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Guest NedA

IRC Section 415 Limits on Defined Benefit Plans

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Guest NedA

What are the reasons for 401 and 415 limits on defined benefit plans?

 Is it, at least in part, to limit the amount that employers can reduce their tax liability by putting profits into a qualified plan?

 Is it to limit the retirement income available to executives as compared to other employees?

 Is it to limit the tax qualified investment earnings available to employers for the purpose of funding the retirement plan?

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The short answers to your questions are

for 1 -yes

for 2 - yes

for 3 - not really, but that may be the result.

A somewhat cynical answer would be along the lines of

Generally the code sections are driven by two Congressional purposes which are in conflict with a basic Congressional purpose.

On one side we have the desire to prevent the employer from unfairly discriminating in favor of himself and other execs.

Added to this is the desire to prevent the employers from avoiding the payment of taxes by putting too much money into the plan. [Forget the Biblical suggestion of saving in years of plenty in order to have food for the years of drought.]

On the other side of the coin, is the basic purpose to encourage employers to institute retirement plans which will provide the savings of money for retirement to supplement social security, private savings and public assistance.

But, whenever Congress encourages anything, it does so with "guidance' as to which kinds of things are "good" and which are "bad".

The definitions vary from year to year, dependent upon which presentors of anecdotal experience can guarantee the most media coverage and political hay or can contribute the most toward campaigns and other luxuries.

Congress also uses the law to help it justify its annual dance of the balancing budgets.

So, section 401 lists many of the basic rules which must be followed and under which the game must be played - if the plan is to provide a tax deduction for the employer (or employee) and the investment income is to be non-taxable while it remains in the plan.

Section 415 places rather arbitrary limits on the amounts toward which people can budget (through the qualified plan) or which they can allocate in any year.

It might be helpful to review the history of pension plan legislation. You will see how each of the sections grew from relatively short sentences or phrases into extremely complex and convoluted language which require all sorts of explanatory material to follow (regulations, private letter ruling, technical advice memorandums, court decisions, etc.).

If it is available to you, review the series of Pension Plan Guides which were published by CCH back in the 70s and early 80s following the passage of ERISA. Many of them were written by Isidore Goodman, former chief, Pension Trust, IRS, and explained the logic behind the various sections. He relates the background, gives the early history and explains the changes.

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Larry - excellent reply! And it applies to all of pension law, not just the specific code sections mentioned. Are you a pension historian by any chance?

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