes of applying the IRC 415 limits. The actuarial assumptions, which would be used for these purposes in 1994, would be the mortality table used under the plan for single sums and an interest rate that is the greater of 5% or the rate used under the plan for single sums (4%). Thus, the UP-1984 Table and 5% would be used to derive an age 65 annuity factor equal to the cost of a $1 per year life annuity, paid monthly, which is 10.036.
The single sum ($750,000) is then divided by the annuity factor (10.036) to obtain an equivalent single life annuity of $74,730.97. Mr. Burns' benefit, expressed as an "annual benefit" ($74,730.97), must not (and does not) exceed the IRC 415(b) limit applicable to Mr. Burns in 1994 ($118,800). Therefore, Mr. Burns' single sum benefit satisfies IRC 415(b).
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GATT (section 767(b)) amended IRC 415(b)(2)(E)(i), (ii), and (iii), to provide in general that where the form of benefit is not subject to IRC 417(e)(3), for purposes of adjusting the benefit or any limitation under IRC 415(b)(2)(B) or (C), the interest rate assumption must not be less than the greater of 5 percent or the rate specified in the plan. Where the form of benefit is subject to IRC 417(e)(3), for purposes of adjusting the benefit or any limitation under IRC 415(b)(2)(B) or (C), the applicable interest rate (as defined in IRC 417(e)(3)) is substituted for 5 percent. That is, where the form of benefit is subject to IRC 417(e)(3), the interest rate used to adjust the benefit or limitation must not be less than the greater of the applicable interest rate or the plan rate. IRC 415(b)(2)(E)(v), added by GATT, provides that for purposes of adjusting any benefit or limitation under IRC 415(b)(2)(B), (C), or (D), the mortality table prescribed by the Secretary for IRC 417(e)(3) must be used (the applicable mortality table).
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The GATT amendments to IRC 415(b)(2)(E) were generally effective as of the first day of the first limitation year beginning in 1995, although an employer could elect to treat the changes as being effective on or after December 8, 1994. GATT also provided that a participant's accrued benefit would not be considered to be reduced in violation of IRC 411(d)(6) where such reduction results solely from the application of the IRC 415(b)(2)(E) changes. Although a participant's accrued benefit is permitted to be reduced, section 767(d)(3) of GATT provided that an accrued benefit is not required to be reduced below the accrued benefit as of the last day of the last plan year beginning before January 1, 1995. Thus, an employee's accrued benefit as of the last day of the last plan year beginning before 1995 could be (but was not required to be) protected. Rev. Rul. 95-29, 1995-1 C.B. 81, provided guidance in the form of questions and answers on the limitations on benefits and contributions under IRC 415 as amended by GATT.
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Section 417(e)(3) provides rules regarding the actuarial assumptions to be used to determine the present value of a participant's accrued benefit. GATT amended section 417(e)(3) to provide a specific mortality table and changed "the applicable interest rate" that must be used to determine the present value of a benefit subject to section 417(e)(3). The applicable interest rate specified in section 417(e)(3) is the annual interest rate on 30-year Treasury securities as specified by the Commissioner. Benefits subject to section 417(e)(3) include all forms of benefit except benefits payable in the form of an annual benefit that does not decrease during the life of the participant, or, in the case of a QPSA, the life of the participant's spouse; or decreases during the life of the participant merely because of the death of the survivor annuitant (but only if the reduction is to a level not below 50 percent of the annual benefit payable before the death of the survivor annuitant), or the cessation or reduction of Social Security supplements or qualified disability benefits (as defined in section 411(a)(9). (See section 417(e)(3) and the regulations thereunder to determine whether a form of benefit is subject to section 417(e)(3).)
(For examples where benefits and/or limitations are adjusted during the period following the effective date of the GATT IRC 415(b)(2)(E) changes and prior to the amendment of GATT by SBJPA, the agent should consult Chapter 2 of Employee Plans CPE Technical Topics for 1998, or consult the area actuary.)
