4.72.6 IRC 415(b)

Manual Transmittal

September 29, 2017

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) For IRM 4.72.6, most of the changes are under IRM 4.72.6.3.1, Cost of Living Adjustments (COLAs):

  • Paragraph (3): Changed the year to 2017.

  • Paragraph (4): Changed the year to 2017.

(2) The 2017 limits have been added to Exhibit 4.72.6-1 and Exhibit 4.72.6-2.

(3) The mortality tables listed under IRM 4.72.6.3.4.2 have been updated.

(4) Updated 4.72.6.1 to reflect the Program Scope and Objectives. Added new subsections 4.72.6.1.1, Background; 4.72.6.1.2, Authority; 4.72.6.1.3, Responsibilities; and 4.72.6.1.4, Acronyms.

(5) Added IRM 4.72.6.1.3(2) to reflect the responsibility to consider the Taxpayer Bill of Rights.

Effect on Other Documents

This supersedes IRM 4.72.6, dated August 9, 2016.

Audience

Tax Exempt and Government Entities
Employee Plans

Effective Date

(09-29-2017)

Robert S. Choi
Director, Employee Plans
Tax Exempt and Government Entities

Program Scope and Objectives

  1. Purpose: This IRM helps Employee Plans (EP) specialists examining defined benefit (DB) plans subject to the IRC 415(b) limits

  2. Audience: EP examiners and other specialists

  3. Policy Owner: Director, EP

  4. Program Owner: EP

  5. Program Goal: To ensure continued compliance and qualification of DB plans subject to the IRC 415(b) limits.

Background

  1. The Employee Retirement Income Security Act of 1974, Pub. Law 93-406 (ERISA) added IRC 415 to the Code. A trust is not a qualified trust under IRC 501(a) if the plan of which such trust is a part provides for benefits or contributions that exceed the IRC 415 limits (IRC 401(a)(16)).

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

    2. For limitation years beginning before 2000, when an individual participated in an employer’s DC and DB plan, the amounts under both plans were subject to the combined plan limit of IRC 415(e). SBJPA repealed IRC 415(e) effective for limitation years beginning after 1999.

  2. 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 26 CFR 1.415(a)-1(g).

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

  3. The technical guidelines in this IRM section summarize the law that agents must consider in determining whether a plan meets the requirements of the Internal Revenue Code for retirement plans subject to the IRC 415(b) limits, as amended by:

    1. Title VII of the Uruguay Round Agreements Act, Pub. Law 103-465 (GATT).

    2. The Small Business Job Protection Act of 1996, Pub. Law 104-188 (SBJPA).

    3. The Taxpayer Relief Act of 1997, Pub. Law 105-34 (TRA ‘97).

    4. The Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. Law 107-16 (EGTRRA).

    5. The Job Creation and Worker Assistance Act of 2002, Pub. Law 107-147 (JCWAA).

    6. The Pension Funding Equity Act of 2004, Pub. Law 108-218 (PFEA).

    7. The Working Families Tax Relief Act of 2004, Pub. Law 108-311 (WFTRA).

    8. The Pension Protection Act of 2006, Pub. Law 109-280 (PPA ‘06).

    9. The Worker, Retiree, and Employer Recovery Act of 2008, Pub. Law 110-458 (WRERA).

  4. In general, applying the IRC 415 limits doesn’t relieve a plan from its obligation to satisfy other plan qualification requirements. See 26 CFR 1.415(a)-1(f)(7).

  5. Plans maintained by states, Indian tribal governments, or political subdivisions are excepted from some IRC 415 limits. See IRC 415(b)(2)(G), IRC 415(b)(10) and IRC 415(b)(11).

  6. The DB compensation limit of IRC 415(b)(1)(B) doesn’t apply to:

    • A governmental plan.

    • A multiemployer plan.

    • Certain collectively bargained plans.

    • A participant in a plan maintained by a church who has never been a highly compensated employee (HCE) of the church.

      Note:

      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. See IRC 415(b)(7) and IRC 415(b)(11) for these exceptions.

Authority

  1. A plan is qualified if it meets the requirements of IRC 401(a) in form and operation.

  2. A trust is not a qualified trust under IRC 501 if the plan of which such trust is a part provides for benefits or contributions that exceed the IRC 415 limits (IRC 401(a)(16)).

