EGTRRA Technical Corrections - Keeping Old Law DB Limits

[mwyatt]

The Job Creation and Worker Assistance Act of 2002 allows for employers to keep the old 415 limits (pre-EGTRRA) to avoid the "pop-up" of accrued benefits if amended by June 30, 2002.

My questions are as follows:

1) Pop-up occurs not only due to increase in 415 limit but also due to retroactive increase in 401(a)(17) salary limitations to $200,000. Can an employer keep the "old law" pre 2002 salary limits in place? Some sources describing JCWAA as recognizing combined effect of salary and benefit limitation increases, but when I read JCWAA, only really recognizes 415. Am I reading this wrong?

2) What would form of amendment look like? Has IRS issued any model language to date?

3) If this does allow you to keep the old compensation limits (which obviously provide for additional pop up consequences), would you stick with prior $170k limit in projecting compensation limits for future years (i.e. 2002 and beyond for projected benefits), or would you recognize 200,000 limit in 2002 and future years.

Thanks for any help.

[Mike Preston]

I thought I read somewhere that the 401(a)(17) pop-up, since it was not in any way retroactive, requires action to be taken before a benefit increase pursuant to the plan's recognition of the increased limite takes affect.

Further, since the increase retroactively is not automatic, one needs an amendment recognize the impact. I'm pretty sure, although I haven't checked, that the increase to the 401(a)(17) limits with respect to years prior to the year beginning on or after 1/1/2002 is something that is an option in the model amendments that the IRS published in 2001-56 (or 2001-57).

Hence, there is no automatic pop-up in this situation.

If the plan document does not provide for use of compensation in excess of a specific limit, you are precluded from using compensation in excess of that limit for your 412 and 404 valuations. FAS may require something entirely different, based on pattersn, etc. In the first year of such a pattern I would be inclined to limit here, too.

[mwyatt]

So I shouldn't have to worry about the retro increases in the 200k limit (applied to 2001 and prior years) since in order to use this new limit either retro or going forward, I need the EGTRRA amendment signed by 5/31/02. So I do this amendment by 5/31/02, and elect NOT to retroactively use $200k, only apply to 2002 years going forward (or if I want, not at all).

Second, I need the amendment in place by 6/30/02 if I do NOT want to recognize the 415 increases. Of course, in my situation, this is a moot point since the benefit under this particular plan is nowhere near the old or new limits, even with the 200k salary limit.

Hence my only real action is to get the EGTRRA amendment in place by 5/31/02, electing NOT to apply retroactively.

Thanks for clarifying this...

[david rigby]

I think the 415 issue centers around the provision (in some plans) that incorporates 415 by reference. Thus, it would be changed, in plans that use this reference, without any action. Plans without such language would an amendment to recognize the new limit.

The issue about the 401(a)(17) limit is based on the fact that plans are not supposed to incorporate that section by reference. Yes some do, but that may not be a valid cite, from the IRS viewpoint. So, if the plan is not permitted to incorporate the reference, then it cannot automatically change.

[MGB]

I think we need to be a little more careful than pax's comments about the IRS. I agree that 401(a)(17) is not supposed to be incorporated by reference. However, since EGTRRA, I've been bombarded with the reality that a large percentage of plans do have this reference.

I don't think it makes any difference that the IRS does not view this as an appropriate reference. First, they have been allowing it in their determination letter process for many years (they wouldn't have allowed it in the 80s, but got very lax on it in the 90s). Second, I would be more concerned with the language of the plan than what the IRS thinks. It is the language of the plan that would be brought into court, with the IRS as just another interested party that may or may not chime in.

So, my concern centers on just what the language says. For example, if it says that the limit used is the highest allowable under 401(a)(17), then you may have an automatic retroactive pop-up, in my opinion.

The next concern is when this occurs. This is going to depend on the structure of the plan's formula and tie-in with maximum references in the plan. Under some plans, this occurred on January 1 and is now an anti-cutback issue, while under other plans it does not occur until a year of service is performed in 2002. Again, this will take careful review of the language of each plan. I don't think there is an across-the-board statement that can be made about all plans.

As soon as possible (should have been before the 2002 plan year), the plan should be amended to clarify what such reference means. If the plan does not incorporate 401(a)(17) by reference, then you have until the end of the 2002 plan year to adopt a good-faith amendment stating the intentions (DON'T do it by just incorporating 401(a)(17) - that is ambiguous).

[FAPInJax]

I also have a concern with the 415 amendment. The IRS commented at EA that this was temporary (allowing the user to back off the automatic increase). The new 415 limit is going to be in effect and the plan can NOT maintain the old 415 rules unless there is an extensive amendment to the document detailing how the calculations are to be made.