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SBJPA (section 1449(b)) amended GATT to provide that whether or not the benefit is subject to IRC 417(e)(3), adjustments to the limitation under IRC 415(b)(2)(B), (C), or (D) only take 5 percent and the rate specified in the plan into account in determining the interest rate to be used for purposes of the adjustment. Thus, the applicable interest rate is not used to adjust the DB dollar limitation. The applicable interest rate is used to adjust the benefit where the benefit is in a form subject to IRC 417(e)(3). The applicable mortality table is taken into account for all adjustments under IRC 415(b)(2)(B), (C), and (D). The applicable mortality table is currently set forth in Rev. Rul. 95-6, 1995-1 C.B. 80. Section 1449(c) of SBJPA provided that the amendments made by sections 1449(a) and (b) are effective as if included in the provisions of section 767 of GATT. Rev. Rul. 98-1, 1998-1 C.B. 249, provides guidance in the form of questions and answers on the limitations on benefits and contributions under section 415 as amended by GATT and taking into account the applicable provisions of SBJPA, after technical correction made by the Taxpayer Relief Act of 1997 (TRA '97). This revenue ruling modifies and supersedes Rev. Rul. 95-29.
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Section 1449(a) of SBJPA amended section 767(d)(3) of GATT to provide that plans adopted and in effect before December 8, 1994, are not required to apply the IRC 415(b)(2)(E) changes (as amended by SBJPA) with respect to benefits accrued before the earlier of (i) the date a plan amendment applying the IRC 415(b)(2)(E) changes is adopted or made effective, whichever is later, or (ii) the first day of the first limitation year beginning after December 31, 1999. Determinations under IRC 415(b)(2)(E) before such earlier date shall be made with respect to such benefits on the basis of IRC 415(b)(2)(E) and the provisions of the plan as in effect on December 7, 1994 (but only if such provisions of the plan meet the requirements of IRC 415 as in effect on December 7, 1994). Rev. Rul. 98-1 provides guidance on the SBJPA transition rules regarding the application of the IRC 415(b)(2)(E) changes. These rules and others are discussed in 4.72.6.3.4.3.4, Transition Rules After SBJPA/Rev. Rul. 98-1.
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Sponsors of plans adopted and in effect before December 8, 1994, who amended their plans for GATT changes to IRC 415(b)(2)(E) prior to August 20, 1996, (SBJPA enactment date) were permitted by SBJPA to amend the plan to repeal such amendment within one year of the enactment of SBJPA. This period was extended by section 3.03 of Rev. Proc. 99-23 to the last day of the first plan year beginning on or after January 1, 2000. The period was further extended to the last day of the first plan year beginning on or after January 1, 2001, by section 4 of Rev. Proc. 2000-7. Thus, prior to the end of the remedial amendment period, an employer adopting a repealing amendment to a plan has the same options for that plan as an employer that has not made any plan amendments to apply the IRC 415(b)(2)(E) changes.
Example 10 Plan A, a DB plan with a normal retirement age of 65, provides that single-sum distributions are determined as the actuarial present value of the annual straight life annuity payable at the actual retirement date. Prior to GATT, Plan A provides that a single sum is determined using the 83 IAM (Male) Mortality Table and 6% interest, but must be at least as great as the single sum calculated using the IRC 417(e) interest rates. The 83 IAM (Male) table is also used for purposes of IRC 415(b) adjustments under the Plan. Following GATT as amended by SBJPA, Plan A is amended to provide that a single sum is determined as the greater of the single sums determined using (1) 83 IAM (Male) and 6%, and (2) the applicable interest rate and the applicable mortality table. The Plan has been amended to apply the IRC 415(b)(2)(E) changes to all accrued benefits for all participants under the Plan. Assume that the applicable interest rate is 8%. Participant M, whose SSRA is age 65, retires at age 65 from Plan A and elects to receive a distribution in the form of a single sum. Both before and after GATT, the largest single sum is equal to $950,000 (the $950,000 single sum determined using the 83 IAM Mortality Table and 6% interest exceeded the single sums determined using the other stated assumptions to be taken into account in determining single sums). How are the IRC 415(b) limitations applied to M's benefit? (This is an example of adjustment for form of benefit.) Solution prior to GATT. Step 1: the $950,000 is converted to a straight life annuity by dividing it by an age 65 annuity factor (10.576), determined