  3. IRC 415(b) limits the annual benefit that a DB plan can accrue or pay to a participant.

  4. Policy Statement 4-119 states that the primary objective of the Employee Plans examination program is regulatory, with emphasis on continued qualification of employee benefit plans. Plans will be examined to determine whether they meet the applicable qualification requirements in operation. IRM 1.2.13.1.36.

  5. Delegation Order 8-3 gives the Director, Employee Plans, authority to enter into and approve a written agreement with any person relating to their tax liability. IRM 1.2.47.4

Responsibilities

  1. Agents examine a plan to determine if the plan:

    • Meets the qualification requirements of IRC 401(a) and IRC 501(a). See IRM 4.71.1.3 and IRM 4.71.1.4.

    • Filed all required tax and information returns. See IRM 4.71.1.14.

    • Reported information and excise tax liabilities correctly. See IRM 4.71.1.4.

  2. In June 2014, the IRS adopted the Taxpayer Bill of Rights (TBOR). Agents must consider these rights when carrying out EP examinations. See Policy 1-236 and the Taxpayer Bill of Rights (TBOR).

Acronyms

  1. The table lists commonly used acronyms and their definitions.

    Acronym Definition
    COLA Cost-of-living adjustment
    CPI Consumer Price Index
    DB Defined benefit plan
    DC Defined contribution plan
    HCE Highly compensated employee
    IRC Internal Revenue Code of 1986, as amended
    IRC 415 limit Benefit or compensation limit in IRC 415
    QDRO Qualified Domestic Relations Order
    QJSA Qualified joint and survivor annuity

Specific Plan Requirement

  1. A qualified plan’s terms must preclude the possibility that a distribution under a DB plan exceeds the IRC 415 limits (26 CFR 1.415(a)-1(d). Also, a DB plan subject to IRC 411, by its terms can’t allow a participant to accrue a benefit in excess of the IRC 415(b) limit. A plan may not satisfy the IRC 415(b) limits even though no participant has actually accrued or received a benefit in excess of these limits, if its terms themselves, don’t preclude an accrual or distribution in excess of the limits. See 26 CFR 1.415(b)-1(a)(3).

    1. A plan must include terms that preclude the possibility that any participant’s annual benefit exceeding the IRC 415(b) limit is 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), each plan’s provisions must specify how it will limit benefits to prevent an IRC 415(b) violation without any employer discretion.

  2. Plans may incorporate IRC 415 limits by reference, but the incorporation by reference can’t violate the definitely determinable requirement of 26 CFR 1.401(a)-1(b)(1) (Tax Reform Act of 1986, TRA ‘86). Therefore, the plan terms must:

    1. Preclude employer discretion.

    2. State any rules that allow optional methods of compliance. See 26 CFR 1.415(a)-1(d)(3).

      Example:

      A plan may use more than one definition of “compensation within the meaning of IRC 415(c)(3)” to apply the IRC 415 limits. A plan that incorporates IRC 415 by reference must specify which definition of compensation it uses.

  3. When plans incorporate IRC 415 limits by reference and a IRC 415 limit may be applied in more than one way, and the plan:

    1. Has a default rule, the default rule applies, unless the plan states otherwise.

    2. Doesn’t have a default rule, the plan terms must state how it will apply this provision.

General Definitions and Concepts

  1. See 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 for general definitions and concepts that relate to IRC 415(b).

Employer
  1. IRC 415: Treat all employees of these entities as employed by a single employer per IRC 414(b), IRC 414(c) and IRC 414(m):

    1. All corporations which are members of a controlled group of corporations (per IRC 1563(a), as modified by IRC 1563(f)(5) and not considering IRC 1563(a)(4) and (e)(3)(C)).

    2. All employees of trades or businesses (whether or not incorporated) which are under common control.

    3. All employees of the members of an affiliated service group are treated as employed by a single employer. See 26 CFR 1.415(a)-1(f)(1) and (2).

  2. When applying IRC 414(b) and (c), replace the phrase “at least 80 percent” with “more than 50 percent” in IRC 1563(a)(1), except to determine whether two or more organizations are a brother-sister group of trades or businesses under common control (IRC 415(h) and 26 CFR 1.415(a)-1(f)(1)).

