4.72.6  IRC 415(b)

Manual Transmittal

September 22, 2014

Purpose

(1) This transmits revised IRM 4.72.6, Employee Plans Technical Guidelines, IRC 415(b).

Background

This IRM provides guidance for examining defined benefit plans subject to the limitations of IRC 415(b).

Material Changes

(1) Revised, clarified, reorganized content throughout. Made editorial updates, updated IRM references and improved the content flow.

(2) Revised to incorporate the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law 107-16 (EGTRRA), the Job Creation and Worker Assistance Act of 2002, Pub. Law 107-147 (JCWAA), the Pension Funding Equity Act of 2004, Pub. Law 108-218 (PFEA), the Working Families Tax Relief Act of 2004, Pub. Law 108-311 (WFTRA), the Pension Protection Act of 2006, Pub. Law 109-280 (PPA ‘06), and the Worker, Retiree, and Employer Recovery Act of 2008, Pub. Law 110-458 (WRERA). This guidance reflects final Treasury regulations under IRC 415 published on April 5, 2007 (T.D. 9319), which are applicable to limitation years beginning on or after July 1, 2007. The amendments made by WRERA are generally effective for limitation years beginning after December 31, 2008.

(3) IRM 4.72.6.2.1.1, Plan, is updated and moved to IRM 4.72.6.2.1.2, Plan.

(4) IRM 4.72.6.2.1.2, Employer, is updated and moved to IRM 4.72.6.2.1.1, Employer.

(5) IRM 4.72.6.3.4, Adjustments to Benefits and Limitations, is retitled, Adjustments for Optional Benefit Forms.

(6) IRM 4.72.6.3.4.1, No Adjustments Required, is retitled, Optional Forms for Which No Adjustments Required.

(7) IRM 4.72.6.3.4.1.1, Ancillary Benefits, is deleted. The ancillary benefits information is moved to paragraph (1) (b) of IRM 4.72.6.3.4.1, Optional Forms for Which No Adjustments Required.

(8) IRM 4.72.6.3.4.1.2, Qualified Joint & Survivor Annuity, is deleted. The information pertaining to a qualified joint & survivor annuity is moved to paragraph (1) (a) of IRM 4.72.6.3.4.1, Optional Forms for Which No Adjustments Required.

(9) IRM 4.72.6.3.4.1.3, Post-Retirement Cost-of-Living Increases, is deleted. The information pertaining to post-retirement cost-of-living is moved to paragraph (1) (c) of IRM 4.72.6.3.4.1, Optional Forms for Which No Adjustments Required.

(10) IRM 4.72.6.3.4.2, Adjustments Are Required, is updated and retitled, Optional Benefit Forms for Which Adjustments Are Required.

(11) IRM 4.72.6.3.4.2.1, Other Forms of Benefit, is deleted. The other forms of benefit information is now in IRM 4.72.6.3.4.2, Optional Benefit Forms for Which Adjustments Are Required.

(12) IRM 4.72.6.3.4.2.1.1, GATT Changes Assumptions Used for Form Adjustments, is deleted because information is obsolete.

(13) IRM 4.72.6.3.4.2.1.2, SBJPA Amends GATT, is deleted because information is obsolete.

(14) IRM 4.72.6.3.4.2.2, Employee Contributions, is updated and moved to IRM 4.72.6.3.3.1, Employee Contributions.

(15) IRM 4.72.6.3.4.2.2.1, Mandatory Contributions, is updated and moved to IRM 4.72.6.3.3.1.1, Mandatory Contributions.

(16) IRM 4.72.6.3.4.2.2.2, Voluntary Contributions, is updated and moved to IRM 4.72.6.3.3.1.2, Voluntary Contributions.

(17) IRM 4.72.6.3.4.2.2.3, Transfer of Assets and Liabilities, is updated and moved to IRM 4.72.6.3.3.3, Transfer of Assets and Liabilities.

(18) IRM 4.72.6.3.4.2.2.4, Rollover Contributions, is updated and moved to IRM 4.72.6.3.3.2, Rollover Contributions.

(19) IRM 4.72.6.3.4.2.2.5, Employee Contributions as Separate DC Plan, is deleted because the information is obsoleted.

(20) IRM 4.72.6.3.4.2.2.6, Unreasonable Conversion Rate, is deleted. The unreasonable conversion rate information is updated and moved to IRM 4.72.6.3.3.2, Rollover Contributions.

(21) IRM 4.72.6.3.4.2.3, Examination Steps, is deleted. The examination steps information is updated and moved to IRM 4.72.6.3.3.7, Examination Steps.

(22) IRM 4.72.6.3.4.3, DB Limitations Adjustments, is retitled and moved to IRM 4.72.6.3.5, Adjustment for Early or Late Benefit Commencement.

(23) IRM 4.72.6.3.4.3.1, Benefits Commence Before SSRA, is updated and moved to IRM 4.72.6.3.5.1, Adjustments When Benefits Commence Before Age 62.

(24) IRM 4.72.6.3.4.3.2, Benefits Commence After SSRA, is updated and moved to IRM 4.72.6.3.5.2, Adjustments When Benefits Commence After Age 65.

(25) IRM 4.72.6.3.4.3.3, Exceptions, is updated and moved to IRM 4.72.6.1.2, Exceptions.

(26) IRM 4.72.6.3.4.3.4, Transition Rules After SBJPA/Rev. Rul. 98-1, is deleted because the information is obsolete.

(27) IRM 4.72.6.3.4.3.5, Examination Steps, is updated and moved to IRM 4.72.6.3.5.3, Examination Steps.

(28) IRM 4.72.6.4.4, QDROs and IRC 415, is retitled, updated and moved to IRM 4.72.6.3.3.4, Qualified Domestic Relations Orders (QDROs) and IRC 415.

(29) IRM 4.72.6.3.4.5, Social Security Supplements and IRC 415, is delete. The Social Security supplements and IRC 415 information is moved to IRM 4.72.6.3.4.2, Optional Benefit Forms for Which Adjustments Are Required.

(30) IRM 4.72.6.3.4.6, Participation or Service of Less Than 10 Years, is moved to IRM 4.72.6.3.7, Participation or Service of Less Than 10 Years.

(31) IRM 4.72.6.3.5, Special $10,000 Minimum Benefit, is updated and moved to IRM 4.72.6.3.6, Special $10,000 Minimum Benefit.

(32) IRM 4.72.6.3.6, When to Apply IRC 415(b) Limitation, is retitled, updated, and moved to IRM 4.72.6.3.3.5, Limiting the Accrued Benefit.

(33) IRM 4.72.6.3.7.1, Combining Plans, is deleted. The combing plans information is updated and moved to IRM 4.72.6.2.1.1, Employer, and IRM 4.72.6.2.1.2, Plan.

(34) IRM 4.72.6.3.8.1.1, Single-Sum Distributions, is deleted. The single-sum distributions information is moved to IRM 4.72.6.3.8.1, Annuity Contracts.

(35) IRM 4.72.6.3.8.1.2, Deferred Annuity Payments, is deleted. The information on deferred annuity payments is move to IRM 4.72.6.3.8.1, Annuity Contracts.

(36) IRM 4.72.6.4.1.1.1, Automatic COLA Adjustments, is retitled Automatic COLAs.

(37) Exhibits 4.72.6-1, Appendix A- Annuity Factors, is deleted because the information is obsolete.

(38) Exhibits 4.72.6-2, Appendix B- Annuity Factors, is deleted because the information is obsolete.

(39) IRM 4.72.6.3.3.6, Multiple Annuity Starting Dates, is added.

Effect on Other Documents

IRM 4.72.6, dated December 1, 2002, is superseded.

Audience

TE/GE (Employee Plans)

Effective Date

(09-22-2014)

Robert Choi
Director, Employee Plans
Tax Exempt and Government Entities

4.72.6.1  (09-22-2014)
Overview

  1. Guidance is provided for examiners on examining defined benefit (DB) plans subject to the limitations of IRC 415(b), as amended under Title VII of the Uruguay Round Agreements Act, Pub. Law 103-465 (GATT), the Small Business Job Protection Act of 1996, Pub. Law 104-188 (SBJPA), the Taxpayer Relief Act of 1997, Pub. Law 105-34 (TRA ’97), the Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law 107-16 (EGTRRA), the Job Creation and Worker Assistance Act of 2002, Pub. Law 107-147 (JCWAA), the Pension Funding Equity Act of 2004, Pub. Law 108-218 (PFEA), the Working Families Tax Relief Act of 2004, Pub. Law 108-311 (WFTRA), the Pension Protection Act of 2006, Pub. Law 109-280 (PPA ’06), and the Worker, Retiree, and Employer Recovery Act of 2008, Pub. Law 110-458 (WRERA). This guidance reflects Treasury regulations under IRC 415 published in April 2007 (T.D. 9319), which are generally applicable to limitation years beginning on or after July 1, 2007. The amendments made by WRERA are generally effective for limitation years beginning after December 31, 2008.

4.72.6.1.1  (09-22-2014)
Technical Overview

  1. IRC 415 was added to the Internal Revenue Code (Code) by the Employee Retirement Income Security Act of 1974, Pub. Law 93-406 (ERISA). IRC 401(a)(16) provides that a trust is not a qualified trust under IRC 401 if the plan of which such trust is a part provides for benefits or contributions that exceed the IRC 415 limitations.

    1. IRC 415(b) limits the annual benefit that can be accrued or paid to a participant under a DB plan, while IRC 415(c) limits the amount of employer and employee contributions that may be allocated to an individual’s account under a defined contribution (DC) plan.

    2. For limitation years beginning before 2000, if an individual is a participant in both a DC and DB plan maintained by the same employer, the amounts under both plans are subject to the combined plan limitation of IRC 415(e). IRC 415(e) was repealed by SBJPA, effective for limitation years beginning after 1999.

  2. In general, the application of the IRC 415 limitations does not relieve a plan from the obligation to satisfy other plan qualification requirements. See Treas. Reg. 1.415(a)-1(f)(7).

  3. IRC 415 is generally effective for years beginning after 1975.

    1. Treasury regulations under IRC 415 (T.D. 9319) are generally effective for limitation years beginning on or after July 1, 2007. See Treas. Reg. 1.415(a)-1(g).

    2. The amendments made by WRERA are generally effective for limitation years beginning after December 31, 2008.

4.72.6.1.2  (09-22-2014)
Exceptions

  1. Exceptions to some provisions under the IRC 415 limitations are applicable to plans maintained by states, Indian tribal governments, or political subdivisions. See IRC 415(b)(2)(G), IRC 415(b)(10) and IRC 415(b)(11).

  2. The DB compensation limit of IRC 415(b)(1)(B) does not apply to:

    • A governmental plan.

    • A multiemployer plan.

    • Certain collectively bargained plans.

    • A participant in a plan maintained by a church (the definition of "church" includes a church, convention or association of churches, or an elementary or secondary school that is controlled, operated or principally supported by a church, convention or association of churches) who has never been a highly compensated employee (HCE) of the church.

    See IRC 415(b)(7), IRC 415(b)(11) and Treas. Reg. 1.415(b)-1(a)(6).

4.72.6.2  (09-22-2014)
Specific Plan Requirement

  1. Treas. Reg. 1.415(a)-1(d) provides that the terms of a qualified plan must preclude the possibility that a distribution under a DB plan will exceed the limitations imposed by IRC 415. In addition, the terms of a DB plan subject to IRC 411 must not allow a participant to accrue a benefit in excess of the IRC 415(b) limitation. A plan may fail to satisfy the IRC 415(b) limitations even though no participant has actually accrued or received a benefit in excess of these limitations, if the plan terms do not preclude an accrual or distribution in excess of the limitations. See Treas. Reg. 1.415(b)-1(a)(3).

