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Governmental excess plan

Carol V. Calhoun

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Section 457(f)(2)(E) contains an exception to the normal rules under section 457 for "a qualified governmental excess benefit arrangement described in section 415(m)."  Among the requirements of section 415(m) is that the plan "is maintained solely for the purpose of providing to participants in the plan that part of the participant’s annual benefit otherwise payable under the terms of the plan that exceeds the limitations on benefits imposed by this section."  Given that "this section" is section 415, it appears that a qualified governmental excess plan can provide only benefits in excess of the 415 limits, not benefits that are cut back due to the limitations on compensation in section 401(a)(17).

However, a governmental 401(a) plan is not bound by the rules against discriminating in favor of highly compensated employees.  Would it therefore be possible to say that for everyone except one individual, the benefit is for example 2% of compensation times years of service, but that for a specified individual, the benefit is for example 4% of compensation times years of service?  The 4% would likely be developed in order that the individual's benefit would be the same percentage of total compensation as everyone else's, but it would not directly reference compensation over the 401(a)(17) cap.  At that point, all benefits not in excess of the 415 limit could be provided by the qualified plan, while those above that limit could be provided by the excess plan.

Alternatively, has anyone seen any flexibility on the part of the IRS to allow an excess plan to deal with the compensation limits as well as the 415 limits?

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The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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Carol, I have never tried to get flexibility from IRS to allow a 415(m) plan to take into account 401(a)(17) and would be astounded if they would permit that.

To your broader question, I think this sort of thing is done in both governmental DB and DC. At one point, I know a representative of the IRS stated informally that notwithstanding prior guidance and practice, 415(m) might not apply to DC plans. I believe the IRS was considering this at least in great part because this sort of thing (e.g., a one-off employer contribution to a 403(b) of 100% of comp up to the 401(a)(17) that "whoops" causes a huge 415(c) dollar excess), is out there, and has been for years. DB situation you describe does not seem different.

With respect to the issue of whether this is really a 401(a)(17) violation because "behind the scenes" someone worked out the benefit percentage based on comp in excess of 401(a)(17), I think that would be a tough thing for the IRS to attack, at least without some regulatory groundwork specifically targeting this sort of thing, first. Even if the IRS somehow got emails between the participant and the sponsor describing the math (which would raise other issues as well), is that really the plan taking into account comp in excess of 401(a)(17), or the plan designer? My recollection is that while the 401(k) regs have a very subtle approach on what constitutes a cash or deferral arrangement, the 401(a)(17) regs don't really say much about what it means to take compensation above the limit into account.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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