  3. Leased employees: For IRC 415, the recipient company must treat leased employees as their employees, unless the leasing organization covers the leased employee in a money purchase pension plan per IRC 414(n)(5) (IRC 414(n) and 26 CFR 1.415(a)-1(f)(3)). The benefits or contributions the leasing organization provides that are attributable to services the employee performed for the recipient are treated as though the recipient provided them.

    Exception:

    The leasing organization doesn’t have to cover the leased employees in a money purchase plan under IRC 414(n)(5) if both of these are met:

    1. Leased employees are covered by the leasing organization’s plan that meets IRC 414(n)(5)(B); and

    2. Leased employees aren’t more than 20 percent of the recipient’s nonhighly compensated workforce. See 26 CFR 1.415(a)-1(f)(3)(ii).

  4. If a company is a member of a controlled group or affiliated service group that maintains a plan, and the company leaves the group and establishes an unrelated new plan, aggregate the prior group’s plan with the new plan to apply the IRC 415 limits to employees covered by both plans. Treat the former plan as if it had terminated immediately before the company left the group with sufficient assets to pay benefit liabilities under the plan, and had purchased annuities to provide plan benefits. See 26 CFR 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 Plan M, a DB plan. On April 30, 2016, Company B terminates membership in the controlled group, and immediately establishes a new DB plan, Plan X. Plan M doesn’t transfer assets and liabilities per IRC 414(l) to new Plan X. For the 2016 limitation year and subsequent limitation years, benefits of employees covered by both Plan M and Plan X must be aggregated to apply IRC 415(b) limits, treating Plan M as if it had terminated and purchased annuities to provide plan benefits.

  5. If, as of the first day of a limitation year, two or more DB plans weren’t required to be aggregated and weren’t, but are aggregated later in that year, the plans would satisfy IRC 415 even though the aggregation causes the plans to exceed the limits under IRC 415(b) for a participant, but only if the plan sponsor doesn’t amend the plan to increase benefits for the participant under either plan after the event which causes the plans to be aggregated. See 26 CFR 1.415(f)-1(e)(3)(i).

Plan
  1. A DB plan is any plan which is not a DC plan (IRC 414(j)). Under a DB plan, participants accrue a benefit each year under a formula that must be explicitly stated in the plan. See 26 CFR 1.401-1(b)(1)(i) and 26 CFR 1.401(a)- 1(b)(1)(i) and (iii).

  2. When you apply IRC 415(b) limits, treat all DB plans (whether or not terminated) ever maintained by an employer (or a predecessor employer) as one DB plan (IRC 415(f) and 26 CFR 1.415(f)-1(a)(1)).

    Example 2:

    Company X maintained a DB plan for five years before it terminated the plan in 2015. Company X adopted another DB plan in 2016.

  3. When applying IRC 415 limits, you must combine benefits under both plans for those employees who participated in both plans. When an employer maintains a plan of a predecessor employer, treat service for the predecessor as service for the employer (IRC 414(a)). Accordingly, take benefits and service for a predecessor employer into account with benefits and service for a successor employer for IRC 415 purposes. See 26 CFR 1.415(f)-1(c).

  4. Multiemployer plans, as defined in IRC 414(f):

    1. Aren’t combined with other multiemployer plans to apply IRC 415(b) limits, even if some or all of the same employers contribute to both plans. See 26 CFR 1.415(f)-1(g)(1).

    2. Are permitted to provide that only the benefits under that multiemployer plan provided by an employer are aggregated with benefits under that same employer’s plans non-multiemployer plans. See 26 CFR 1.415(f)-1(g)(2).

    3. Aren’t combined with any other plan that is not a multiemployer plan to apply the compensation limit of IRC 415(b)(1)(B) and 26 CFR 1.415(b)-1(a)(1)(ii). See 26 CFR 1.415(f)-1(g)(2).

Limitation Year
  1. The IRC 415 limits apply to amounts for or with respect to a limitation year. A plan’s limitation year is the calendar year unless the plan terms state a different consecutive 12-month period. See 26 CFR 1.415(j)-1 for the definition of limitation year and special rules.

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

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

    3. Once established, the plan sponsor may only change the limitation year by amending the plan.

  2. If the plan sponsor changes the limitation year (including specifying a limitation year other than the default), the new limitation year must be a consecutive 12- month period which begins on any day within the current limitation year. See 26 CFR 1.415(j)-1(d)(1).

