new "three highest" 415 limits and previous higher income

[Guest Steven Podnos]

Client made 200K plus for 20 years. In 2005, starts a new DB plan with initial funding contribution of 110K/yr (50 yoa). However, in 2005, w2 income drops to about 50K per year. Client funded full contribution in 2005, now I'm uncertain how to fund for 2006 and 2007,etc.?

[AndyH]

Was the plan adopted and effective before or after 5/31/05? If before, then the proposed regs would grandfather pre-participation comp as ok for 415.

If after, you have a judgement, then an assumption to make.

[Belgarath]

Andy - I'm unsure if your response means you believe the grandfathering applies to 2006 and 2007 and beyond? Could you clarify? As you know, I have a lot of trouble with this new 415 reg...

Also, FWIW, see IRS Notice 2005-87 which extends the 5-31-05 date to a date not earlier than when the final regs are published. (Copied below from CCH)

CB-NOTICE, PEN-RUL 17,132G, Notice 2005-87, I.R.B. 2005-50, December 12, 2005.

Notice 2005-87, I.R.B. 2005-50, December 12, 2005.

Proposed regulations: Grandfather rule: Limitations on benefits: Annual additions: Preexisting plans The IRS has stated that the grandfather rule for

preexisting benefits in qualified plans that is currently in proposed regulations addressing the limitations of Code Sec. 415 (see ¶20,261N) will be expanded

from May 31, 2005, to a date that is not earlier than the publication date of the final regulations. Plan sponsors adopting new plans and plan amendments

during the interim period before the final regulations are published will not be subject to the interpretations set forth in the final regulations regarding

benefits accrued prior to the effective date of the final regulations, assuming that the plan provisions are in accordance with statutory provisions and other

IRS guidance in effect at the time the new plan or amendment is adopted.

Back references: ¶1561, ¶1645, ¶7527, and ¶8210.

Part III —Administrative, Procedural and Miscellaneous

Section 415 Regulations and Preexisting Plans

Notice 2005-87

Purpose

This notice provides that when the final regulations under §415 of the Internal Revenue Code are published, the grandfather rule of §1.415(a)-1(g)(3) of the

proposed regulations for preexisting benefits in defined benefit plans will be expanded.

Background

Section 415 of the Code provides various limitations on benefits under qualified defined benefit plans and annual additions under qualified defined

contribution plans. The proposed regulations under §415, issued May 31, 2005, provide comprehensive guidance regarding the limitations of §415,

including updates to the regulations for numerous statutory changes. The regulations are proposed to apply to limitation years beginning on or after

January 1, 2007.

Section 1.415(a)-1(g)(3) of the proposed regulations provides a grandfather rule for preexisting benefits under which a defined benefit plan will be

considered to satisfy the limitations of §415(b) for a participant with respect to benefits accrued or payable under the plan as of the effective date of the

final regulations. This grandfather rule applies only to benefits accrued pursuant to plan provisions that were adopted and in effect on May 31, 2005, and

only if such plan provisions meet the requirements of statutory provisions, regulations, and other published guidance in effect on May 31, 2005.

Commentators have expressed concerns about the grandfather provision of the proposed regulations. Commentators asserted that plan sponsors should

not be required to apply the final regulations before their effective date and noted that the May 31, 2005, date would effectively require them to apply the

final regulations retroactively (since any benefit provided by a defined benefit plan adopted after May 31, 2005, or benefits attributable to a post-May 31,

2005, amendment will not be covered by the grandfather rule).

Expansion of Grandfather Rule for Preexisting Plans

The Treasury and Service intend that, when the regulations under §415 are finalized, the May 31, 2005, date that is in the grandfather rule in

§1.415(a)-1(g)(3) will be replaced with a date that is not earlier than the date of publication of the final regulations. Thus, in the interim period before final

regulations are published, plan sponsors who adopt new plans and plan amendments will not be subject to the interpretations set forth in the final

regulations with respect to benefits accrued prior to the effective date of the final regulations, if the plan provisions relating to §415(b) meet the

requirements of statutory provisions, final regulations and other published guidance in effect when the new plan or the new amendment is adopted.

Additionally, in the interim period before final regulations are published, plan provisions will not be treated as failing to satisfy the requirements of §415

merely because the plan's definition of compensation for a limitation year that is used for purposes of applying the limitations of section 415 reflects

compensation for a plan year that is in excess of the limitation under section 401(a)(17) that applies to that plan year.

Drafting Information

The principal author of this notice is Kathleen Herrmann of the Employee Plans, Tax Exempt and Government Entities Division. For further information

regarding this notice, please contact the Employee Plans taxpayer assistance telephone service at (877) 829-5500 (a toll-free number) between the hours of

8:00 a.m. and 6:30 p.m. Eastern Time, Monday Through Friday. Ms. Herrmann can be reached at (202) 283-9888 (not a toll-free number).

[AndyH]

Well, in the words of the immortal Emily Litella, "Never Mind". In re-reading the proposed regs, I was taking the May date for something other than what it was intended. Sorry for any confusion caused by Emily or me.

[Effen]

I always thought that was Rosanne Rosanna Danna?

[WDIK]

Both were Gilda Radner characters, but I think that AndyH is right in this case.

[AndyH]

For those that don't remember, a little research c/o Wikipedia:

"Radner's character peered through her bifocals and read a prepared letter addressing some public issue, becoming increasingly agitated as her statement progressed, only to discover in the middle of her report that she had gotten the theme of her story wrong. A typical example:

"What is all this fuss I hear about the Supreme Court decision on a "deaf" penalty? It's terrible! Deaf people have enough problems as it is!

When the on-air reporter interrupted to point out her error (death vs. deaf), she would crinkle her nose, usually say, "Oh, that's quite different...", and then humbly say to the audience, "Never mind!"

Other misunderstood topics included Soviet Jewelry, Endangered Feces, Making Puerto Rico a Steak, Presidential Erections, Pouring Money into Canker Research, the Eagle Rights Amendment, Busting School Children, Natural Racehorses, and Sax and Violins on Television.

Emily's answering machine message said: "Hello, This is Emily Litella. I'm not home right now, but I will call you back as soon as possible. Just leave your name, number and what time you called after you hear the sound of the Jeep."

[Guest Steven Podnos]

So, to clarify, if the plan was started 1/1/05, can the client's contributions be based on the three highest earning years prior to plan participation??

[Belgarath]

See attached post, which you may find helpful. Andy pointed out that you can still use pre-participation comp averaging, it's just 415 limits that will require the participation comp, once the regs are effective. I have found this subject confusing, as you'll see...

http://benefitslink.com/boards/index.php?s...97entry129297

[AndyH]

I don't think quoting me will help anything at this point. Steve, if the plan was established prior to the 5/31/2005 effective date, then I don't see why you could not ignore this issue until the regs are finalized and fund assuming that the the pre-participation comp level is ok for 415 purposes.

But if the plan was established and effective after that date then I would think you would need two projections, one of the benefit using all comp and the other of the 415 limit using only post participation comp, and fund for the lesser of course.

Just one opinion.