    1. A plan must include terms that preclude the possibility that any annual benefit exceeding the IRC 415(b) limitation will be accrued or payable in any optional form of benefit payable under the plan, including the normal form of benefit.

    2. If two or more DB plans are aggregated under the rules of IRC 415(f), the plan provisions under each of the plans must specify how benefits will be limited so as to prevent a violation of IRC 415(b), without involving employer discretion.

  2. The Tax Reform Act of 1986 (TRA ’86) provided that the limitations of IRC 415 may be incorporated by reference, but such an incorporation by reference must not violate the definitely determinable requirement of Treas. Reg. 1.401(a)-1(b)(1). Thus, the terms of the plan must preclude employer discretion, and any rules that allow optional methods of compliance must be stated in the plan. See Treas. Reg. 1.415(a)-1(d)(3).

    Example:

    More than one definition of "compensation within the meaning of IRC 415(c)(3)" may be used for purposes of applying the IRC 415 limits. A plan that otherwise incorporates IRC 415 by reference must specify which definition of compensation is used.

    1. If a provision of IRC 415 may be applied in more than one manner but is to be applied in a specified manner in the absence of a specific plan provision to the contrary (i.e., a default rule), and if the plan terms incorporate IRC 415 by reference with respect to that provision without specification of any variation from the default rule, then the default rule applies.

    2. If a provision of IRC 415 may be applied in more than one manner, and if no statutory or regulatory default rule applies, then the plan terms must specify the manner in which the IRC 415 limitations are to be applied with respect to that provision, even if the plan generally incorporates IRC 415 by reference.

4.72.6.2.1  (09-22-2014)
General Definitions and Concepts

  1. IRM 4.72.6.2.1.1, Employer, IRM 4.72.6.2.1.2, Plan and IRM 4.72.6.2.1.3, Limitation Year provide general definitions and concepts that are relevant to IRC 415(b).

4.72.6.2.1.1  (09-22-2014)
Employer

  1. IRC 414(b), (c), and (m) provide that for purposes of IRC 415 all employees of all corporations which are members of a controlled group of corporations (within the meaning of IRC 1563(a), as modified by IRC 1563(f)(5) and determined without regard to IRC 1563(a)(4) and (e)(3)(C)), all employees of trades or businesses (whether or not incorporated) which are under common control, and all employees of the members of an affiliated service group are treated as employed by a single employer. See Treas. Reg. 1.415(a)-1(f)(1) and (2).

    IRC 415(h) and Treas. Reg. 1.415(a)-1(f)(1) provide that for purposes of applying IRC 414(b) and (c), the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in IRC 1563(a)(1), except for purposes of determining whether two or more organizations are a brother-sister group of trades or businesses under common control.

  2. IRC 414(n) and Treas. Reg. 1.415(a)-1(f)(3) provide that, for purposes of IRC 415, a leased employee is treated as an employee of the recipient of the leased employee’s services, unless the leased employee is covered by a money purchase pension plan described in IRC 414(n)(5).

    1. In particular, except as provided in (b) below, benefits or contributions provided by the leasing organization that are attributable to services performed for the recipient are treated as provided by the recipient.

    2. An exception is provided with respect to a leased employee covered by a money purchase pension plan described in IRC 414(n)(5) if both of the following conditions are met: (i) The leased employee is covered by a plan that is maintained by the leasing organization and that meets the requirements of IRC 414(n)(5)(B); and (ii) Leased employees do not constitute more than 20 percent of the recipient’s nonhighly compensated workforce. See Treas. Reg. 1.415(a)-1(f)(3)(ii).

  3. If a company is a member of a controlled group or affiliated service group that maintains a plan covering its employees, and the company subsequently leaves the group and establishes an unrelated new plan, the plan of the prior group is aggregated with the company’s new plan for purposes of applying the IRC 415 limits to employees covered by both plans. The formerly affiliated plan is treated as if it had terminated immediately prior to the cessation of affiliation with sufficient assets to pay benefit liabilities under the plan, and had purchased annuities to provide plan benefits. See Treas. Reg. 1.415(f)-1(b)(2).

    Example 1: Companies A, B, and C are members of a controlled group of corporations. Employees of all members of the controlled group are eligible to participate in a DB plan, Plan M. On April 30, 2013, Company B terminates membership in the controlled group, and immediately establishes a new DB plan, Plan X. No transfers of assets and liabilities within the meaning of IRC 414(l) are made from Plan M to the new Plan X. For the 2013 limitation year and subsequent limitation years, benefits of employees covered by both DB plans (Plan M and Plan X) must be aggregated for purposes of applying the IRC 415(b) limitations, treating Plan M as if it had terminated and purchased annuities to provide plan benefits.

  4. If, as of the first day of a limitation year, two or more DB plans were not required to be aggregated and were not aggregated, but are aggregated later in that year, the plans would not fail to satisfy IRC 415 merely because the aggregation later in the year causes the plans to exceed the limits under IRC 415(b) with respect to a participant, but only if no plan amendments increasing benefits with respect to the participant under either plan are made after the occurrence of the event which causes such plans to be aggregated. See Treas. Reg. 1.415(f)-1(e)(3)(i).

4.72.6.2.1.2  (09-22-2014)
Plan

  1. IRC 414(j) defines a DB plan as any plan which is not a DC plan. Under a DB plan, participants accrue a benefit each year under a formula that must be explicitly stated in the plan. See Treas. Reg. 1.401-1(b)(1)(i), and Treas. Reg. 1.401(a)-1(b)(1)(i) and (iii).

  2. IRC 415(f) and Treas. Reg. 1.415(f)-1(a)(1) provide that for purposes of applying the IRC 415(b) limitations, all DB plans (whether or not terminated) ever maintained by an employer (or a predecessor employer) are to be treated as one DB plan.

    Example 2: Company X maintained a DB plan for five years before it terminated the plan in 2012. Company X adopted another DB plan in 2013. For those employees who have participated in both plans, benefits under both plans must be combined for purposes of applying the IRC 415 limits.

  3. IRC 414(a) provides that for purposes of that section, in any case in which the employer maintains a plan of a predecessor employer, service for the predecessor is treated as service for the employer. Accordingly, benefits and service for a predecessor employer are taken into account with benefits and service for a successor employer for IRC 415 purposes. See Treas. Reg. 1.415(f)-1(c).

  4. A multiemployer plan, as described in IRC 414(f), is not aggregated with other multiemployer plans for purposes of applying the limits of IRC 415(b) limits, even if some or all of the same employers contribute to both plans. See Treas. Reg. 1.415(f)-1(g)(1).

  5. A multiemployer plan, as defined in IRC 414(f), is permitted to provide that only the benefits under that multiemployer plan that are provided by an employer are aggregated with benefits under plans maintained by that employer that are not multiemployer plans. See Treas. Reg. 1.415(f)-1(g)(2).

  6. A multiemployer plan, as defined in IRC 414(f), is not aggregated with any other plan that is not a multiemployer plan for purposes of applying the compensation limit of IRC 415(b)(1)(B) and Treas. Reg. 1.415(b)-1(a)(1)(ii). See Treas. Reg. 1.415(f)-1(g)(2).

4.72.6.2.1.3  (09-22-2014)
Limitation Year

  1. The IRC 415 limits apply to amounts for or with respect to a limitation year. The limitation year for a plan is the calendar year unless the terms of the plan provide for a different consecutive 12-month period. See Treas. Reg. 1.415(j)-1 for the definition of limitation year and special rules.

    1. A plan may only provide for one limitation year regardless of the number or identity of the employers maintaining the plan.

    2. A plan may provide that the limitation year is a fiscal year with an annual period varying from 52 to 53 weeks, so long as the fiscal year satisfies the requirements of IRC 441(f).

    3. Once established, the limitation year may be changed only by amending the plan.

  2. If a change in the limitation year is made (including specification of a limitation year other than the default of the calendar year), the new limitation year must be a consecutive 12-month period which begins on any day within the current limitation year. See Treas. Reg. 1.415(j)-1(d)(1).

    No adjustment is made to the IRC 415(b) limitations to reflect the short limitation period created by a change in the limitation year. See Treas. Reg. 1.415(j)-1(d)(2).

  3. If an employer maintains more than one qualified plan, those plans may provide for different limitation years. See Treas. Reg. 1.415(j)-1(c)(3) for testing rules applicable to an individual who has participated in more than one DB plan of the employer, where different limitation years are used by those plans.

4.72.6.2.2  (09-22-2014)
Examination Steps

  1. Determine whether the employer is a member of a controlled group of corporations, a member of trades or businesses (whether or not incorporated) which are under common control, or a member of an affiliated service group. Taking IRC 415(h) into account, determine whether the employer is treated with other members of these groups as a single employer for purposes of applying the IRC 415 limits. If other members are to be taken into account, determine the same information for their DB plans, as described in the following examination steps, as that determined for the employer.

  2. Determine all DB plans currently maintained by the employer, including any previously terminated DB plans that have ever been maintained by the employer. For each plan, determine the plan’s effective date and earliest participation dates.

  3. If an employee currently participating in a DB plan of the employer has also participated in another ongoing or terminated plan(s) of the same employer (or of an employer treated as the same employer for purposes of IRC 415 testing), aggregate benefits, service and participation under these plans for purposes of applying the IRC 415(b) limits.

  4. Determine the limitation year for each plan.

4.72.6.3  (09-22-2014)
IRC 415(b) Limits

  1. IRC 415(b)(1) provides, in general, that benefits with respect to a participant exceed the IRC 415(b) limits if, when expressed as an annual benefit (within the meaning of IRC 415(b)(2)), such annual benefit is greater than the lesser of:

    1. $160,000

    2. 100 percent of the participant's average compensation for her/his high three years.

  2. The IRC 415(b)(1)(A) limitation is often referred to as the "DB dollar limitation" while the IRC 415(b)(1)(B) limitation is often called the "DB compensation limitation."

  3. The DB compensation limitation does not apply to certain collectively bargained plans. See IRC 415(b)(7).

  4. Under SBJPA, effective for limitation years beginning after December 31, 1994, the DB compensation limitation does not apply to governmental plans (as defined in IRC 414(d)). EGTRRA provided that the DB compensation limitation does not apply to multiemployer plans (as defined in IRC 414(f)) for limitation years beginning after December 31, 2001. PPA ’06 provided that the DB compensation limitation does not apply to a participant in a plan maintained by a church (as defined in IRC 3121(w)(3)(A)) who has never been an HCE of the church for limitation years beginning after December 31, 2006. See IRC 415(b)(11) and Treas. Reg. 1.415(b)-1(a)(6).

  5. See IRM 4.72.6.3.8, Participation or Service of Less Than 10 Years, regarding proration of the DB dollar limitation in the instance of a participant with less than 10 years of participation and proration of the DB compensation limitation in the instance of a participant with less than 10 years of service.

4.72.6.3.1  (09-22-2014)
Cost of Living Adjustments (COLAs)

  1. IRC 415(d) and Treas. Reg. 1.415(d)-1 provide that the DB dollar limitation is adjusted annually as prescribed by the Commissioner to take into account increases in the cost of living. The adjusted limitation is effective as of January 1 of a calendar year and applicable to limitation years that end with or within that calendar year.