using the 83 IAM table and 6% (the greater of 5% and the plan's rate), as shown below. $950,000 / 10.576 = $89,826 Step 2: the applicable §415(b) limitation, the lesser of the dollar limitation and the compensation limitation applicable to M's benefit, is determined. Step 3: M's equivalent annual benefit ($89,826) must not exceed the applicable limitation. Limit as necessary. Solution after GATT as amended by SBJPA. Step 1: Convert the $950,000 to an equivalent straight life annuity, in two separate calculations: (i) $950,000 is divided by an immediate annuity purchase rate (10.576) determined using 83 IAM and 6%, the plan assumptions for actuarial equivalence for single sums; $950,000 / 10.576 = $89,826 (ii) $950,000 is divided by an immediate annuity purchase rate (9.196) determined using the applicable interest rate (8%) and the applicable mortality table: $950,000 / 9.196 = $103,306 The equivalent annual benefit for purposes of IRC 415 is the greater of (i) and (ii), which is $103,306. Step 2: Determine the applicable IRC 415(b) limit, the lesser of the applicable dollar limitation and the applicable compensation limitation. Step 3: The equivalent annual benefit ($103,306) must not exceed the applicable limit. Plan language must preclude an accrual in excess of the limit. Example 11 Plan R, a DB plan, provides that the normal form of pension is a 10-year certain and life annuity. Actuarial equivalence for all purposes under the Plan is based on the 83 IAM (Male) Mortality Table and 6% interest. Following SBJPA, the Plan was amended to apply the IRC 415(b)(2)(E) changes to all accrued benefits for all participants under the Plan. Participant P, whose SSRA is age 65, retires at age 65 from Plan A and elects to receive the plan benefit equal to (prior to application of IRC 415) a $120,000 per year 10-year certain and life annuity. How are the IRC 415(b) limitations applied to P's benefit? (This is an example of adjustment for form of benefit.) Solution prior to GATT. Step 1: the 10-year certain and life annuity is converted to an equivalent straight life annuity commencing at the same age using the 83 IAM table and 6% (the greater of the plan rate and 5%). This is accomplished by converting the 10-year certain and life annuity to a lump sum by multiplying $120,000 by the annuity purchase rate for an age 65 10-year certain and life annuity (11.132), and then converting the lump sum to a straight life annuity by dividing it by the purchase rate for an age 65 straight life annuity (10.576). ($120,000 x 11.132) / 10.576 = $126,309 The equivalent annual benefit payable at age 65 as a straight life annuity is equal to $126,309. Step 2: Determine the applicable IRC 415(b) limit, the lesser of the applicable dollar limit or the applicable compensation limit. Step 3: The equivalent annual benefit must not exceed the applicable limitation. Plan language must preclude an accrual in excess of the limit. Solution after GATT as amended by SBJPA. Step 1: Convert the 10-year certain and life annuity to a straight life annuity. (Note that this benefit is a nondecreasing annuity benefit and is not subject to §417(e)(3).) (i) Using the plan's definition of actuarial equivalence, the $120,000 10-year certain and life benefit is converted to an equivalent straight life annuity, using annuity factors (based on 83 IAM and 6%) for an age 65 10-year certain and life annuity and an age 65 straight life annuity. ($120,000 x 11.132) / 10.576 = $126,309 (ii) Using 5% interest and the applicable mortality table, the 10-year certain and life benefit is converted to a straight life annuity. The applicable annuity factors are 12.079 (annuity factor for an age 65 10-year certain and life annuity) and 11.534 (age 65 straight life annuity factor). ($120,000 x 12.079) / 11.534 = $125,670 The equivalent annual benefit payable as a straight life annuity is equal to the greater benefit, $126,309. Step 2: Determine the applicable IRC 415(b) limit. Step 3: The equivalent annual benefit must not exceed the applicable limitation. Plan language must preclude an accrual in excess of the limit.
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Adjustments for employee contributions are described.
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When a DB plan provides for mandatory contributions, the annual benefit attributable to such contributions is not taken into account in testing the IRC 415(b) limitation on benefits. Therefore, when these contributions are not kept in a separate account, the portion of the annual benefit that is attributable to the mandatory contributions must be determined using the rules under IRC 411(c)(2)(B). The annual benefit minus the benefit attributable to mandatory employee contributions is the amount that cannot exceed the limitation on benefits under IRC 415(b).
