Effective date of new 415 limits

[AndyH]

Most of the new stuff is effective for plan years beginning after 12/31/2001, but the DB 415 limit increases seem to be effective for plan years ending after 12/31/2001.

This is despite the fact that, according to the joint committee report, both the House and Senate legislation proposed effective dates for years beginning after 12/31/2001. Yet, for some reason, it was accelerated (for non calendar plans). Why?

[mwyatt]

I guess that this coordinates with the way that we recognize 415 limits currently. Example, a plan year that runs 2/1/00-1/31/01. If I'm doing this @ boy (2/1/00) than I can only recognize the limit in effect for 2000 of $135,000; if I'm doing @ 1/31/01, I can use the $140,000 limitation.

Now what this means for the valuations we've performed @ boy for 2001 years beginning > 1/1/01, I would GUESS that we use we would still use the pre TRRA '01 limit of $140,000 w/ SSRA if BOY; if EOY use the TRRA '01 new limits. I'm sure that Jim H. will clarify (although I'm sure his explanation will cause some consternation). IMHO I would think that you couldn't reflect TRRA 01 415 rules for BOY vals starting after 2001.

Any other thoughts?

[MGB]

Andy,

I was working with the staffers that were doing the technical writing when it went to conference committee.

In the Senate version, they used the terminology "tax years beginning in", with no reference to limitation years (which is only in regulations, not the Code). In the House version, it referenced "years", which is the same language used in all previous laws changing the 415 limits.

When I pointed out the problems the Senate language would create (effectively negating the regulations use of "limitation years ending in"), they went back and changed the language. However, they only did it for DB limits and missed the DC change for this one year.

The actual exchange we had late at night on the 22nd:

Mark,

We would love your thoughts about whether the attached proposed solution (to the issue you raised earlier today) staff has outlined as appropriate and whether we have missed any relevant issues. If there is any way you could get back to me early Wednesday, that would be extremely helpful. Thanks so much.

(my comments went directly into the attachment)

(from staff) Page 136, between lines 19 and 20 (and subsequent pages referenced below)

Section 415(B) limit. The section 415(B) limit phase-in is based on “taxable years”; section 415 applies on the basis of “limitation years”, not taxable years. The phase-in could be revised to refer to limitation years or, as is often done, the reference could be simply to “years”. See, for example, the effective date of bill section 611 on page 146, lines 14-16.

(my response) I agree with the above approach, given that previous laws making changes in the limits have referred to “years” for effective dates of new limits. This is very consistent and would be construed to mean what is intended.

(from staff) Also, under present law, the section 415 limit increase that occurs in a calendar year applies to limitation years ending in that calendar year, not beginning in that calendar year. Accordingly, the phase-in should be based on years ending in the specified calendar years, unless that would affect the revenue estimate.

(my response) The vast majority of plans use calendar year as the limitation year. This change would have a negligible revenue effect.

(from staff) (A corresponding change would be needed to bill section 611(g) on page 146.) If the “beginning in” structure is used, the legislative history should clarify that old-law indexing should occur in 2002, but solely for purposes of plans with limitation years beginning in 2001 and ending in 2002.

(my response) The “beginning in” would cause great hardship for administrative systems, plan documents, benefit calculation procedures, etc., that are all based on regulatory guidance (1.415-3(a)(2) and 1.415-6(a)(2)) that has been in effect since 1980.

(from staff) Compensation limit. A similar issue arises on page 139, between lines 20 and 21 with respect to the compensation limit. The phase-in is based on “taxable years”; the 401(a)(17) compensation limit applies, however, on the basis of “plan years”. The complicating factor here is that, under the bill, the section 404(l) compensation limit incorporates the 401(a)(17) compensation limit by reference; the section 404(l) compensation limit applies on the basis of taxable years. Under the bill, the 401(a)(17) compensation limit is also incorporated by reference for purposes of Code sections 408(k) and 505(B)(7), which apply based on different types of years. Accordingly, again, the simplest solution may be to refer to “years” in the phase-in.

(my response) I agree this is appropriate, although I am not sure this clears up the cross-referencing.

(from staff) SIMPLE limit. The issue also exists with respect to SIMPLE plans (see page 145, between lines 2 and 3). The SIMPLE limits apply on a calendar year basis, not based on taxable years. So the phase-in should be based on “calendar years” or simply on “years”.