    1. An adjustment to the DB dollar limitation is permitted to be applied to a participant who has not commenced benefits before the date on which the adjustment is effective. See Treas. Reg. 1.415(d)-1(a)(4)(ii).

    2. With respect to a distribution of accrued benefits that commenced before the date on which an adjustment to the DB dollar limitation is effective, a plan is permitted to apply the adjusted limitations to that distribution, but only to the extent that benefits have not been paid. See Treas. Reg. 1.415(d)-1(a)(4)(iv) regarding the manner of adjustment for benefits that have commenced.

  2. While a DB plan may include a provision that automatically adjusts the maximum dollar limitation for changes in the cost of living, the provision may only provide for scheduled increases that become effective as provided in IRC 415(d) no sooner than January of each calendar year. See Treas. Reg. 1.415(d)-1(a)(3) and Treas. Reg. 1.415(d)-1(d).

  3. The DB dollar limitations in effect from ERISA through 2014 are given below. The COLA increases that apply to the DB dollar limitations each year are published online at: http://www.irs.gov/retirement/article/0,,id=96461,00.html

    IRC 415(b)(1)(A) Dollar Limitations
    Limitation added by ERISA $ 75,000
    January 1, 1976 $ 80,475
    January 1, 1977 $ 84,525
    January 1, 1978 $ 90,150
    January 1, 1979 $ 98,100
    January 1, 1980 $110,625
    January 1, 1981 $124,500
    January 1, 1982 $136,425
    January 1, 1983 - - January 1, 1987 $ 90,000
    January 1, 1988 $ 94,023
    January 1, 1989 $ 98,064
    January 1, 1990 $102,582
    January 1, 1991 $108,963
    January 1, 1992 $112,221
    January 1, 1993 $115,641
    January 1, 1994 $118,800
    January 1, 1995 - - January 1, 1996 $120,000
    January 1, 1997 $125,000
    January 1, 1998 - - January 1, 1999 $130,000
    January 1, 2000 $135,000
    January 1, 2001 $140,000
    January 1, 2002 - - January 1, 2003 $160,000
    January 1, 2004 $165,000
    January 1, 2005 $170,000
    January 1, 2006 $175,000
    January 1, 2007 $180,000
    January 1, 2008 $185,000
    January 1, 2009 - - January 1, 2011 $195,000
    January 1, 2012 $200,000
    January 1, 2013 $205,000
    January 1, 2014 $210,000
  4. In certain circumstances the DB compensation limitation applicable to a participant who has separated from service with a nonforfeitable right to an accrued benefit may be adjusted annually to take into account cost-of-living increases. See IRC 415(d)(1)(B).

    1. If the annual benefit payable to a terminated participant is limited by the compensation limitation and the plan specifically provides for such post-termination adjustments, the compensation limitation applicable to the participant in the limitation year during which the participant separated from service may be adjusted for subsequent limitation years. See Treas. Reg. 1.415(d)-1(a)(2).

    2. The compensation limitation applicable to such an individual for a limitation year is calculated by multiplying the compensation limitation applicable to the individual, as adjusted under prior law through the prior limitation year, by the factor provided by the Service for the current limitation year.

    3. Factors which may be used to adjust the DB compensation limitation applicable to separated participants are published by the Service as part of the COLAs under IRC 415(d). The factors used to adjust the DB compensation limitation applicable to a participant who separated from service before January 1 of the calendar years from 1995 through 2014 are given below.

    1. 1995 1.0217
      1996 1.0264
      1997 1.0294
      1998 1.0220
      1999 1.0160
      2000 1.0235
      2001 1.0351
      2002 1.0270
      2003 1.0159
      2004 1.0220
      2005 1.0273
      2006 1.0383
      2007 1.0334
      2008 1.0236
      2009 1.0530
      2010 1.0000
      2011 (1) 1.0000
      2011 (2) 1.0118
      2012 (1) 1.0327
      2012 (3) 1.0376
      2013 1.0170
      2014 1.0155

      Note:

      (1) For a participant who separated from service before January 1, 2010.
      (2) For a participant who separated from service during 2010.
      (3) For a participant who separated from service during 2010 or 2011.

  5. For individuals whose benefits under a plan are limited by IRC 415(b) and the plan provides for the escalation of benefits as the IRC 415(b) DB dollar limitation is increased, benefits may only be increased beginning in the calendar year the increased IRC 415(b) limit becomes effective, and benefits for prior years are not retroactively increased because of benefit increases in the current year. See Treas. Reg. 1.415(d)-1(a)(3).

  6. For purposes of calculating a single-sum distribution of a participant’s benefit, COLA increases in the dollar limitation and the compensation limitation must not be anticipated.

    If a plan formula provides that a participant’s benefit is increased each year by a COLA which is a function of the Consumer Price Index (CPI), a participant receiving benefit in the form of a single-sum must receive projections of the CPI increases (based on reasonable actuarial assumptions) as part of the single-sum, but only to the extent the single-sum does not exceed the actuarial present value of the lesser of the current dollar limitation or current compensation limitation applicable to the participant.

  7. When a plan terminates, the dollar limit in effect as of the termination date is frozen for purposes of determining the maximum annual benefit that is payable to any participant from the terminated plan, even if distribution of the benefits from the terminated plan occurs in a later year. This is because in order to increase the amount payable as the IRC 415(b) limits increase, the plan must provide for such increase. However, each time there is an "automatic" increase, a plan amendment is deed to have occurred. Because the "amendment" would increase the accrued benefit above that permitted at the date of plan termination, such amendment would disqualify the plan.

    Example 3: Company A has a DB plan, Plan Z, with a plan year and limitation year that both end on June 30. What is the DB dollar limitation applicable to a participant in Plan Z for the limitation year ending June 30, 2013?

    Solution: The dollar limitation applicable to the July 1, 2012 through June 30, 2013 limitation year is $205,000. The adjusted dollar limitation effective January 1, 2013 is applicable to limitation years that end during the calendar year 2013.

    Note:

    Benefits accrued or distributed under the plan may not exceed the limit applicable during 2012 (that is, $200,000) until on or after January 1, 2013. See Treas. Reg. 1.415(d)-1(a)(3).

    Example 4: A DB plan, Plan Y, with a calendar year plan year and limitation year was terminated on August 8, 2012, but was not able to make single-sum distributions to participants until February 2013. Which adjusted dollar limitation will be used for purposes of calculating the maximum single-sum distribution that can be distributed to a Plan Y participant?

    Solution: The dollar limitation in effect on the date of termination ($200,000) would be used for calculating the maximum accrued benefit under the plan in an optional form, i.e., the maximum single-sum which can be distributed. If the plan provides for interest on late distributions, the amount may be increased accordingly.

    Example 5: In 2012, Mr. Burton retired from Plan K, a DB plan, at age of 65 and began receiving benefits. His benefit at retirement age, prior to limitation for IRC 415(b), was $250,000 per year, payable as a single life annuity. Mr. Burton’s accrued benefit in 2012 was limited by the IRC 415(b) dollar limitation to $200,000. This is because Treas. Reg. 1.415(b)-1(a)(3) requires that the plan must preclude the possibility that a benefit will be accrued, distributed or otherwise payable in an optional form that exceeds the limitations of IRC 415. The terms of Mr. Burton’s plan provide for the use of the adjusted dollar limitation under IRC 415(b) and (d). In 2013, the plan is amended to provide for a three percent COLA adjustment for retiree benefits. How will this affect Mr. Burton’s benefit in 2013?

    Solution: The accrued benefit at Mr. Burton’s retirement date is $200,000 as defined in IRC 411(a)(7)(A). Any future increase in his benefit will be based on this accrued benefit, instead of his formula benefit before the limitation of IRC 415(b) because to base the increase on the benefit prior to application of IRC 415 would violate Treas. Reg. 1.415(b)-1(a)(3). In 2013, Mr. Burton can receive a three percent increase in his benefit, provided the increase will not cause his benefit to exceed either of the limitations under IRC 415(b) for 2013 (and provided that the increase does not violate any other plan qualification requirement, such as the nondiscrimination requirement of IRC 401(a)(4)). Therefore, in 2013 Mr. Burton’s benefit would be computed as $206,000 (1.03 x $200,000) which would then be limited to $205,000, the 2013 IRC 415(b) dollar limitation.

4.72.6.3.1.1  (09-22-2014)
Examination Steps

  1. Is the correct IRC 415(b) dollar limitation being used for purposes of applying the IRC 415 limits? If a DB plan is terminated in one limitation year and benefits in the form of a single-sum are not distributed until the following limitation year, is the correct IRC 415(b) limit (the limitation in effect at the time of termination) used for demonstrating that IRC 415 limits are satisfied?

  2. If benefits of retired participants (with benefits limited by either the DB dollar limitation or the DB compensation limitation) are increased as the IRC 415(b) limitation increases, do the terms of the plan specifically provide for such post-retirement increases?

  3. If the IRC 415 compensation limit applicable to terminated participants is being increased each year for cost-of-living increases, do the plan terms explicitly provide for such increases? Are the increases being applied correctly?

4.72.6.3.2  (09-22-2014)
Average Compensation for High Three Years

  1. The IRC 415(b)(1)(B) compensation limitation uses a participant’s average compensation for her/his high three years. For this purpose, a participant’s "high three years" is described in IRC 415(b)(3) as the period of consecutive calendar years (not more than three) during which the participant had the greatest aggregate compensation from the employer.

  2. Treas. Reg. 1.415(b)-1(a)(5) provides that for the determination of a participant’s high three years of service, the plan may use any 12-month period to determine a year of service instead of the calendar year, provided that it is uniformly and consistently applied in a manner that is specified under the terms of the plan.

    If an employee has a severance from employment and is subsequently rehired, any calendar year (or other 12-month period used by the plan to measure compensation years, if applicable) for which the employee performed no services for and receives no compensation from the employer maintaining the plan, such year is disregarded as a break in service. If the break in service rule applies, the year that immediately follows the break in service period is treated as consecutive with the year that immediately precedes such period. See Treas. Reg. 1.415(b)-1(a)(5)(iii).

    Note:

    Because the regulations allow the use of a participant’s high three consecutive years of service (rather than participation), if such high three years occur before the plan’s effective date or before the employee becomes an active participant in the plan, use of such high three years will not cause the plan to fail to satisfy the requirements of IRC 415(b).

  3. While the terms of a plan may provide a different definition of compensation for purposes of calculating the benefit accrual under the plan, a definition of compensation within the meaning of IRC 415(c)(3) must be used to determine whether the DB compensation limit has been exceeded.

    1. A plan that incorporates IRC 415 by reference must specify which definition of compensation is used. Compensation used for IRC 415 purposes is defined in Treas. Reg. 1.415(c)-2 and discussed in detail in IRM 4.72.7, Employee Plans Technical Guidelines, Examination Guidelines for IRC 415(c).

    2. For years beginning after December 31, 1997, compensation for IRC 415 purposes includes any elective deferral (as defined in IRC 402(g)(3)), and any amount that is contributed or deferred by the employer at the election of the employee and that is not includible in the gross income of the employee by reason of IRC 125 or IRC 457. For limitation years beginning after December 31, 2000, compensation for IRC 415 purposes also includes any elective amounts that are not includible in the gross income of the employee by reason of IRC 132(f)(4) (i.e., qualified transportation fringes). This amendment was effective retroactively for years beginning after December 31, 1997.

