================================================== BenefitsLink Newsletter New U.S. tax and labor law materials on the net pertaining to employee benefits, for employers, participants and service-providers. ================================================== IRS GUIDANCE ON REPEAL OF SECTION 415(e) LIMIT IS RELEASED _______________________________________________________________________ Authored by Sal Tripodi and reprinted with permission of TRI Pension Services (http://www.cybERISA.com). TRI Pension Services, started in 1994, is committed to providing consulting, professional training, and reference material in ERISA- related subjects. Its customers include pension professionals (third party administrators, attorneys, accountants, actuaries, and pension consultants), as well as employers who sponsor pension plans, and the human resource and pension departments of such employers. _______________________________________________________________________ IRS Notice 99-44 provides Q&A guidance on the repeal of section 415(e). Section 415(e) limits an employee's overall benefits under a defined contribution plan and a defined benefit plan maintained by the same employer (treating related employers under tax code section 414 as the same employer). The repeal is effective for limitation years beginning on or after January 1, 2000. The full text of the notice is online at http://www.benefitslink.com/IRS/notice99-44.shtml Here is a brief listing of the key points made in Notice 99-44. (1) If a plan incorporates the section 415 limits by reference, then the repeal automatically takes effect as of the first day of the first limitation year beginning on or after January 1, 2000. This might result in an automatic increase in a participant's benefits payable under a defined benefit plan. If an employer wants to delay the automatic increase in benefits, to give itself time to study the funding costs and qualification issues associated with an increase in benefits, the employer would have to amend the plan before the effective date of the repeal. Q&A-7 prescribes a model amendment for this purpose. (2) If a plan is not described in 1) (i.e., the plan contains provisions that describe the section 415(e) limit), an increase in benefits arising from the repeal of section 415(e) would not necessarily be automatic. The terms of the plan would have to be analyzed. Generally, if the plan doesn't simply cross-reference the limit, but rather describes language that limits benefits in a manner that reflects the section 415(e) limit, an automatic increase would usually not occur in the absence of a plan amendment. For this type of plan, the employer has a choice: a) wait until the plan is actually amended to start administering the plan without taking into account section 415(e), or b) ignore section 415(e) in operation, pursuant to the GUST remedial amendment period guidelines in Rev. Proc. 99-23, and adopt a conforming amendment by the end of the remedial amendment period. If the employer takes the first approach, there may be qualification issues to consider if the amendment is not made retroactively effective to the statutory effective date of the repeal of section 415(e). See 4) and 5) below. (3) Benefits of employees and retirees may be increased to reflect the repeal of section 415(e), but only if the individual still has an accrued benefit left in the plan. In other words, if the individual was already paid out their entire accrued benefit (e.g., lump sum payment) before the effective date of the repeal, there is no increase permitted. Q&A-3 and Q&4 of the notice prescribe rules for benefit increases for retirees and former employees. A benefit increase may not reflect adjustments for benefits received prior to the 2000 limitation year that were limited by section 415(e). In other words, the repeal of section 415(e) only affects annual benefits prospectively. Nondiscrimination testing requirements relating to plan amendments (Reg. section 1.401(a)(4)-5) and relating to benefit increases for former employees (Reg. section 1.401(a)(4)-10(b)), are deemed satisfied if the benefit increases occur as of the effective date of the section 415(e) repeal and the group which receives the increases consists of: a) all current and former employees who have an accrued benefit under the plan as of the effective date of the repeal, or b) all employees participating in the plan who have at least one hour of service after the effective date of the repeal. (4) Nondiscrimination testing may be affected by how the repeal of section 415(e) is handled by the plan. If the repeal is taken into account as of the effective date of the repeal, then a plan which is otherwise designed to be a safe harbor plan under the section 401(a)(4) nondiscrimination testing rules continues to satisfy the safe harbor. However, if the repeal is delayed, either by adoption of the plan amendment described in 1) above, or by continuing to operate the plan in accordance with plan provisions that state the section 415(e) limitation, as described in 2) above, then the plan is not a safe harbor plan under section 401(a)(4) unless the continued application of section 415(e) is applied only to highly compensated employees. See Q&A-5 and Q&A-10 of the notice. (5) Any exception from the qualification rules that is provided in order to satisfy section 415 is not applicable to a plan which limits an employee's annual additions under a defined contribution plan or accrued benefit under a defined benefit plan solely by reason of the continued operation of the section 415(e) limit after the effective date of the repeal. For example, if a 401(k) plan refunds elective deferrals to correct excess annual additions, but the excess determined by the plan exists solely because of the continued operation of the plan's 415(e) provisions after the effective date of the repeal, the refund would violate the qualification requirements. See Q&A-8 of the notice. ================================================== To unsubscribe: send email to majordomo@majordomo.net with "unsubscribe BL-newsletter" in the body of the message. Anyone can subscribe by sending email to majordomo@majordomo.net with "subscribe BL-newsletter" in the body of the message. Help wanted? Job wanted? See http://EmployeeBenefitsJobs.com/