Introduction
On 4/5/07, the US Treasury Department issued final regulations under Internal Revenue Code Section 415. The Final Regulations adopt many of the provisions that were contained in proposed regulations that were previously issued in 2005 with a significant number of changes made by the Pension Protection Act of 2006.
Background
Section 415 was added to the Code by the Employee Retirement Income Security Act of 1974 (ERISA) in an effort to limit the amount of benefits that may be received under tax-qualified employee benefit plans. These limits are generally updated each year for Cost of Living adjustments. For 2008, contributions made to a defined contribution plan may not exceed the lesser of (1) $46,000 or (2) 100& of a participant's "compensation" (i.e., "pay"). The 2008 maximum benefit under a defined benefit plan may not exceed the lesser of (1) 100% of a participant's high three year average "pay" or (2) $185,000.
Section 415 regulations were last issued in 1981 and modifications and changes were made through the issuance of various Revenue Rulings and IRS Notices. The Final Regulations generally incorporate such prior guidance where still applicable.
Effective Date
The Final Regulations generally are effective for limitation years beginning on or after July 1, 2007 (i.e., for calendar year plans, the effective date is January 1, 2008).
Plan Amendments
Plans must be amended by the due date of the employer's tax returns (including extensions) for the year in which the change is effective. Because this amendment changes the plan's definition of pay for plan allocation purposes, it is recommended that the amendment be adopted before any allocation conditions (if any) to receive a share of any contributions for the year are satisfied.
For prototype plans sponsored and maintained by TrendCepts, we have already adopted the amendment, a copy of which is being provided to you. For non-prototype plans, you should adopt the Good Faith Amendment immediately upon receipt.
The Good Faith Amendment contains the following provisions:
Post-Severance Compensation (pay)
Post-Severance compensation is defined as compensation, bonuses, commissions that would have been paid to the employee if he/she had continued employment. This pay must be included as long as it is paid within 2-1/2 months after termination or the end of the limitation year in which termination occurred, whichever is later. Generally, limitation year is the plan year.
We have prepared the amendment to exclude the following optional forms of pay. The employer can choose to include some or all in their definition of compensation:
- Unused sick and/or vacation leave
- Non-qualified deferred compensation
- Salary continuation payments made to employees who are not currently performing services for the employer due to qualified military service
- Compensation paid to permanently disabled Participants.
- Compensation earned but not paid during the plan year solely because of the timing of the pay periods and pay dates.
Definition of Annual Additions
The definition of "Annual Additions", which is the maximum dollar amount that may be contributed to a participant's retirement account under a defined-contribution plan annually, is modified. Annual Additions shall not include:
- Payment made to restore losses resulting from actions by a fiduciary
- Transfers from another Plan
- Rollovers from another Plan
- Repayments of loans.
If the annual additions are exceeded for any participants, then the Plan may only correct such excess in accordance with the Employee Plans Compliance Resolution Systems (EPCRS).
For purposes of applying the 415 limits, all plans ever maintained by the Employer from which the participant receives annual additions, are treated as one plan.