  4. IRC 401(a)(17) imposes an annual compensation limit on the amount of compensation a qualified plan can take into account in determining benefit accruals under a DB plan. Because a plan may not base benefits on compensation in excess of the limitation under IRC 401(a)(17), a plan’s definition that is used for purposes of applying the limitations of IRC 415 is not permitted to reflect compensation that is in excess of the limitation under IRC 401(a)(17) applicable to that year. See Treas. Reg. 1.415(c)-2(f) and Treas. Reg. 1.415(b)-1(a)(5)(i).

    However, benefits accrued or payable under a plan as of the end of the limitation year immediately prior to July 1, 2007 (the effective date of the 2007 Treasury regulation) may be based on compensation in excess of the IRC 401(a)(17) compensation limit to the extent consistent with plan provisions that were adopted and in effect before April 5, 2007. Such plan provisions must meet the applicable requirements of the statutory provisions, the regulations, and other published guidance that were in effect at the time. See Treas. Reg. 1.415(a)-1(g)(4).

    Example 6: Mr. Holler commenced employment on January 1, 2013, at age 55, and began participating immediately in his employer’s DB plan (Plan M). The benefit at normal retirement age (65) under Plan M (before limitation for IRC 415(b)) is years of service (not to exceed 10) times 10 percent times final average compensation, where final average compensation is calculated using the participant’s high three consecutive years average compensation. Mr. Holler’s 2013 compensation is $300,000. What compensation amounts would be taken into account in 2013 in determining Mr. Holler’s benefit and the IRC 415(b)(1)(B) compensation limitation applicable to this benefit?

    Solution: In calculating the benefit under the plan formula in 2013, the compensation is limited by the 2013 IRC 401(a)(17) compensation limit to $255,000. The compensation-based limitation under IRC 415 applicable to Mr. Holler would be $255,000, the lesser of his actual compensation ($300,000) and the applicable IRC 401(a)(17) compensation ceiling ($255,000).

4.72.6.3.2.1  (09-22-2014)
Examination Steps

  1. Is an IRC 415(c)(3) definition of compensation used under the plan for purposes of determining whether the limitations of IRC 415 have been exceeded? Does the plan specify which definition is used for purposes of determining the IRC 415(c)(3) compensation?

  2. Are elective deferrals treated appropriately in determining the compensation used for IRC 415 testing (i.e., IRC 415(c)(3) compensation)?

  3. Is the employee’s compensation from all members of a controlled group (or from all members of an affiliated service group) taken into account?

  4. For the IRC 415(b) percentage of compensation limitation, is average compensation for a participant’s high three years calculated correctly? Are the compensation ceilings under IRC 401(a)(17) taken into account for the determination of the three high year average compensation used for the IRC 415 limitation applied under the plan?

4.72.6.3.3  (09-22-2014)
Annual Benefit

  1. The limitations of IRC 415(b)(1) apply to benefits with respect to a participant, as expressed in terms of an "annual benefit." Annual benefit is defined in IRC 415(b)(2)(A) as a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in IRC 401(a)(31), IRC 402(c)(1), IRC 403(a)(4), IRC 403(b)(8), IRC 408(d)(3), and IRC 457(e)(16)) are made. See Treas. Reg. 1.415(b)-1(b).

  2. Unlike a DC plan, which limits the amount of annual additions which may be made to the account of a participant in any given year, a DB plan must limit the annual benefit that may accrue or be paid at any time to a participant. In determining the annual benefit, benefits attributable to certain amounts are not taken into account:

    1. Mandatory or voluntary employee contributions.

    2. Rollover contributions.

    3. Elective transfer of an immediately distributable benefit from another plan (either a DB plan or a DC plan), as described in the Treas. Reg. 1.411(d)-(4), Q&A 3 (c). See Treas. Reg. 1.415(b)-1(b)(3)(ii).

    4. Assets or liabilities transferred from one qualified plan to another, to the extent the benefits transferred to the transferee plan are otherwise required to be taken into account in determining whether the transferor plan satisfies the limitations of IRC 415(b). See Treas. Reg. 1.415(b)-1(b)(3).

4.72.6.3.3.1  (09-22-2014)
Employee Contributions

  1. In general, the DB limitations of IRC 415(b)(1) apply to employer-provided benefits under the plan. Benefits attributable to employee contributions are disregarded for purposes of applying the DB limitations. In general, the employee contribution amounts are treated as a separate DC plan subject to the limitations of IRC 415(c).

  2. For purposes of applying the rules of IRC 415(b), the following amounts are not treated as employee contributions. See Treas. Reg. 1.415(b)-1(b)(2)(ii).

    1. Contributions that are picked up by a governmental employer as provided under IRC 414(h)(2).

    2. Repayment of any loan made to a participant from the plan.

    3. Repayment of a previously distributed amount as described in IRC 411(a)(7)(B), including amounts that would have been included except that the plan does not restrict the timing of repayments to the maximum extent permitted by IRC 411(a).

    4. Repayment of a withdrawal of employee contributions as provided under IRC 411(a)(3)(D), including amounts that would have been included except that the plan does not restrict the timing of repayments to the maximum extent permitted by IRC 411(a).

4.72.6.3.3.1.1  (09-22-2014)
Mandatory Contributions

  1. If a DB plan provides for mandatory contributions, the annual benefit attributable to such contributions is not taken into account in testing the IRC 415(b) limitation on benefits. Therefore, the portion of the annual benefit that is attributable to the mandatory contributions must be determined using the rules under IRC 411(c)(2)(B). See Treas. Reg. 1.415(b)-1(b)(2)(iii).

  2. In general, the accrued benefit derived from contributions made by an employee as of any applicable date is the amount equal to the employee’s "accumulated contributions" (as defined under IRC 411(c)(2)(C)), expressed as an annual benefit commencing at normal retirement age.

4.72.6.3.3.1.2  (09-22-2014)
Voluntary Contributions

  1. Voluntary contributions are, generally, kept in a separate account with the participant having a nonforfeitable right to the actual account balance, including the participant’s contributions plus any earnings on these contributions. Accordingly, the portion of the plan to which voluntary employee contributions are made is treated as a DC plan pursuant to IRC 414(k). See Treas. Reg. 1.415(b)-1(b)(2)(iv).

  2. If voluntary contributions are used to purchase annuities to provide part of the benefit at retirement, the part of the total benefit provided by voluntary contributions is not subject to the IRC 415(b)(1) limitation.

4.72.6.3.3.2  (09-22-2014)
Rollover Contributions

  1. If the plan provides for a benefit derived from a rollover contribution (other than a benefit derived from a separate account to be maintained with respect to the rollover contribution), then for purposes of applying the IRC 415(b) limitation, the annual benefit attributable to a rollover contribution is determined in the same manner as the annual benefit attributable to mandatory employee contributions, regardless of the assumptions used to compute the benefit amount under the plan that is attributable to the rollover contribution. If a plan were to provide an annuity resulting from the rollover amount that is determined using a more favorable actuarial basis than required under the rules of IRC 411(c), then the portion of the benefit resulting from the amount directly rolled over that exceeds the benefit derived from that rolled over amount under the rules of IRC 411(c)(2)(B) would be subject to the non-forfeiture rules applicable to benefits derived from employer contributions and would be included in the annual benefit for purposes of IRC 415(b). See Treas. Reg. 1.415(b)-1(b)(2)(v) and Rev. Rul. 2012-4.

  2. Benefits attributable to rollover contributions that are kept in a separate account are treated as a DC plan and thus are not subject to the benefit limitations under IRC 415(b).

4.72.6.3.3.3  (09-22-2014)
Transfer of Assets or Liabilities

  1. When there is a transfer of assets or liabilities from one qualified DB plan to another, to the extent the benefits transferred to the transferee plan are otherwise required to be taken into account under IRC 415(f) and Treas. Reg. 1.415(f)-1 by the transferor plan, the transferred benefit does not have to be taken into account by the transferor plan in applying the IRC 415 limits. See Treas. Reg. 1.415(b)-1(b)(3). If both plans were maintained by the same employer, the benefits under both plans would have to be taken into consideration for purposes of applying the IRC 415 limits. See, however, the non-duplication rules prescribed under Treas. Reg. 1.415(f)-1(d)(1).

  2. Except as provided under (3) below, where there has been a transfer of benefits from one DB plan to another DB plan, regardless of whether the transferor or transferee plans are aggregated, the transferee plan must take into account the transferred benefits. See Treas. Reg. 1.415(b)-1(b)(3)(i)(C).

  3. If the transfer is an elective transfer of an immediately distributable benefit, as described in Treas. Reg. 1.411(d)-4, Q&A 3(c), the amount transferred is treated in the same manner as a rollover contribution to the transferee plan.

4.72.6.3.3.4  (09-22-2014)
Qualified Domestic Relations Orders (QDROs) and IRC 415

  1. IRC 414(p) provides rules that a domestic relations order must satisfy to be treated as a QDRO. Treas. Reg. 1.415(a)-1(f)(6) requires that benefits provided to alternate payees of participants pursuant to QDROs must be aggregated with benefits provided to participants in applying the limitations of IRC 415. The aggregated accruals and distributions are subject to the single limitation applicable to the participant under IRC 415(b).

    Example 7: In 2007, Mr. Hill, age 59, and his wife, age 54, divorce. Under the terms of a QDRO, Mr. Hill’s former spouse commences receiving a portion of Mr. Hill’s retirement annuity benefit that is equivalent to a single life annuity of $50,000 per year commencing at the participant’s normal retirement age, age 65. In 2013, Mr. Hill reaches age 65 and plans to commence his benefit. How would the IRC 415(b) dollar limitation be applied in this circumstance?

    Solution: In 2013, the IRC 415(b) dollar limit on Mr. Hill’s annual benefit is $205,000. The annual benefit payable to the participant may not exceed $155,000 per year because of the prior QDRO payment.

4.72.6.3.3.5  (09-22-2014)
Limiting the Accrued Benefit

  1. A plan must preclude the possibility that any annual benefit exceeding the IRC 415(b) limitations will be accrued (except a plan that is not subject to the requirement of IRC 411), distributed, or otherwise payable in any optional form of benefit at any time. See Treas. Reg. 1.415(b)-1(a)(3).

  2. If the plan determines accrued benefits on the basis of the fractional rule under IRC 411(b)(1)(C), the plan must specify the way in which the IRC 415 benefit limitations are applied to the participant’s benefit.

    1. Determine the projected benefit under the plan formula, apply the applicable IRC 415 limitation to the projected benefit, and then calculate the accrued benefit based on this limited benefit, applying any additional limits as necessary. This method is sometimes described as the "project, limit, and prorate" method.

    2. Determine the participant’s projected benefit under the plan formula, calculate the participant’s prorated benefit from the unlimited projected benefit, and then apply the applicable limitation to obtain the participant’s accrued benefit. This second method is sometimes described as the "project, prorate, and limit" method.

  3. The IRC 415(b) limits must be applied to the accrued benefit. Therefore, reductions or adjustments for optional forms of benefits, such as qualified joint and survivor benefits, should be applied after the IRC 415(b) limits are applied.

    Example 8: Mr. Johnson’s formula benefit under a plan is $400,000 per year payable at age 65, before reflecting the IRC 415 dollar limit of $205,000 per year for 2013. Mr. Johnson retires in 2013 at age 62 and elects a 100 percent qualified joint and survivor annuity (QJSA). The plan applies an early retirement factor of 0.85 at age 62 and an optional form factor of 0.90 for the 100 percent QJSA form of payment. Which of the following is the correct calculation of Mr. Johnson’s benefit payable at age 62 as a 100 percent QJSA:

    1. First adjust the formula benefit to the benefit payable at age 62 as a 100 percent QJSA, and then apply the IRC 415 limit. Benefit payable at age 62 as a 100 percent QJSA = $400,000 x .85 x .90 = $306,000. This benefit is then limited to the dollar limit of $205,000. So $205,000 is payable at age 62 as a 100 percent QJSA.