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In general, the accrued benefit derived from contributions made by an employee as of any applicable date is the amount equal to the employee's "accumulated contributions" (as defined under IRC 411(c)(2)(C)), expressed as an annual benefit commencing at retirement age.
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Voluntary contributions are, generally, kept in a separate account with the participant having a nonforfeitable right to the actual account balance, including the participant's contributions plus any earnings on these contributions.
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If voluntary contributions are used to purchase annuities to provide part of the benefit at retirement, the part of the total benefit provided by voluntary contributions is not subject to the IRC 415(b)(1) limitation.
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When there is a transfer of assets or liabilities from one qualified plan to another, the annual benefit attributable to the assets transferred does not have to be taken into account by the transferee plan in applying the IRC 415 limits. The annual benefit payable on account of the transfer for any individual that is attributable to the assets transferred will equal the annual benefit transferred on behalf of such individual multiplied by a fraction, the numerator of which is the total assets transferred and the denominator of which is the total liabilities transferred. See Reg. 1.415-3(b)(1)(iv).
Note:
However, if both plans were maintained by the same employer, the benefits under both plans would have to be taken into consideration for purposes of applying the IRC 415 limits.
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Benefits attributable to rollover contributions that are kept in a separate account would not be subject to the IRC 415(b) limitation. If the rollover contributions are used to provide part of the benefit, the annual benefit attributable to these contributions is determined on the basis of reasonable actuarial assumptions and is not included in the annual benefit of the participant that is limited by IRC 415(b).
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Benefits attributable to rollovers are treated by the transferee and transferor plans in the same way as any transfer of assets and liabilities. That is, they are generally taken into account by the transferor plan rather than the transferee plan. See 4.72.6.3.4.2.2.3.
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Reg. 1.415-3(d) provides that when a DB plan provides for either (or both) mandatory or voluntary contributions, these contributions are considered to be a separate DC plan subject to the IRC 415(c) limitation on annual additions.
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If the plan provides for employee contributions, the actual amount contributed is used in determining the annual addition.
Note:
For limitation years beginning prior to 1/1/87, the amount of employee contributions, whether mandatory or voluntary, which is included in annual additions for that year is the lesser of (i) the amount of employee contributions in excess of 6% of the employee's compensation for the limitation year, or (ii) one-half of the employee contributions for that year. For limitation years beginning after 12/31/86, all employee contributions are included in annual additions.
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Furthermore, when a DB plan provides for employee contributions and as a result these contributions are considered a separate DC plan, the plans must then satisfy the 1.0 rule of IRC 415(e) for employers who maintain both a DB plan and a DC plan, for limitation years beginning prior to 2000.
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If rollover contributions are made to a DB plan, the annual benefit attributable to these contributions must be determined on the basis of reasonable actuarial assumptions, (e.g., interest rate, mortality table, or conversion rate specified by the plan). Using a conversion rate unreasonably favorable to the participant artificially reduces the employer provided portion of the benefit to which the IRC 415(b)(1) limits are applied. See Reg. 1.415-3(b)(1)(iii).
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Do any of the DB plans provide for voluntary or mandatory employee contributions?
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If a plan provides for employee contributions, are the IRC 415(b) limits applied only to the employer provided portion of a participant's benefit? Is the portion of the benefit attributable to employee contributions calculated correctly?
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Where a DB plan provides for employee contributions, are the employee contributions treated as a separate DC plan, and when aggregated with contributions under any other DC plans maintained by the employer, do the aggregated contributions satisfy IRC 415(c)? For limitation years beginning before 2000, do the DB and DC plans satisfy IRC 415(e)?
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Adjustments must be made to the DB dollar limitation for early and late commencement of benefits. (EGTRRA changed the ages at which the DB dollar limitation must be adjusted for early and late commencement of benefits. Effective for limitation years ending after December 31, 2001: the dollar limitation is adjusted for commencement of benefits prior to age 62, and no adjustment is required for benefits that commence from age 62 to age 65; and the dollar limitation will be adjusted for late commencement where benefits commence after age 65.)