EGTRRA 415 limits for non-calendar year plans

[Brenda Wren]

Does anyone know for sure when the 415 limit increase (100% to $40,000) kicks in for non-calendar year plans? The Corbel webcast speaker's opinion is that it kicks in for plan years ENDING in 2002. I believe his opinion is based upon the COLA adjustments for IRC 415 being effective for plan years "ending in". If this is correct, that would mean 401(k) plans with a June 30 year end could start deferring 100% of comp now. However, I have also consulted with local ERISA attorneys and they do NOT agree. EGTRRA is not a COLA adjustment. Any other opinions out there?

[Guest Harry O]

The law is actually quite clear. The increase in the section 415 limit for DC plans is effective for years beginning after 12/31/01. However, the increase in the section 415 limit for DB plans is effective for years ENDING after 12/31/01. This means that the new DB limit of $160,000 is currently applicable to non-calendar year plans that began in 2001. Employers need to check their plan documents since plans that incorporate the section 415 limits by reference have already adopted the new limits like it or not.

[R. Butler]

I agree with Harry O. The Act clearly states that the limits you are questioning take effect in plan years BEGINNING after 12/31/01.

[MGB]

There is ambiguity in the effective date. EGTRRA states "years" beginning in 2002. It does not say "limitation years", nor "plan years", etc.

The law (in general, not just EGTRRA) does not have any reference to limitation years. This is purely a concept from regulations. In the regulations that define limitation years, it states that the limit for a limitation year is the limit for the calendar "year" that the limitation year ends in.

Taking a very stretched view of EGTRRA's statement of "year", one can say that the new law is for the calendar "year" of 2002. Therefore, a limitation year ending in 2002 would be able to use the new limits. This is the interpretation that was referenced in the Corbel seminar.

Having been involved in lobbying during the drafting the language of this section of EGTRRA, we tried to get both DC and DB to state the new limits were effective for limitation years ending in 2002. However, no reference could be made to limitation years because they are not a concept of the law. This was a part of the wrangling over phase-ins (both DB and DC limits were to be phased in over many years). When they dropped the phase-ins (about 2 a.m. the night before finalizing in conference committee) the final language got messed around and only the DB came out the way it did. I still think the DC is ambiguous and a person could make a strong case that the DC limit is effective for limitation years ending in 2002.

Having said all that, the Treasury has already indicated it will issue guidance that the DC limits are only effective for limitation years beginning in 2002, no matter what the law says.

Note that this means noncalendar year limitation years will never be subject to one of the limits in the future. The $40,000 will undoubtedly increase every year (with the new $1,000 increments, it only takes a 2.5% CPI). Assume the future limits are 2003: $41,000, 2004: $42,000, etc. For 2002-2003 noncalendar yar, $40,000 is in effect. For 2003-2004, $42,000 is in effect. The $41,000 is skipped over.

[stephen]

Thank You agin MGB for your insight on these matters!

[Effen]

Has this issue been formally resolved?

Specifically, is the DC limit for a Plan Year Ending 1/31/04 $41,000?