    2. First apply the IRC 415 dollar limit to the formula benefit at age 65, and then adjust to the benefit payable at age 62 as a 100 percent QJSA. The benefit payable at age 62 as a 100 percent QJSA = $205,000 x .85 x .90 = $156,825. Note that if the plan provides for unreduced 100 percent QJSA form of payment, then there would be no adjustment for form of payment.

    Answer: (b) is correct. The IRC 415 limit is applied to Mr. Johnson’s accrued benefit.

4.72.6.3.3.6  (09-22-2014)
Multiple Annuity Starting Dates

  1. Treas. Reg. 1.415(b)-1(b)(1)(iii) provides guidance regarding the determination of an annual benefit in the case of multiple annuity starting dates. Under this rule, the IRC 415(b) limits must be satisfied as of each annuity starting date, taking into account the benefits that have been or will be provided at all of the annuity starting dates.

  2. Multiple annuity starting dates occur under the following circumstances:

    1. The participant had received or is receiving benefit distribution from another plan that is aggregated with a plan under which the participant receives current accruals.

    2. The participant previously commenced distribution under the plan but is now making a new distribution election.

    3. Benefit payments are increased as a result of plan terms or a plan amendment applying a COLA or similar benefit increase, unless the increase complies with one of the safe harbors provided in the Treasure regulation.

    See Treas. Reg. 1.415(b)-1(b)(1)(iii)(A) and (B).

  3. In determining the annual benefit for a participant as of a particular annuity starting date, the plan must actuarially adjust the past and future distributions with respect to the benefits that commenced at the other annuity starting dates. No specific calculation methodologies are prescribed by the rule, so there is some room for a good faith interpretation.

4.72.6.3.3.7  (09-22-2014)
Examination Steps

  1. Do any of the DB plans provide for voluntary or mandatory employee contributions, rollover contributions, or amounts transferred from another DB plan?

  2. If a plan provides for employee contributions, are the IRC 415(b) limits applied only to the employer provided portion of a participant’s benefit? Is the portion of the benefit attributable to employee contributions calculated correctly?

  3. If a DB plan provides for employee contributions, are the employee contributions treated as a separate DC plan, and when aggregated with contributions under any other DC plans maintained by the employer, do the aggregated contributions satisfy IRC 415(c)?

  4. Are any QDROs in force with respect to benefits under the plan? Have benefits under the plan been previously distributed to any alternate payee pursuant to a QDRO? For any QDRO, have benefits been aggregated with benefits accrued or distributed to the relevant participant, and have the IRC 415 limits been properly applied to the aggregated benefit?

  5. How are the IRC 415 limits applied? Are the limits applied to the accrued benefits, or to the optional form of benefits?

  6. Is there a multiple annuity starting dates issue? If yes then contact a field actuary.

4.72.6.3.4  (09-22-2014)
Adjustments for Optional Benefit Forms

  1. The 415(b)(1) limitation is a maximum against which the plan’s annual benefit is compared, where annual benefit refers to a retirement income benefit payable annually in the form of a straight life annuity. If a DB plan provides a retirement benefit in any form other than a straight life annuity, the plan benefit is adjusted to be expressed in terms of a straight life annuity that is the actuarial equivalent of such benefit under rules provided in IRC 415(b)(2)(B) and Treas. Reg. 1.415(b)-1(c).

4.72.6.3.4.1  (09-22-2014)
Optional Forms for Which No Adjustments Required

  1. Benefits for which no adjustment is required to recognize payment in an alternate benefit form include the following:

    1. Survivor benefits payable to a surviving spouse under a QJSA, to the extent that such benefits would not be payable if the participant’s benefit were not paid in the form of a QJSA. See Treas. Reg. 1.415(b)-1(c)(4)(i)(A). See also Treas. Reg. 1.415(b)-1(c)(4)(ii)(B) regarding QJSAs combined with other distributions.

    2. Ancillary benefits that are not directly related to retirement benefits, such as preretirement disability benefits not in excess of the qualified disability benefit, preretirement incidental death benefits (including a qualified preretirement survivor annuity), and post-retirement medical benefits. See Treas. Reg. 1.415(b)-1(c)(4)(i)(B). See item (3)(b) under IRM 4.72.6.3.4.2, Optional Benefit Forms for Which Adjustments Are Required, regarding the requirement to adjust the IRC 415 limits with respect to Social Security supplements.

    3. Certain automatic benefit increase features. No adjustment is required to a benefit that is paid in a form that is not a straight life annuity to take into account the inclusion in that form of an automatic benefit increase feature, as described in Treas. Reg. 1.415(b)-1(c)(5)(ii), if the benefit is paid in a form to which IRC 417(e)(3) does not apply, and if the plan satisfies other conditions with respect to the automatic increase feature, as prescribed under Treas. Reg. 1.415(b)-1(c)(5)(iii).

  2. Although no adjustment is required to recognize payment in an alternate form for the plan features described in the preceding paragraph, any adjustments that are made with respect to any other alternate form of payment are made by reference to actuarial equivalence to the annual benefit payable as a single life annuity without automatic benefit increase and without inclusion of the value of any ancillary benefits.

    Example 9: Plan M accrues benefits on the basis of a QJSA benefit as the plan’s normal form of benefit. The plan may distribute a QJSA retirement benefit to a participant retiring at age 65 in 2013 of $205,000 annually (provided the DB compensation limit for that participant is not lower than the DB dollar limit), if the plan provides that there is no adjustment to recognize the QJSA form. However, if the participant elects distribution of the benefit in the form of a single-sum payment, then the limitation on the single-sum benefit is the actuarial equivalence of a single life annuity of $205,000, rather than the actuarial equivalence of the QJSA benefit of $205,000.

4.72.6.3.4.2  (09-22-2014)
Optional Benefit Forms for Which Adjustments Are Required

  1. If a DB plan provides a benefit other than in the form of a straight life annuity, an adjustment is required (except for those benefits previously discussed for which no adjustment is required). Such form of benefit must be adjusted to an actuarially equivalent straight life annuity beginning at the same age at which the plan benefit is to be received. See IRC 415(b)(2)(B).

  2. For a benefit paid in a form to which IRC 417(e)(3) does not apply, the actuarially equivalent straight life annuity benefit is the greater of: (i) The annual amount of the straight life annuity (if any) payable to the participant under the plan commencing at the same annuity starting date as the form of benefit payable to the participant; or (ii) The annual amount of the straight life annuity commencing at the same annuity starting date that has the same actuarial present value as the form of benefit payable to the participant, computed using a five percent interest rate assumption and the applicable mortality table described in IRC 417(e)(3)(B) for that annuity starting date. See IRC 415(b)(2)(E)(i), IRC 415(b)(2)(E)(v), and Treas. Reg. 1.415(b)-1(c)(2).

    In general, for annuity starting dates on or after January 1, 2008, the mortality table provided in Rev. Rul. 2007-67, as updated by Notice 2008-85 and Notice 2013-49, should be used for making the adjustments with respect to determinations required to be based on the applicable mortality table.

  3. For a benefit paid in a form to which IRC 417(e)(3) does apply, the actuarially equivalent straight life annuity benefit is the greatest of: (i) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial equivalence; (ii) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5 percent interest rate assumption and the applicable mortality table for the distribution under IRC 417(e)(3)(B); or (iii) The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable computed using the applicable interest rate for the distribution under IRC 417(e)(3)(C) and the applicable mortality table for the distribution under IRC 417(e)(3)(B), divided by 1.05 (except that this final calculation is not required for plans sponsored by an "eligible employer" as described in IRC 408(p)(2)(C)(i) – generally an employer who had less than 100 employees in the prior year with income of at least $5,000). See IRC 415(b)(2)(E)(ii), IRC 415(b)(2)(E)(v), IRC 415(b)(2)(E)(vi), and Treas. Reg. 1.415(b)-1(c)(3). See IRC 417(e)(3) and the regulations thereunder to determine whether a form of benefit is subject to IRC 417(e)(3).

    A Social Security supplement is generally a benefit that begins and terminates before the age when a participant is entitled to old-age insurance benefits, does not exceed the old-age insurance benefit that the participant will receive at the applicable age and is paid in addition to the regular benefit paid to the participant. Social Security supplements are benefits that are directly related to retirement benefits and, therefore, are taken into account for IRC 415 purposes, although they are not accrued benefits for IRC 411 purposes. Note that a Social Security supplement is not the same thing as a Social Security leveling option where the participant’s benefit is adjusted such that the monthly benefit paid before commencement of Social Security is the same as the sum of the monthly benefit from the plan and Social Security payments after commencement of Social Security. See Treas. Reg. 1.411(a)-7(c)(4) and Treas. Reg. 1.415(b)-1(c)(4)(ii)(A).

    Example 10: Mr. Burns will retire in 2013 at age 65 after 20 years of participation in a DB plan, Plan W. Plan W is not sponsored by an eligible employer as described in IRC 408(p)(2)(C)(i) and provides that participants may elect to receive their benefit in the form of a single-sum which is the actuarial equivalent of their annual benefit under the Plan, calculated using tabular factors specified in the plan. Using those plan assumptions, Mr. Burns’ benefit in the form of a single-sum, before limitation for IRC 415, is $2,500,000, based on a normal retirement benefit payable as a single life annuity payable at 65 equal to $170,953. Mr. Burns’ high three average compensation is $210,000. Assume for purposes of this example that the applicable interest rates under IRC 417(e)(3) for 2013 (which, after PPA ’06 is now expressed as three different segment interest rates) are 1.00 percent, 3.57 percent and 4.77 percent. How is the IRC 415(b) limit applied to his single-sum benefit?

    Solution: Mr. Burns’ high three year average compensation exceeds the 2013 dollar limitation ($205,000), so the dollar limitation is the limitation that will apply to Mr. Burns’ benefit. Because a single sum is a form of benefit other than a straight life annuity for which an adjustment is required, and because the single-sum form is a form of payment to which IRC 417(e) applies, the actuarially equivalent straight life annuity is equal to $215,481, determined as the greatest of the following amounts:

    1. $170,953, the annual amount payable as a straight life annuity at the same age under the plan.

    2. $215,481, the annual amount payable as a straight life annuity at the same age that is actuarially equivalent to $2,500,000, determined using the 2013 applicable mortality table and a 5.5 percent interest rate.

    3. $174,105, the annual amount payable as a straight life annuity at the same age that is actuarially equivalent to $2,500,000, determined using the 2013 applicable mortality table and the applicable interest rates, divided by 1.05.

    Since $215,481 exceeds $205,000, the annual limit for 2013 for distributions commencing at age 65, a single-sum distribution of $2,500,000 would violate IRC 415. The maximum lump sum payable to Mr. Burns is $2,378,400 (that is, $205,000/$215,481 x 2,500,000). For additional examples, see Treas. Reg. 1.415(b)-1(c)(6).

4.72.6.3.4.3  (09-22-2014)
Examination Steps

  1. What is the normal form of the retirement benefit under the plan?

  2. If a plan provides for optional forms of benefit, other than in the form of a single life annuity or a QJSA, do the plan terms provide the actuarial assumptions to be used for determining actuarial equivalence for other forms of benefit?

