Section 415(c) limits

[Belgarath]

I'm having trouble reconciling what I'm reading in summaries by both Sal Tripodi and Deloitte - both sources smarter than I am so I'm suspicious of my conclusions - with the regs.

Both of them state that the annual adjustment applies to limitation years ending the applicable calendar year. I agree.

HOWEVER, they also use an example (Deloitte's is a 6-1-06 to 5-31-07 plan and limitation year) where for 2006, limit is 44,000, and 2007 is 45,000. They state that if a participant terminates employment prior to 1-1-07, that participant's 415 annual addition limit is 44,000.

I'm just not getting this result from the regs, or at least not in the manner I'd assume a plan would be drafted. Under 1.415(d)-1(b)(2)(iii), it appears to me under the last sentence, "However, after a January 1 adjustment is made, annual additions for the entire limitation year are permitted to reflect the dollar limitation as adjusted on January 1."

As I said, I would start off with the assumption that I'm wrong when two such sources appear to disagree, yet I'm not certain where. As long as the plan is drafted to take into account the adjusted limitation, where's the problem? Where is there a specific limitation for terminated participants where the date of termination is the deciding factor? Does the sentence prior to the above citation trump the final sentence cited above? If so, it isn't very clear to me. I'm missing something...

[J Simmons]

It isn't very clear at all.

"Annual additions for a limitation year cannot exceed the currently applicable dollar limitation (as in effect before the January 1 adjustment) prior to January 1. However, after a January 1 adjustment is made, annual additions for the entire limitation year are permitted to reflect the dollar limitation as adjusted on January 1."

Does that mean that I could accrue only $44,000 for the period of 6/1-12/31/06, but then could accrue another $1,000 ($45,000-44,000) during the rest of the plan year (1/1-5/31/07)?

It seems that Deloitte is interpreting that in a way that bifurcates the plan year, and suggests that if I terminate before 1/1/07 the employer couldn't make that extra $1,000 contribution for me (albeit in 2007) based on my 2006 earnings (on and after 6/1/2006) if they'd otherwise be sufficient to support such a contribution. Since I'd not be employed during the sub-plan year 1/1-5/31/07, according to Deloitte, I'd not be eligible for that other $1,000.

I'd disagree with Deloitte on this, because that second sentence spells out that "annual additions for the entire limitations year" are permitted after the January 1 adjustment. So I think that the extra $1,000 could be made for me in 2007, although I terminated before the end of 2006.

[Belgarath]

Thanks. That's how I interpreted it as well. Disagreeing with both Sal and Deloitte is fraught with peril, but that's where I'm finding myself, absent additional information. I was wondering if this perhaps came up at a conference where the IRS "clarified" this from the podium, hence both Sal's and Deloitte's interpretation?

Of course, in real life administration, this is unlikely to come up very often...but if you can dream it up, it always happens at least once.

[John Feldt ERPA CPC QPA]

Perhaps the reason for this bifurcation is in case the plan terminates before 1/1? In that case, I think that the new dollar limit is not available?

[Guest BobK]

The Final 415 Regulations address this concept in paragraph 1.415(d)-1(b)(2)(iii).

It states "Annual Additions for a limitation year cannot exceed the currently applicable dollar limitation (as in effect before the January 1 adjustment) prior to Janaury 1. However, after a january 1 adjustment is made, annual additions for the entire limitation year are permitted to reflect the dollar limitation as adjusted on January 1."

Based on this language, I would agree with Sal's position.

Hope this helps.

[masteff]

Perhaps the reason for this bifurcation is in case the plan terminates before 1/1? In that case, I think that the new dollar limit is not available?

I went down that line of thinking but realized that point is addressed in new reg 1.415(j)-1 and applies to the plan as a whole and not to the individual participant. So, it still doesn't explain where their thinking on the termed employee comes from. I disagree with them based on the plain language of the regs. It would be true if the participant couldn't accrue additional benefits prior to end of the plan/limitation year, but the part could still get post-termination profit sharing and forfeitures, at the least.

The other argument I would make is that the preamble does not suggest this treatment, and as it would be a departure from the past, and as the preamble covers important changes, I don't see where the IRS intended this consequence.