Proposed 415 Regs

[JAY21]

I haven't seen any discussion of the proposed 415 regs on these boards. Am I alone in thinking that the IRS has taken negative and as far as I can see an unchallenged interpretation on compensation which has the effect of reducing the high-3 average (under prior regs) by now basing it only on years of participation (vs. prior service) and also applying the 401(a)(17) comp limit to it. Isn't it funny that the clarifying and simplifying regs always try to curtail the small business owner which is most likely to be impacted. I presume since these are proposed regs we do have the opportunity to comment on them to the IRS. I would hope ASPA or someone might also take up the cause. I think the loss of pre-participation compensation is especially hurtful since most small business owners don't have the income to both take high compensation and make large DB contributions so it could significantly reduce their contributions (no doubt that's what the IRS is hoping for) since they can't rely upon pre-participation comp to get them up to or near the 415 dollar limit.

[WDIK]

http://benefitslink.com/boards/index.php?showtopic=29141

[JAY21]

Thanks for the link on past discussion. However, aren't we outraged and going to burn our bras or something ? Oh.....guess I don't wear one, but some form of great outrage still seems in order ! Seriously though, I often use prior high-3 comp for a new small plan and now to not be able to also use it for 415 limits will be a very limiting factor for the small plan owner with limited income/cash flow.

[No Name]

I'm burning my draft card... oops, already did!

[mwyatt]

To be honest, Congress put through this change to exclude pre-participation compensation from the high 3 average via TRA '86. Since that time, we've been leaning on including pre comp for the average because the IRS never modified the regs (and you can find past threads here linking to the IRS audit guidelines substantiating that interpretation). Given this reality, the IRS is only bringing the regs up to the point where the law said they should have been 19 years ago.

Now the application of the IRC 417 limits is a different story and doesn't make a heck of alot of sense. Looking at the relationship between the dollar and salary limit ($170k to $210k) this new interpretation is effectively creating a cap around age 68, regardless of actual wages paid to the employee/owner. Look to this one to catch some flak in the hearings on the regs this summer.

[rcline46]

Ok, so - no pre-participation comp, new plan granting 5 years past service, beginning of year val.

Previously there was an accrued benefit on day 1 of the plan, because we got the 5 past years and used at the very least the pay for the limitation year ending 1 day prior to beginning of the year.

Under the proposed regulations, we cannot use even this immediately preceeding pay, so the pay for accruals is -0- zip zilch nada. No accrued benefit.

Now let us suppose we are using a typical UC funding method. No AB, no funding. Bad result. Proposed regulation is just WRONG!!!!

In my opinion of course.

[mwyatt]

Interesting insight rcline, although the problem would go away by end of year 1 for small benefit plans. Example: $10/month * YOS type formula that would clearly be unaffected by 415 limits. Strict reading would say that since comp would have to be $0 at the beginning of first year, that the beginning AB would be limited to $0. However, by the end of year 1, comp exists and full benefit well under the limit. Not sure that a reasonable conclusion would be to literally take the entire EOY benefit at year 1 as all being funded by normal cost. Sure the regs (these are proposed after all) would be tweaked to take this point into account (and if not then they should be).

[could be me maybe not]

Maybe it is step one of W's plan to save the PBGC-reduce the accrued benefit of the owner.

[mwyatt]

Hey Could be:

Last I checked, I think any participant in a plan would be affected by a $0 415 limit, regardless of ownership...

[david rigby]

Now let us suppose we are using a typical UC funding method.  No AB, no funding.

Huh? If the accrued benefit is zero at BOY, but not at EOY, how does this give you "no funding"?

Have I misunderstood your post?

[JAY21]

Thanks mwyatt for the TRA 86 cite. Still a rule unenforced for 19 years would often be unenforcable under other bodies of law, and arguably should go through another round of discussions, since plans have been designed under the existing regs and even if the accrued benefit is grandfathered under these new proposed regs I'm sure the projected benefit (which includes future years of service) is not.

I guess I'm just barking at the moon since apparently the IRS has this unfulfilled mandate from Congress (19 years old) on the high-3 avg., so perhaps the only fight available is on the 401(a)(17) issue.

[rcline46]

Why -0- funding? Remember I posited a Beginning of Year Valuation, which requires -0- current pay (although you CAN finagle a final pay). With -0- pay, you can only have a -0- accrued benefit. Under UC funding - cannot have a cost.

The first pay you will have is the beginning of the next year the way most documents are written.

Other funding methods based on projected benefits WILL have a cost. My contention is that if ANY funding method under the proposed regs is forced to have no cost, then the regs A PRIORI are bad.

[could be me maybe not]

....while awaiting the imminent pax attack.....

mwyatt, I should have realized that my sarcasm about those PBGC beach-goers and that valuable small plan PBGC coverage and the collossal damage that small plan bailouts do I am sure escapes other mammals.

[david rigby]

With -0- pay, you can only have a -0- accrued benefit. Under UC funding - cannot have a cost.

The first pay you will have is the beginning of the next year the way most documents are written.

In my experience, most documents define pay at the end of the year (how much did you earn last year?). I fail to see how a zero accrued benefit at BOY yields zero normal cost under UC.

As you state, we need not restrict this to UC.

"imminent pax attack"? I'm hurt.

[mwyatt]

The $0 benefit is a nonstarter, as one would project salaries into the future (or in the case of year 1, assuming BOY val, based on the prior year comp adjusted for whatever salary scale that you choose). So you won't, even given these 415 changes, come up with a $0 accrued benefit @ EOY, or a projected benefit of $0 for that matter. I think you would be hard pressed to argue that eliminating pre-comp salaries gives you no basis to make future projections as to wages for funding purposes.

What I did think about though is that this language would eliminate any pre-participation benefit at establishment of the plan. It could of course pop up in the 1st year given salary for the year 1. But I think that it is contradictory to say in the case of UC funding that the entire benefit would be pushed into the 1st year NC with no AAL. This is an unintended consequnce of this change (regardless of whether your formula is pinned to the wall or provides a dollar per year of service), but I can't imagine this making it through final regs or the "law of logic".

[could be me maybe not]

"Civilized" life might use "rebuke" instead of "attack"