  3. Are amounts under optional forms of benefit which require IRC 415 limitation adjustments correctly converted to an actuarially equivalent single life annuity commencing at the same age? Do the actuarial assumptions used for the conversion satisfy IRC 415(b)(2)(E)?

4.72.6.3.5  (09-22-2014)
Adjustments for Early or Late Benefit Commencement

  1. Adjustments must be made to the DB dollar limitation for early and late commencement of benefits.

  2. No adjustment is made to the DB compensation limit to reflect early or late commencement of benefits.

4.72.6.3.5.1  (09-22-2014)
Adjustments When Benefits Commence Before Age 62

  1. If retirement income benefits under a plan commence before a participant’s attainment of age 62, the determination of whether the limitation has been satisfied is made by reducing the dollar limitation so that such reduced limitation (payable beginning when such retirement income benefit begins) is equivalent to a $160,000 (as adjusted to recognize cost-of-living increases) annual straight life annuity benefit beginning at 62. See IRC 415(b)(2)(C) and Treas. Reg. 1.415(b)-1(d).

  2. For purposes of adjustments to reflect early commencement of benefits, the participant’s age is determined based on completed calendar months as of the annuity starting date of the participant’s benefit.

  3. For purposes of adjustments to reflect early commencement of benefits, the actuarially equivalent straight life annuity is computed using a five percent interest rate and the applicable mortality table under IRC 417(e)(3)(B) that is effective for the annuity starting date of the participant’s benefit.

  4. If the plan has an immediately commencing straight life annuity payable at age 62 and the age of benefit commencement, then the dollar limitation is equal to the lesser of the amount in (3) above and the amount determined under plan factors as described here. The amount determined under plan factors is equal to the dollar limit multiplied by the ratio of the immediately commencing straight life annuity to the straight life annuity commencing at age 62.

  5. In general, for purposes of determining the actuarially equivalent amount with respect to early commencement of benefits, to the extent that a forfeiture does not occur upon the participant’s death before the annuity starting date, no adjustment is made to reflect the probability of the participant’s death between the annuity starting date and the participant’s attainment of age 62, unless the plan provides for such an adjustment. To the extent that a forfeiture occurs upon the participant’s death before the annuity starting date, an adjustment must be made to reflect the probability of the participant’s death between the annuity starting date and the participant’s attainment of age 62.

    Example 11: Participant A will commence receiving benefits in the form of a single life annuity immediately following the attainment of age 60 in 2013. For purposes of adjusting the dollar limitation, a participant’s death before retirement does not result in a forfeiture of benefit. What is the IRC 415 DB dollar limit applicable to A’s benefits?

    Solution: At age 62, the DB dollar limit applicable to benefits commencing in 2013 is $205,000. The dollar limit applicable to benefits payable as a single life annuity commencing at age 60, assuming no other adjustments (for example, for plan participation of less than 10 years) is $178,065, determined using the 2013 applicable mortality table and a five percent interest rate. There is no mortality adjustment made to reflect the probability of the participant’s death between age 60 and age 62 because the participant’s death before the annuity starting date does not result in a forfeiture of benefit.

    Assume the plan provides an immediate straight life annuity at age 60 of $163,800 and an immediate straight life annuity at age 62 of $182,000. The amount determined under the plan factors is an adjusted dollar limit of $184,500 ($205,000 x 163,800/182,000), which would not apply since it would be greater than the amount above of $178,065. For additional examples, see Treas. Reg.1.415(b)-1(d)(7)

4.72.6.3.5.2  (09-22-2014)
Adjustments When Benefits Commence After Age 65

  1. If retirement income benefits under a plan commence after a participant’s attainment of age 65, the determination of whether the limitation has been satisfied is made by increasing the dollar limitation so that such increased limitation (payable beginning when such retirement income benefit begins) is equivalent to a $160,000 (as adjusted to recognize cost-of-living increases) annual straight life annuity benefit beginning at 65. See IRC 415(b)(2)(D) and Treas. Reg. 1.415(b)-1(e).

  2. For purposes of adjustments to reflect delayed commencement of benefits, the participant’s age is determined based on completed calendar months as of the annuity starting date of the participant’s benefit.

  3. For purposes of adjustments to reflect delayed commencement of benefits, the actuarially equivalent straight life annuity is computed using a five percent interest rate and the applicable mortality table under IRC 417(e)(3)(B) that is effective for the annuity starting date of the participant’s benefit.

  4. If the plan has an immediately commencing straight life annuity payable at age 65 and the age of benefit commencement, then the dollar limitation is equal to the lesser of the amount in (3) above and the amount determined under plan factors as described here. The amount determined under plan factors is equal to the dollar limit, multiplied by the ratio of the adjusted immediately commencing straight life annuity to the adjusted age 65 straight life annuity.

  5. In general, for purposes of determining the actuarially equivalent amount with respect to delayed commencement of benefits, to the extent that a forfeiture does not occur upon the participant’s death before the annuity starting date, no adjustment is made to reflect the probability of the participant’s death between the participant’s attainment of age 65 and the annuity starting date, unless the plan provides for such an adjustment. To the extent that a forfeiture occurs upon the participant’s death before the annuity starting date, an adjustment must be made to reflect the probability of the participant’s death between the participant’s attainment of age 65 and the annuity starting date.

    Example 12: Mr. Ellis was eligible to retire under Plan P at his normal retirement age of 65 in 2011, but chose to continue working. He retired in 2013 at age 67. The terms of the DB plan provide that benefits are increased by 0.5 percent for each month after attainment of normal retirement age that a participant delays commencement of benefits under the plan. Under Plan P, there is no forfeiture of Mr. Ellis’ accrued benefit should he die after age 65, but before actual retirement. What is the DB dollar limit applicable to Mr. Ellis for benefits payable in the form of a single life annuity?

    Solution. The dollar limit applicable for a single life annuity payable commencing at age 67 in 2013 is $238,264, which is the straight life annuity at age 67 that is actuarially equivalent to an annuity of $205,000 commencing at age 65, determined using a five percent interest and the applicable mortality table, There is no mortality adjustment made to reflect the probability of the participant’s death between age 65 and age 67 because the participant’s death before the annuity starting date does not result in a forfeiture of benefit.

    Under the plan terms, benefits are increased by six percent for each year that benefit commencement is later than age 65. Accordingly Mr. Ellis’ age 65 benefit, now commencing at age 67, is increased by 12 percent. Using these plan factors the age 65 dollar limit of $205,000 is increased by 12 percent to $229,600. Because this is less than the otherwise adjusted amount of $238,264, this is the dollar limit that applies to Mr. Ellis for benefits commencing at age 67. For additional examples, see Treas. Reg.1.415(b)-1(e)(4).

4.72.6.3.5.3  (09-22-2014)
Examination Steps

  1. What is the normal retirement age under each plan?

  2. If a participant’s benefit commences before age 62, is the IRC 415(b) dollar limitation adjusted correctly? Do the actuarial assumptions used for the adjustment satisfy IRC 415(b)(2)(E)?

  3. If a participant’s benefit commences after age 65, is the IRC 415(b) dollar limitation properly adjusted for such late commencement? Do the actuarial assumptions used for the adjustment satisfy IRC 415(b)(2)(E)?

  4. Does the use of mortality in adjusting the dollar limitation for early or delayed commencement of benefits satisfy the rules relating to forfeiture of benefits?

4.72.6.3.6  (12-01-2002)
Special $10,000 Minimum Benefit

  1. IRC 415(b)(4) provides rules under which a minimum annual benefit may be provided. Annual benefits payable with respect to a participant under any DB plan shall be deemed not to exceed the limitation of IRC 415(b) if both:

    1. The annual retirement benefits payable with respect to such participant under such plan and under all other DB plans of the employer do not exceed $10,000 for the plan year, or for any prior plan year.

    2. The employer has not at any time maintained a DC plan in which the participant participated.
      See Treas. Reg. 1.415(b)-1(f).

  2. Mandatory employee contributions are not considered a separate DC plan for purposes of applying this special limitation, so the fact that a DB plan provides for employee contributions does not preclude a plan from taking advantage of this special exception. See Treas. Reg. 1.415(b)-1(f)(4).

  3. The special $10,000 minimum applies to the amount actually paid to a participant in any year regardless of the form in which the benefit is paid or the participant’s age. Accordingly this minimum applies for any annuity form of benefit including joint and survivor and a life annuity with a certain number of payments guaranteed, and at any age. It applies equally to a terminated participant receiving payments at age 25 and a terminated participant who is receiving payments at age 67. See Treas. Reg. 1.415(b)-1(f)(2).

    An actuarially equivalent lump sum based on this special $10,000 minimum benefit may not be paid because this would be more than $10,000 paid in one year. See Treas. Reg. 1.415(b)-1 (f)(2).

    Example 13: Mr. Carter is a participant in a DB plan. The plan provides for a benefit payable in the form of a straight life annuity beginning at age 65. His average compensation for the period of his high three years of service is $6,000. The plan does not provide for mandatory employee contributions, and at no time has he been a participant in a DC plan maintained by his employer. Under the terms of the plan, with respect to the current limitation year his annual benefit, before the application of IRC 415(b), is $9,500.

    Because Mr. Carter’s annual payments do not exceed $10,000, and because he has at no time participated in a DC plan maintained by his employer, the annual payments from the plan of $9,500 are not considered to exceed the limitation on benefits otherwise applicable to Mr. Carter, which is $6,000; the compensation-based limitation of IRC 415(b)(1)(B).

    This result can be the same even if, under the terms of the plan, Mr. Carter’s benefit of $9,500 were payable at age 60, if the plan provided for mandatory employee contributions, or if the benefit was payable in the form of a life annuity with a 10-year certain feature with annual payments of $9,500.

    However, now assume that the plan allows Mr. Carter to elect to receive his benefit in the form of a single-sum and the amount of the single-sum that is the actuarial equivalent of his straight life annuity ($9,500 annually) determined in accordance with the rules of IRC 417(e)(3) and Treas. Reg. 1.417(e)-1(d) and that this single-sum amount is $95,000.

    Because this amount would exceed $10,000 for the current limitation year, the special rule of IRC 415(b)(4) does not provide an exception from the generally applicable limits of IRC 415(b)(1) that apply to a single-sum distribution. Accordingly the otherwise applicable limits apply to this single-sum distribution and a single-sum distribution of $95,000 would not satisfy the requirements of IRC 415(b). Limiting the single-sum distribution to $60,000 (which for this example is assumed to be the present value of the $6,000 annual annuity benefit that complies with the compensation-based limitation of IRC 415(b)(1)(B)) in order to satisfy IRC 415 result in an impermissible forfeiture under the requirements of IRC 411(a). Accordingly, the plan should not provide for a single-sum distribution in this circumstance.

  4. See IRM 4.72.6.3.7 regarding proration of the special $10,000 minimum in the instance of a participant with less than 10 years of service.

    Example 14: Mr. Levin participates in Plan X, a DB plan, and reaches the plan’s normal retirement age of 65 with more than ten years of service with the employer, and a high three average compensation of $8,900. Under the terms of Plan X, prior to application of the IRC 415 limitations, Mr. Levin would be entitled to an annual benefit payable as a single life annuity commencing at normal retirement of $11,000. Mr. Levin has never participated in any DC plan sponsored by the employer. What is the IRC 415 limit applicable to Mr. Levin’s benefit?