(my response) I agree.

[AndyH]

Mark, your points are very valid. The answer isn't readily apparent. It seems the old language is bad, and that it's been interpreted differently by different people.

Maybe the existing law needs to be clarified first. Does somebody retiring in July of 2000 who participates in a plan with a July to June plan year get the 2001 415 limit? Is this what existing law says?

What is the correct application of "Effective January 1"?

[AndyH]

For what it's worth, someone in my office asked the 7/1-6/30 415 question of Jim Holland this morning who replied that the person wouldn't get the 2001 415 limit unless the person retired after January 1.

If we accept that position, the practical application of the 415 law changes and indexing seems to be that it is a calendar year limit.

Anybody disagree with this interpretation?

[MGB]

Andy,

I am not sure I would agree with Holland (but I am assuming he is right for the moment). I need to look at older laws and see what they did when they decreased limits. For example, when TEFRA reduced limits, were the reduced limits applied to limitation years that crossed '82-'83? If so, did they only apply to terminations after the effective date? Was the effective date written like it is now, or did it reference something else (like plan years beginning in '83)? I have not looked back at these yet, but probably will in the next few days. The idea is that whatever they did in reducing limits should apply in an increase in limits (I know...I a using logic here and sometimes logic doesn't apply to IRS views).

If Holland is right, I don't agree with your conclusion that we have a calendar year limit in the future. The 1/1 effective date is only an issue with the $160,000 in 2002. He is saying that a limitation year ending in 2002 is subject to the $160,000, but only for terminations after the effective date (1/1/2002). But, that is only an issue this year. When the first CPI increase hits, it will be effective for the entire limitation year that crosses 2002-2003. This would not have been the case if the original Senate language had remained...then we would have been stuck with taxable years, i.e., calendar years, because we are talking about the taxpayer here, not the company.

[David MacLennan]

I would be quite surprised if Holland were right on the June 30 PYE example above, if they have a June 30 limitation year. The regs clearly state the dollar limits apply by referencing the limitation year end, e.g., the $140K limit would apply for benefits paid in the 6/30/01 PYE.

[AndyH]

But then what does "effective as of January 1 of each calendar year" mean?

[David MacLennan]

I think the "eff Jan 1" in the regs means that you cannot anticipate the change. In my 6/30 PYE example, someone retiring 7/1/00 could only have 135K annual benefit immediately, but on Jan 1 the plan could grant an increase to 140K retroactive to 7/1/00.

I know the regs don't spell out the above interpretation. But I'm confident because if you look at the 415 regs, and the level of detail presented, it seems pretty clear to me if pro-ration was intended they would have clearly stated this. Also, for what it's worth, the Audit Guidelines give a fiscal limitation year example and no pro-ration is mentioned.

[David]

For funding purposes, my understanding has always been that you may use the 415 limit in effect on the last day of the plan yr. (plan yr. = lim. yr.). If that's the case, does anyone see a problem setting up a plan with, for ex., a 7/1/01 - 6/30/02 plan/lim. yr. with ret. age = 62 and doing a boy val funding for $160,000? I have a prospective client for which the new limits would be helpful.

[David MacLennan]

I know that the small plan software I use (DATAIR) automatically uses the $ limit in eff at the end of the plan year rather than the beg of the plan year, so I don't doubt that it is common practice. However, for indexed increases in the $ limit, these become eff Jan 1 (as noted above) which is after a BOY val date, so under the 412 regs and Rev Rul 77-2 re changes eff after the beg of the plan year it seems the $ limits should at most be prorated in the actuarial valuation for non-calendar plan years.

Re your question though, the 160K increase is not an indexed increase with Jan 1 eff date, and so prob can be reflected in full in the BOY 7/1/01 valuation. I would wait until the dust settles on EGTRA and advise your client that for the time being to only fund for the current limits - he can always contribute more later on, up to the due date of the 2001 tax return. Also, you need to have the 160K limit in your plan document before the actuary can reflect it in the valuation (in practice, before he/she signs the Sch b).

[David]

Thank you for your helpful response. One question though, why wouldn't the 160k limit simply be incorpoarted by reference to Sec 415 in the doc?

[David MacLennan]

Prob OK if the doc incorporates it by reference. Without taking the time to look at any of the documents in my office, I think most state the 90,000 limit with indexing, that's why I thought you would need to amend the plan.