New Proposed 415 Regulations

[SoCalActuary]

A group of actuaries is considering a meeting in Los Angeles, possibly June 6 or July 11, at the Price Raffel offices in Century City. We hope to prepare a breakdown of the proposed new 415 regulations issued today. The meeting might be expanded to other topics as well. If you are an enrolled actuary interested in a peer-group discussion, feel free to contact me directly for more information and details.

[jevd]

Do you have a site where they have been published?

I don't see them in the IRS Bulletin or Fed Register ?

Thanks

[SoCalActuary]

Try Technical Answers Group (TAG).

Also look in Benefits Buzz today.

[mwyatt]

TAG had it in their new stuff this morning.

2 points of note concerning the High 3 Year Comp in the regs:

Changes so that pre-participation comp no longer recognized (bringing the regs in line with the TRA '86 modication to the Code, but ignored to now due to no amendment to the prior regs).

Somewhat illogical, but uses the limited comp, rather than actual comp, which will have bad ramifications for older high paid participants. This will be a problem with participants with high comp and a retirement age past 65. In fact, this will limit around age 67-68 these participants to the comp limit, rather than the adjusted dollar limit (comparing relation of 210k salary limit to the 170k dollar limit, approximate increase of 24%).

[Effen]

In fact, this will limit around age 67-68 these participants to the comp limit, rather than the adjusted dollar limit

If this is true, this is in direct contradiction to numerous IRS statements. I have asked them directly, and have heard them answer others directly, that 415 100% of "comp" limit does NOT recognize 401(a)(17) limit.

[Belgarath]

http://www.irs.gov/pub/irs-regs/13024104.pdf

[Guest penman]

See the last sentence of the paragraph in 1.415(b)-(1)(a)(5)(i).

This is what the Explanation of Provisions says:

Because a plan may not base benefit accruals on compensation in excess of the limitation under section 401(a)(17), a plan's definition of compensation used for purposes of applying the limitations of section 415 is not permitted to reflect compensation in excess of the limitation under section 401(a)(17). Thus, for example, where a participant commences receiving benefits in 2005 at age 75 (so that the adjusted dollar limitation could be as high as $379,783), and the participant had compensation in excess of the applicable section 401(a)(17) limit for 2002, 2003, and 2004, the participant's benefit under the plan is limited by the average compensation for his highest three years as limited by section 401(a)(17) (i.e., $201,667, or the average of $200,000, $200,000, and $205,000).

[mwyatt]

Effen:

C. Determination of high 3 average compensation

The proposed regulations would make two changes that would have a significant effect on the determination of a participant's average compensation for the participant's high 3 consecutive years. Consistent with the provisions of section 415(b)(3), the proposed regulations would restrict compensation used for this purpose to compensation earned in periods during which the participant was an active participant in the plan. In addition, the proposed regulations under §1.415©-2 would clarify the interaction of the requirements of section 401(a)(17) and the definition of compensation that must be used for purposes of determining a participant's average compensation for the participant's high 3 consecutive years. Because a plan may not base benefit accruals on compensation in excess of the limitation under section 401(a)(17), a plan's definition of compensation used for purposes of applying the limitations of section 415 is not permitted to reflect compensation in excess of the limitation under section 401(a)(17). Thus, for example, where a participant commences receiving benefits in 2005 at age 75 (so that the adjusted dollar limitation could be as high as $379,783), and the participant had compensation in excess of the applicable section 401(a)(17) limit for 2002, 2003, and 2004, the participant's benefit under the plan is limited by the average compensation for his highest three years as limited by section 401(a)(17) (i.e., $201,667, or the average of $200,000, $200,000, and $205,000).

[Effen]

In the past the IRS has allowed a benefit > 401(a)(17) comp limit to be paid, as long as the benefit formula recognized 401(a)(17) limit.

Based on their example, if the benefit formula was 188% of compensation, the 201,667 high 3-yr comp would produce a benefit of $379,134, which is less than $ limit ($379,783). Assuming the participants actual pay was > $379,134, the benefit would be permitted. We have had plan terminations approved based on this. I have had direct conversations w/ agents of various levels permitting this. I have notes that this was discussed in a session at the 94 EA meetings.

It looks like they are now saying this is no longer permitted. I hope this gets changed before they are finalized.

[mwyatt]

Perhaps we can pin these things on "the societal good" as a way to get this overturned at the hearings. Consider Dr. H past 65; with the higher limit we're operating under now, plan (and accruals for the NHCEs) continues until he retires; with the new limits, plan would end when the hi 3 limit got to the dollar limit, robbing poor Nurse N. of additional benefits.

We won't even go into the rational of a 5.5% interest rate when the 30-year rate hit 4.43% today...

[J2D2]

Not sure what's more scary - the 170 pages of regs or the fact that so many of you have already gotten so far into them.

[jevd]

Not all of us.

I'm waiting for the summaries and analysis by the experts on this board and others.

[Guest Mike Spickard]

I have been told by local ERISA counsel that these regs go into effect June 1, 2005. I searched the announcement but did not see such an effective date. Has IRS announced when these new regs will become effective?

[AndyH]

That was my question. Numerous attempts at skimming failed to yield an effective date so far.

[mwyatt]

This from my RIA e-mail this morning:

IRS Issues First Comprehensive Guidance on Plan Limits on Benefits and Contributions in 25 Years.

IRS has issued proposed regs, generally effective for plan limitation years beginning on or after January 1, 2007, on the limits applicable to benefits and contributions under qualified plans that would consolidate miscellaneous guidance that has been issued, and statutory changes that have occurred, since 1981, when the last set of final regs was issued. The proposed regs also specifically allow National Guard and Reserve members to contribute to their employer's plan while on active duty. Preamble to Prop Reg 5/25/2005 ; Prop Reg § 1.415(a)-1 through Prop Reg § 1.415(j)-1 ; Prop Reg § 1.401(a)(9)-6 ; Prop Reg § 1.401(k)-1(e)(8) ; Prop Reg § 1.403(b)-3(b)(4) ; Prop Reg § 1.457-4 ; Prop Reg § 1.457-5 ; Prop Reg § 1.457-6 ; Prop Reg § 1.457-10

[david rigby]

Treasury News Release: http://www.treasury.gov/press/releases/js2471.htm

Also see page 41 of the earlier link to the proposed regs on IRS website.

[No Name]

I was interested to see that the $10,000 minimum benefit may not be converted to a lump-sum benefit. I had heard opinions on this, but the new regs make it crystal clear.

[Guest Carol the Writer]

What does this mean for participants whose high three average compensation occurred prior to the effective date of the plan? In my client's case, he was never above the 401(a)(17) limit, but his high three years were before the plan began. If anyone has any thoughts or ideas, I would be appreciative. Also, how certain is it that the IRS intends to implement this, and when will these regs go into effect, if anyone knows. (I know the concensus is that no one knows, according to the previous posts. This is just wishful thinking for my client.) Thanks!

[mbozek]

The proposed regs cannot apply to plans until at least 60 days after the Treasury issues final regulations. In order for the regs to be effective for plan years beginning Jan 1, 2007 the final regs would have to adopted not later than Nov 1, 2006.