    Solution. The IRC 415 limit applicable to annual benefits payable to Mr. Levin is $10,000. Although Mr. Levin’s annual benefit would otherwise be limited to the DB compensation limit of $8,900, the special $10,000 minimum would apply to annual benefits payable under the plan. See Treas. Reg.1.415(b)-1(f)(5) for additional examples.

4.72.6.3.6.1  (09-22-2014)
Examination Steps

  1. Has the plan based the determination of any actuarially equivalent amount for the IRC 415(b) benefit limitations on reference to the special $10,000 minimum?

  2. For any participant for whom the plan has provided an annual benefit on the basis of the special $10,000 minimum, has that participant ever participated in any defined contribution plan sponsored by the employer or any member of the employer’s controlled group?

4.72.6.3.7  (09-22-2014)
Participation or Service of Less Than 10 Years

  1. If a participant has less than 10 years of service or participation, IRC 415(b)(5) provides for a reduction in the limitations applicable to that participant. See Treas. Reg. 1.415(b)-1(g).

  2. If an employee has less than 10 years of participation in a DB plan, the otherwise applicable DB dollar limitation (IRC 415(b)(1)(A)) is multiplied by a fraction:

    1. The numerator of which is the number of years (and fractional parts thereof, or one if greater) of participation in the DB plan of the employer.

    2. The denominator of which is 10. See Treas. Reg. 1.415(b)-1(g)(1).

  3. In determining a participant’s years of participation for these purposes, Treas. Reg. 1.415(b)-1(g)(1)(ii) provides that:

    1. For a participant to receive a year (or a portion of a year) of participation for an accrual computation period, the plan must be established no later than the last day of such accrual computation period.

    2. 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: (i) 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 (ii) 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. 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.

    3. A participant who is permanently and totally disabled within the meaning of IRC 415(c)(3)(C)(i) for an accrual computation period is credited with a year of participation with respect to that period.

  4. The DB compensation limitation of IRC 415(b)(1)(B) and the special $10,000 minimum of IRC 415(b)(4) are reduced in a similar manner except that such reduction is applied with respect to years of service (less than 10) with an employer rather than years of participation in a plan.

  5. In no event shall the reductions of IRC 415(b)(5)(A) or (B) reduce the limitations referred to in IRC 415(b)(1) and IRC 415(b)(4) to an amount less that 1/10 of such limitation determined without regard to IRC 415(b)(5).

    Example 15: Mr. Johnson, a participant in Corporation B’s plan for six years, has seven years of service with the employer at the time of his retirement in 2013 at normal retirement age 65. Mr. Johnson’s average compensation for his high three years of service is $120,000. What is the IRC 415 limit applicable to annual benefits payable to Mr. Johnson in the form of a single life annuity?

    Solution. The DB dollar limit applicable to Mr. Johnson’s benefit is $123,000, equal to $205,000 x 6/10, based on Mr. Johnson’s six years of participation. The DB compensation limit applicable to Mr. Johnson’s benefit is $84,000, equal to $120,000 x 7/10, based on Mr. Johnson’s seven years of service. Therefore, the IRC 415 limit applicable to Mr. Johnson’s benefit is $84,000, the lesser of the participation-adjusted DB dollar limit of $123,000 and the service-adjusted DB compensation limit of $84,000. See Treas. Reg. 1.415(b)-1(g)(4) for additional examples.

4.72.6.3.7.1  (09-22-2014)
Examination Steps

  1. For participants with less than 10 years of participation, is the IRC 415(b)(1)(A) dollar limitation reduced appropriately?

  2. For participants with less than 10 years of service, is the IRC 415(b)(1)(B) compensation limitation reduced appropriately?

  3. For participants with less than 10 years of service, is the special $10,000 limitation of IRC 415(b)(4) reduced appropriately?

4.72.6.3.8  (09-22-2014)
Non-Cash Distributions

  1. If a DB plan makes a distribution in any form other than cash, it is important to realize the plan may not distribute more than is permissible under the limitations of IRC 415(b). In valuing non-cash distributions, current values should reflect accurate fair market values.

4.72.6.3.8.1  (09-22-2014)
Annuity Contracts

  1. Annuity contracts may be purchased for participants in qualified plans who retire or leave employment with rights to a deferred or immediate retirement annuity or when the plan is about to terminate. In such a case, the benefits that may be distributed in later years under the annuity contract must conform to the benefits that could have been provided under the terms of the plan. In particular, the contracts may not provide for distributions in excess of the IRC 415(b) limitations that are applicable under the plan. See Treas. Reg. 1.415(b)-1(a)(3).

  2. If a single-sum distribution is permitted under the annuity contract on or after the date the contract is distributed to the employee, such single-sum is a distribution in a form other than a single life annuity and must satisfy the limitations on assumptions that may be used in converting the annuity benefit to an alternate form specified in IRC 415(b)(2)(E).

    Note:

    Any cash surrender value or any other amount available to the employee is considered a distribution and in combination with other distributions under the contract must not exceed the maximum distribution limits under IRC 415(b). The contract should preclude such an excess by its terms.

  3. If the contract provides for deferred annuity payments commencing after the date the contract is distributed, all payment options under the plan, which will also be available under the contract, must satisfy the IRC 415(b) limitations for each age and form of benefit provided, including the restrictions on assumptions that must be used to calculate optional benefit forms or benefits commencing at ages other than the participant’s normal retirement age.

4.72.6.3.8.2  (09-22-2014)
Springing Cash Value Life Insurance Policies

  1. Certain qualified plans used to purchase a life insurance product known as a "springing cash value" policy. The policy may be purchased for an employee who is about to retire or when the plan is about to terminate. They were known as springing cash value policies because the cash surrender charges were very high for a set number of years, usually five to seven years, and then all but vanished. In this scenario, the policy was purchased by the participant for the cash surrender value before the large surrender charges went away. When the surrender charges went away, the cash value would "spring" up to a much greater value.

    1. Advance premiums are paid by the trust to purchase the policy. The cash surrender value reported in the policy document for the first few years during which the policy is in effect is generally low. However, the death benefit is high to protect the employees’ beneficiaries in the policy’s early years. Thus, for the first few years, the cash surrender value reflected in the policy is much lower than the value of the premiums paid or the reserve accumulations. Later, the cash value increases to reflect the advance premiums paid or other reserve. The Service has opined that it does not believe that in the early years of the policy, the current cash surrender value correctly represents the fair market value of the contract.

    2. Rev. Proc. 2005-25 provides two safe harbor formulas that, if used to determine the value of an insurance contract, will meet the definition of fair market value for purposes of IRC 402(a).

    3. The fair market value of the contract should be compared to the maximum single-sum value of the participant’s otherwise applicable accrued benefit payable at that age, as limited to the appropriate annual amount under IRC 415(b).

4.72.6.3.8.3  (09-22-2014)
Variable Annuity Distributions

  1. Certain qualified plans purchase annuity contracts for participants who retire or otherwise become eligible for a benefit distribution, in the form of variable annuity contracts. Typically, benefits under such a plan will be specified as units in a fund maintained by an insurance company where the benefit amount payable in succeeding years is adjusted by a specified procedure based on the actual investment return of the fund or some other external investment index. Actual payments are provided through an annuity contract distributed to the participant that specifies the adjustment procedures and benefit amounts payable.

  2. In the case of such a contract, only for the purposes of determining if the benefit payable does not exceed the limitations of IRC 415, an adjustment must be made to the initial benefit amount payable under the contract to offset the expected increase in benefits payable in future years. This adjustment must be made in accordance with rules concerning adjustments that need to be made where the form of benefit is other than a straight life annuity. See IRC 415(b)(2)(E) and Treas. Reg. 1.415(b)-1(c). In general, an adjustment must be made to the initial annual benefit paid under the contract such that the present value of the varying benefit amounts does not exceed the present value of the otherwise applicable maximum level annual benefit that could be paid.

    If the maximum benefit under IRC 415 (as adjusted) is greater than or equal to the initial benefit provided by the plan, the plan satisfies IRC 415(b). See Treas. Reg. 1.415(b)-1(c)(6), Example 10.

4.72.6.3.9  (09-22-2014)
Transitional Rules and Protected Benefits

  1. IRC 415 was added to the Code by ERISA. The limitations under IRC 415(b) which were imposed under ERISA were significantly modified by Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and TRA’ 86. Although both TEFRA and TRA ‘86 decreased the IRC 415 limits that were imposed by ERISA for the future, transition rules were provided and the current accrued benefit of participants prior to the effective dates of ERISA, TEFRA, and TRA’86 were protected.

4.72.6.3.9.1  (09-22-2014)
ERISA Protected Benefits

  1. Before ERISA, the limitation on benefits was, in general, 100 percent of the highest average compensation the participant earned covering any reasonable period of service with the employer establishing the plan. See Rev. Rul. 72-3. Under ERISA, the limitation on annual benefits from a DB plan was the lesser of $75,000, adjusted annually for COLAs, and 100 percent of the participant’s high three year average compensation. The $75,000 dollar limitation was reduced where benefits commenced before age 55, by adjusting the limitation to be actuarially equivalent to such a benefit beginning at age 55.

  2. The IRC 415 limits were effective for years beginning after December 31, 1975. A transitional rule for DB plans was provided in ERISA section 2004(d)(2). This section provided that in the case of an individual who was an active participant in a DB plan before October 3, 1973, the individual’s annual benefit would be treated as not exceeding the IRC 415(b) limit if the following conditions were satisfied:

    1. The participant’s annual benefit payable on retirement did not exceed 100 percent of his or her annual rate of compensation on the earlier of: (i) October 2, 1973, or (ii) the date on which he/she separated from the service of the employer.

    2. The participant’s annual benefit was no greater than the annual benefit which would have been payable to such participant on retirement if: (i) all the terms and conditions of the plan in existence on such date had remained in existence until such retirement, and (ii) the participant’s compensation taken into account for determining benefits under the plan for any period after October 2, 1973, did not exceed his or her annual rate of compensation on such date.

    3. In the case of a participant who separated from the service of the employer prior to October 2, 1973, the annual benefit is no greater than his or her vested accrued benefit as of the date of separation from service.

  3. Thus, when the limitations applicable to DB plans under ERISA became effective, the benefits of those individuals who were active participants in DB plans before October 3, 1973, were protected and would not be treated as exceeding IRC 415(b) to the extent permitted under conditions of paragraph (2) (a), (b) and (c) of IRM 4.72.6.3.9.1, ERISA Protected Benefits.

  4. A transitional rule was also applied to individuals who participated in both a DB plan and a DC plan of the same employer. Under this rule, the otherwise applicable limitation to such individuals’ benefits and contributions under IRC 415(e) as enacted by ERISA was assumed to be satisfied provided benefits were not increased, in the case of a DB plan, nor contributions made, in the case of a DC plan, after the date of enactment.

4.72.6.3.9.2  (09-22-2014)
TEFRA Protected Benefits

  1. Limitations on benefits and contributions under qualified retirement plans were reduced by TEFRA, effective for limitation years beginning in 1983. TEFRA did not change the compensation limitation but modified the dollar limitation applicable to DB plans (which with COLAs had increased to $136,425, effective January 1, 1982) in the following ways:

    1. Reduced the maximum annual benefit to the lesser of $90,000 or 100 percent of the participant’s high three year compensation.

    2. Provided that the dollar limitation was actuarially reduced if benefits commenced before age 62 (the 100 percent of high three year compensation limitation applies regardless of the age benefits commence).

