Proposed 415 Regs

[JAY21]

OK, If no changes to the proposed 415 regs (hopefully there will be), we know the proposed regs "clarify" that the high-3 415 comp limit is based upon "participation" for those plans adopted after the effective date of the proposed regs (May 2005). Anyone have any thoughts on a situation where a new plan adopted in Dec. 2005, but which has an offset to the 415 limit for a prior DB plan sponsored by same employer, can continue to use the old previously established 415 high-3 comp limit even though the new plan not adopted until Dec. 2005. For what it's worth under old plan the distribution was far below the 415 limit. I plan on using the 2005 proposed regs offset approach to the 415 limit.

The sponsor does not contemplate drawing as high of salary under the new plan as under the prior DB plan so he'd prefer to use the previously established high-3 average. I don't see where the proposed regs address this combination of events for the new DB plan's 415 high-3 limit, but if anyone knows differently, please let me know.

[SoCalActuary]

I will assume that:

The prior plan had established a higher 3 yr avg than the new plan.

The 3 years used in the prior plan were years while the person was a participant.

I would argue that the new plan is a continuation of the old plan for 415 purposes.

Thus, the 3 year average was already established, and is usable for the new accruals.

However, my caveats are:

I don't believe the proposed regs are the best answer, so hold out for new guidance.

I remember the IRS backing off the 401(a)(9) regs for db plans, then sneaking them in later

as final guidance without changing the issues we protested in 2003, so I am cautious on this.

The other concern is whether you are expected to aggregate the two plans. Are they both part

of the same employer? Any ownership change in the intervening period that make them two

separate employers?

[Belgarath]

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) Of course, this only defers whatever problems you may have, so it probably isn't any real help at all.

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).

[JAY21]

Thx SoCal; all your assumptions are correct and yes it's the same employer (controlled group). Belgarath, thanks for the reminder on the extended date on the 415 grandfathered benefits.

So thinking it through, even if the plan did not have a higher high-3 during the years of participation under the old DB plan (say the high-3 occurred during the gap years between the two plans existence) then I could still use this extended reliance and use pre-participation comp for the high-3 (under interpretation of existing guidance) until the final effective date of the new regs (e.g., 2007). Therefore, I could end up with 2 years of the higher accrual rate for 2005-2006 (grandfathered) after which I basically have a frozen accrued benefit unless/until the new post-2007 participation comp times yos/yop ever increases the accrued benefit beyond the 12/31/2006 grandfathered benefit.

Does this sound right conceptually ?

[SoCalActuary]

Assuming the worst, and their wrong-headed proposal is finalized, then you have the same interpretation I have.