415 limits and years of participation

[zimbo]

If a plan is effective 1/1/2002 and freezes benefit accruals as of 12/31/2006 (but is NOT terminated) and terminates as of 12/31/2007, what is the fractional reduction in the 415 dollar limit?

Is it 5/10 or 6/10?

[AndyH]

5

You need to earn a year of accrual service as defined under the plan.

[John Feldt ERPA CPC QPA]

So if you need an extra year for 415 purposes, instead of freezing the plan, the plan should adopt a really small formula, and then freeze at termination? Cite please.

[Guest Guest99]

I believe 6/10 is the correct answer. See the final 415 regs:

"A participant is credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the participant is credited with at least the number of hours of service (or period of service if the elapsed time method is used for benefit accrual purposes) required under the terms of the plan in order to accrue a benefit for the accrual computation period . . ."

As I read this, it does not say that you must accrue a benefit, only that you must satisfy the hours requirement for a benefit accrual. The language would be different (and simpler) if they wanted to link the 415 YOP with benefit accrual. I'll be interested to see if I have persuaded AndyH, and what others have to say.

[David MacLennan]

I believe 6/10 is the correct answer. See the final 415 regs:

"A participant is credited with a year of participation (computed to fractional parts of a year) for each accrual computation period for which the participant is credited with at least the number of hours of service (or period of service if the elapsed time method is used for benefit accrual purposes) required under the terms of the plan in order to accrue a benefit for the accrual computation period . . ."

As I read this, it does not say that you must accrue a benefit, only that you must satisfy the hours requirement for a benefit accrual. The language would be different (and simpler) if they wanted to link the 415 YOP with benefit accrual. I'll be interested to see if I have persuaded AndyH, and what others have to say.

[John Feldt ERPA CPC QPA]

David,

That has been our interpretation also. However, we have only had the need to utilize that with a few clients, and it's never been brought up in an IRS examination with any of them.

[AndyH]

Looking at this again, I agree. I should have checked rather than going from memory.

6/10 is correct.

[Blinky the 3-eyed Fish]

The new 415 regs provide no different language than what Notice 87-21 did previously on this topic. One could argue it's impossible to be credited with at least the number of hours of service required under the terms of the plan in order to accrue a benefit for the accrual computation period if the plan is frozen. Because no matter if the participant worked 1 hour, 1,000 hours or whatever, they didn't accrue an additional benefit.

Anyone want to look up a Gray Book answer on this?

[david rigby]

I found nothing in the Gray Book on point.

[AndyH]

Can I change my mind again, but only 50%? Now I know where my initial comment came from.

IRS audit guidelines. Bold is my emphasis.

"In determining a participant’s years of participation for these purposes,

Q&A-7 of Notice 87-21 provides that a participant is credited with a year

of participation (computed to fractional parts of a year) for each accrual

computation period for which the following conditions are met:

a. The participant is credited with at least the number of hours of

service (or period of service if the elapsed time method is used for

benefit accrual purposes) required under the terms of the plan in

order to accrue a benefit for the accrual computation period, and

b. The participant is included as a plan participant under the eligibility

provisions of the plan for at least one day of the accrual computation

period.

c. If these two conditions are met, the portion of a year of participation

credited to the participant is equal to the amount of benefit accrual

service credited to the participant for such accrual computation

period. Thus, where the terms of a plan provide that a participant

with 50 hours of service earns a year of service for benefit accrual

purposes, a participant with 50 hours of service could be credited

with a year of participation for purposes of IRC 415(b)(5).

[David MacLennan]

The same fractional Year of Participation rule is in the final 415 regs (applies when benefit service can be accrued in fractional amounts).

[Andy the Actuary]

This interpretation makes sense. If a plan had a strange provision that say only counted the first 8 years of service for benefit determination purposes, the 415 phase-in would still accrue over 10 years so it's possible some participant could accrue benefits beyond 8 years while others accrue their benefits over 8 years.

Any comments?