    3. Provided that the dollar limitation may be increased if the benefit commences after age 65 (no adjustment is made to the compensation limitation).

    4. Restricted the actuarial assumptions used to compute these adjustments.

    5. Restricted the actuarial assumptions that can be used for adjustment of both the dollar limitation and the compensation limitation if a benefit is paid in a form other than a single life annuity.

  2. Section 235(g) of TEFRA provided certain transitional rules related to these new limitations. The new requirement that the $90,000 dollar limitation be actuarially reduced for commencement prior to age 62 was not applied to reduce the dollar limitation at any age on or after age 55 below $75,000. In addition, if the benefit commenced prior to age 55, the applicable dollar limitation was not reduced below the amount that was actuarially equivalent to an annual benefit of $75,000 commencing at age 55.

    Note:

    The $75,000 limitation in the exceptions is not increased for subsequent changes in the cost of living effective under IRC 415(d). Because the $90,000 in the general rule was to be adjusted for such changes, the exception would, eventually, cease to have any effect.

  3. Section 235(g)(4) of TEFRA also protected a participant’s “current accrued benefit” in a DB plan as it existed on July 1, 1982, provided the plan satisfied IRC 415 before TEFRA, from reduction as a result of such amendments.

  4. Notice 83-10 provides information in question and answer form relating to these amendments and transition rules. Q&A T-3 of Notice 83-10 provides that benefits accrued as of the TEFRA effective date (the last day of the limitation year beginning in 1982) are protected for a DB plan in existence on July 1, 1982, which satisfied IRC 415 before TEFRA, provided that the accrued benefit is determined without regard to changes in the plan after July 1, 1982, and without regard to cost-of-living increases occurring after July 1, 1982. This question and answer also states that the protection afforded to such current accrued benefit also extends to optional benefit forms or early retirement benefits provided under the plan on July 1, 1982.

  5. TEFRA also reduced the dollar limitation applicable to DC plans and made changes in the operation of IRC 415(e). These changes are explained in Notice 83-10.

4.72.6.3.9.3  (09-22-2014)
TRA ’86 Protected Benefits

  1. TRA’86 changed the $90,000 limitation applicable to DB plans by providing that it applied to benefit payments commencing at the participant’s Social Security retirement age (SSRA). The limitation is reduced where benefits commence prior to a participant’s SSRA. The actuarial equivalence factors used in reducing the $90,000 limit for benefits commencing prior to the SSRA were modified, and the $75,000 floor for benefit payments commencing on, or after, the attainment of age 55 was eliminated. Thus, maximum benefits were generally reduced under TRA’86.

  2. Section 1106(i)(3) of TRA’86 protects the "current accrued benefit" for any individual who is a participant in a DB plan as of the first day of the first limitation year to which the changes made by TRA’86 apply, provided the plan was in existence on May 6, 1986, and satisfied the applicable IRC 415 limits for all limitation years before the TRA’86 changes in IRC 415 became effective.

  3. Guidance, in the form of questions and answers, with respect to the new limitations on contributions and benefits under IRC 415 was provided in Notice 87-21. Q&A 12 of Notice 87-21 states that the rules in Notice 83-10 are to be used in determining if a plan was in existence on May 6, 1986.

    1. The "current accrued benefit" is the participant’s accrued benefit as of the close of the last pre-TRA’86 limitation year (determined as if the individual separated from service as of the end of that year) but determined without regard to changes in the terms and conditions of the plan or cost-of-living increases occurring after May 6, 1986. The current accrued benefit includes optional benefit forms and early retirement benefits or retirement-type subsidies that are protected under IRC 411(d)(6).

    2. Q&A 12 also provides that if the protected current accrued benefit for a participant is larger than the applicable IRC 415(b)(1)(A) limit, as amended by TRA’86, such limitation shall equal the protected accrued benefit in applying the IRC 415(b) limitation, and 415(e) limitation (for limitation years beginning before 2000).

  4. The general considerations to be applied in recognizing a "protected accrued benefit" are the same as those discussed in detail under the prior section dealing with TEFRA changes. Of course, any protected benefit under TEFRA remains part of the protected benefit under TRA’86.

4.72.6.3.9.4  (12-01-2002)
RPA ’94 (GATT) Old-Law Benefits

  1. IRC 415(b)(2)(E) was amended under RPA ’94 (GATT) as amended by SBJPA, with such changes generally effective on the first day of a plan’s first limitation year beginning in 1995. However, sponsors of plans in existence on December 7, 1994, and which met the requirements of IRC 415 on that date, could protect the methodology used under IRC 415(b)(2)(E) to determine a participant’s accrued benefit as of a certain date (a participant’s RPA ’94 (GATT) freeze date) which must be a date before the date the IRC 415(b)(2)(E) changes (under GATT as amended by SBJPA) are effective for the plan (the plan’s final implementation date) which must be a date on or before the first day of the first limitation year beginning after 1999. Rev. Rul. 95-29 provided guidance on the RPA ’94 (GATT) changes prior to GATT’s amendment by SBJPA. Rev. Rul. 98-1 modified and superseded Rev. Rul. 95-29, and provided guidance and transition rules for the IRC 415 changes under GATT as amended by SBJPA.

4.72.6.3.10  (09-22-2014)
Examination Steps

  1. If a participant is receiving her/his benefits in the form of a non-cash distribution, does the amount spent by the plan to purchase any contract(s) for the participant exceed the maximum distribution permissible under IRC 415(b)?

  2. If a participant’s benefit is provided by an annuity contract:

    1. Are the benefits in the various distribution forms and ages permitted under the contract in compliance with IRC 415(b)?

    2. Under the contract, do all available distributions, including single-sum distributions, premium refunds, and dividends, satisfy the IRC 415(b) limitation applicable to the individual?

  3. If any life insurance policies are purchased by a plan, does the fair market value of the policies exceed the maximum distribution permissible under the terms of the plan and the IRC 415 limitation applicable to the individual? Rev. Proc. 2005-25 provides guidance in this area.

  4. For purposes of applying the limitations of IRC 415(b) where a participant’s benefit is to be provided by a variable annuity contract, is the initial benefit under the contract adjusted properly using actuarial assumptions or adjustment factors that satisfy IRC 415(b)(2)?

  5. Have any grandfathered benefits been properly taken into account by the plan for purposes of compliance with IRC 415(b)?

    1. For DB plans in existence before October 3, 1972, for those participants with benefits protected under ERISA which exceed the currently applicable IRC 415(b) limitation, make certain that the correct limitation is applied to each individual.

    2. For DB plans in existence on July 1, 1982, for those participants with benefits protected under TEFRA which exceed the currently applicable IRC 415(b) limitation, make certain that the correct limitation is applied to each individual.

    3. For DB plans in existence on May 6, 1986, for those participants with benefits protected under TRA ’86 which exceed the currently applicable IRC 415(b) limitation, make certain that the correct limitation is applied to each individual.

    4. For DB plans in existence on December 7, 1994, where a participant has an RPA ’94 old-law benefit, determine that the old-law benefit is calculated using the correct assumptions under IRC 415(b)(2)(E), and that the methodology used to determine satisfaction of IRC 415(b), where part of a participant’s benefit is an RPA ’94 old-law benefit, satisfies one of the three methods (plan terms should state which of the three methods is used).

4.72.6.4  (09-22-2014)
Funding and Deductibility

  1. Benefits in excess of the IRC 415 limits for any year may not be taken into account in determining the deductible limits under IRC 404 for that year. See IRC 404(j)(1).

  2. Future increases in the DB dollar ceiling and future increases in the compensation ceiling for separated participants, as may be applied under the cost-of-living provisions of IRC 415(d), may not be taken into account for purposes of applying the deductible limits under IRC 404 for any year prior to the year in which any such increase first takes effect. See IRC 404(j)(2).

4.72.6.4.1  (09-22-2014)
Limiting the Projected Benefit

  1. The benefit projected to be payable at the assumed retirement age (for funding purposes) must be subject to appropriate limitations under IRC 415(b) (i.e., the lesser of the currently effective applicable dollar limitation or 100 percent of projected high three year average compensation). Several considerations apply when determining the appropriate limitations that apply to the projected benefit.

4.72.6.4.1.1  (09-22-2014)
Dollar Limitation

  1. For purposes of limiting the projected benefit at each assumed retirement age and in each assumed form of distribution, the dollar limitation must be adjusted for the assumed age of commencement and the assumed form of benefit using assumptions that satisfy IRC 415(b)(2)(E).

  2. If an individual has a protected accrued benefit under a IRC 415 transitional rule, the protected accrued benefit, payable under the terms of the plan as they existed prior to the effective date of the legislation triggering the transitional rule, must be compared to the current dollar limitation applicable at each expected retirement age and for each assumed benefit form, and the greater of the two amounts is the applicable projected limitation.

4.72.6.4.1.1.1  (09-22-2014)
Automatic COLAs

  1. Treas. Reg. 1.415(d)-1(d) provides that a DB plan may include a provision that automatically adjusts the maximum dollar limitation each year for scheduled cost-of-living increases as they are effective under IRC 415(d). However, such provisions may only provide for scheduled annual increases in the dollar limitation that become effective no sooner than the date the adjusted IRC 415(b)(1)(A) dollar limitation becomes effective. Scheduled future increases for calendar years beginning after the current plan year may not be effective in that plan year. Therefore, a reasonable funding method may not anticipate these benefit changes. See Treas. Reg. 1.415(a)-1(d)(3)(v)(B) and Treas. Reg. 1.412(c)(3)-1(d).

  2. If the plan year is other than a calendar year, Rev. Rul. 81-215, provides that increases in the maximum dollar benefit assumed accrued or payable for funding purposes may take into account the adjusted dollar limitation effective under IRC 415(d) on any day of the plan year in full.

4.72.6.4.2  (09-22-2014)
Compensation Limitation

  1. Treas. Reg. 1.412(c)(3)-1(c) requires that the salary reflected in projected benefits under a reasonable funding method must be the projected salary on which benefits would be based under the plan at the age when benefits are expected to commence. If a qualified plan provides benefits based on compensation at separation from service, costs may be based on projected benefits that reflect the expected salary history of a participant to that age, even if those projected benefits exceed the current high three consecutive year average compensation (provided that at no time during actual benefit accrual do the accrued benefits actually violate the DB compensation limit).

4.72.6.4.3  (09-22-2014)
Adjusting IRC 415(b) Limit for Benefits in Other Plans of Employer

  1. Plan provisions must preclude the aggregated benefits under all DB plans of the employer from exceeding the IRC 415(b) limitations. Plan provisions must be specific as to how and in which plan accruals will be limited to satisfy this requirement.

  2. For funding purposes, projected benefits under all plans must be taken into account using reasonable actuarial assumptions and in accordance with the provisions of the plan(s). Funding computations must incorporate any required adjustments.

4.72.6.4.4  (09-22-2014)
Examination Steps

  1. If it is determined on plan examination that a participant’s projected benefit for funding purposes exceeds the IRC 415(b) limitation applicable to the participant at the expected distribution date, determine whether the plan has funded and deducted for such benefit in violation of IRC 404(j).

  2. Are COLA increases in the dollar limitation anticipated for any purpose under the plan?

  3. If participants’ benefits under a plan are based on final average salary and costs are therefore based on reasonable projected benefits, are projected benefits, which may in this case exceed an individual’s currently applicable compensation limitation, limited to the lesser of the participant’s projected high three year compensation or the currently effective dollar limitation applicable to the individual?


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