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BenefitsLink Newsletter
New U.S. tax and labor law materials on the net pertaining to
employee benefits, for employers, participants and service-providers.
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IRS GUIDANCE ON REPEAL OF SECTION 415(e) LIMIT IS RELEASED
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Authored by Sal Tripodi and reprinted with permission of TRI Pension
Services (http://www.cybERISA.com).
TRI Pension Services, started in 1994, is committed to providing
consulting, professional training, and reference material in ERISA-
related subjects. Its customers include pension professionals (third
party administrators, attorneys, accountants, actuaries, and pension
consultants), as well as employers who sponsor pension plans, and
the human resource and pension departments of such employers.
_______________________________________________________________________
IRS Notice 99-44 provides Q&A guidance on the repeal of section 415(e).
Section 415(e) limits an employee's overall benefits under a defined
contribution plan and a defined benefit plan maintained by the same
employer (treating related employers under tax code section 414 as the
same employer). The repeal is effective for limitation years beginning
on or after January 1, 2000.
The full text of the notice is online at
http://www.benefitslink.com/IRS/notice99-44.shtml
Here is a brief listing of the key points made in Notice 99-44.
(1) If a plan incorporates the section 415 limits by reference, then
the repeal automatically takes effect as of the first day of the first
limitation year beginning on or after January 1, 2000. This might
result in an automatic increase in a participant's benefits payable
under a defined benefit plan. If an employer wants to delay the
automatic increase in benefits, to give itself time to study the
funding costs and qualification issues associated with an increase in
benefits, the employer would have to amend the plan before the
effective date of the repeal. Q&A-7 prescribes a model amendment for
this purpose.
(2) If a plan is not described in 1) (i.e., the plan contains
provisions that describe the section 415(e) limit), an increase in
benefits arising from the repeal of section 415(e) would not
necessarily be automatic. The terms of the plan would have to be
analyzed. Generally, if the plan doesn't simply cross-reference the
limit, but rather describes language that limits benefits in a manner
that reflects the section 415(e) limit, an automatic increase would
usually not occur in the absence of a plan amendment. For this type of
plan, the employer has a choice: a) wait until the plan is actually
amended to start administering the plan without taking into account
section 415(e), or b) ignore section 415(e) in operation, pursuant to
the GUST remedial amendment period guidelines in Rev. Proc. 99-23, and
adopt a conforming amendment by the end of the remedial amendment
period. If the employer takes the first approach, there may be
qualification issues to consider if the amendment is not made
retroactively effective to the statutory effective date of the repeal
of section 415(e). See 4) and 5) below.
(3) Benefits of employees and retirees may be increased to reflect the
repeal of section 415(e), but only if the individual still has an
accrued benefit left in the plan. In other words, if the individual was
already paid out their entire accrued benefit (e.g., lump sum payment)
before the effective date of the repeal, there is no increase
permitted. Q&A-3 and Q&4 of the notice prescribe rules for benefit
increases for retirees and former employees. A benefit increase may not
reflect adjustments for benefits received prior to the 2000 limitation
year that were limited by section 415(e). In other words, the repeal of
section 415(e) only affects annual benefits prospectively.
Nondiscrimination testing requirements relating to plan amendments
(Reg. section 1.401(a)(4)-5) and relating to benefit increases for
former employees (Reg. section 1.401(a)(4)-10(b)), are deemed satisfied
if the benefit increases occur as of the effective date of the section
415(e) repeal and the group which receives the increases consists of:
a) all current and former employees who have an accrued benefit under
the plan as of the effective date of the repeal, or b) all employees
participating in the plan who have at least one hour of service after
the effective date of the repeal.
(4) Nondiscrimination testing may be affected by how the repeal of
section 415(e) is handled by the plan. If the repeal is taken into
account as of the effective date of the repeal, then a plan which is
otherwise designed to be a safe harbor plan under the section 401(a)(4)
nondiscrimination testing rules continues to satisfy the safe harbor.
However, if the repeal is delayed, either by adoption of the plan
amendment described in 1) above, or by continuing to operate the plan
in accordance with plan provisions that state the section 415(e)
limitation, as described in 2) above, then the plan is not a safe
harbor plan under section 401(a)(4) unless the continued application of
section 415(e) is applied only to highly compensated employees. See
Q&A-5 and Q&A-10 of the notice.
(5) Any exception from the qualification rules that is provided in
order to satisfy section 415 is not applicable to a plan which limits
an employee's annual additions under a defined contribution plan or
accrued benefit under a defined benefit plan solely by reason of the
continued operation of the section 415(e) limit after the effective
date of the repeal. For example, if a 401(k) plan refunds elective
deferrals to correct excess annual additions, but the excess determined
by the plan exists solely because of the continued operation of the
plan's 415(e) provisions after the effective date of the repeal, the
refund would violate the qualification requirements. See Q&A-8 of the
notice.
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