  3. Don’t adjust the IRC 415(b) limits to reflect the short limitation period created by a change in the limitation year. See 26 CFR 1.415(j)-1(d)(2).

  4. If an employer maintains more than one qualified plan, those plans may have different limitation years. See 26 CFR 1.415(j)-1(c)(3) for testing rules that apply to an individual who participates in more than one of his/her employer’s DB plans having different limitation years.

Examination Steps

  1. Determine whether the employer is a member of a/an:

    • Controlled group of corporations

    • Trade or business (whether or not incorporated) under common control

    • Affiliated service group

  2. Consider IRC 415(h) to determine if you should treat the employer with other members of these groups as a single employer for the IRC 415 limits. If you include other members, determine the same information for their DB plans, as you do for the employer using the exam steps below.

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

  4. Aggregate benefits, service and participation under all plans to apply the IRC 415(b) limits for employees currently participating in an employer’s DB plan and who have 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).

  5. Determine the limitation year for each plan.

IRC 415(b) Limits

  1. A participant’s benefits under IRC 415(b)(1) (expressed as an annual benefit per IRC 415(b)(2)), can’t exceed 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) limit is often referred to as the “DB dollar limit” and the IRC 415(b)(1)(B) limit is often called the “DB compensation limit.”

  3. The DB compensation limit doesn’t apply to certain collectively bargained plans. See IRC 415(b)(7).

  4. The DB compensation limit doesn’t apply to:

    1. Governmental plans (as defined in IRC 414(d)) (SBJPA, effective for limitation years beginning after December 31, 1994)

    2. Multiemployer plans (as defined in IRC 414(f)) (EGTRRA for limitation years beginning after December 31, 2001)

    3. 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 (PPA ’06 for limitation years beginning after December 31, 2006)

  5. See IRC 415(b)(11) and 26 CFR 1.415(b)-1(a)(6).

  6. See IRM 4.72.6.3.7, Participation or Service of Less Than 10 Years, for how to prorate:

    1. The DB dollar limit for participants with less than 10 years of participation.

    2. The DB compensation limit for participants with less than 10 years of service.

Cost of Living Adjustments (COLAs)

  1. The DB dollar limit is adjusted annually as prescribed by the Commissioner to take into account increases in the cost of living (COLA) (IRC 415(d) and 26 CFR 1.415(d)-1). The adjusted limit is effective as of January 1 of a calendar year and applies to limitation years that end with or within that calendar year.

    1. Plans may adjust the DB dollar limit for a participant who hasn’t commenced benefits before the date on which the adjustment is effective. See 26 CFR 1.415(d)-1(a)(4)(ii).

    2. For distributions of accrued benefits that began before the effective date of an adjustment to the DB dollar limit, plans may apply the adjusted limits to that distribution, but only for benefits that haven’t been paid. See 26 CFR 1.415(d)-1(a)(4)(iv) for how to adjust benefits that have commenced.

  2. While a DB plan may include a provision that automatically adjusts the maximum dollar limit for COLAs, the language may only permit scheduled increases that become effective per IRC 415(d) in January of each calendar year. See 26 CFR 1.415(d)-1(a)(3) and 26 CFR 1.415(d)-1(d).

  3. See Exhibit 4.72.6-1 for the DB dollar limits from 1975 through 2017. See also https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions for the COLA increases that apply to the DB dollar limits each year.

  4. In certain circumstances the DB compensation limit that applies to a participant who has separated from service with a nonforfeitable right to an accrued benefit may be adjusted annually to take into account COLA increases. See IRC 415(d)(1)(B).

    1. If the annual benefit payable to a terminated participant is limited by the compensation limit and the plan specifically allows post- termination adjustments, the plan may adjust the participant’s compensation limit that applies in the limitation year the participant separated from service for subsequent limitation years. See 26 CFR 1.415(d)-1(a)(2).

    2. The compensation limit that applies to an individual for a limitation year is calculated by multiplying the applicable compensation limit, as adjusted under prior law through the prior limitation year, by the IRS-provided factor for the current limitation year.

    3. The IRS publishes factors which may be used to adjust the DB compensation limit for separated participants as part of the COLAs under IRC 415(d). See Exhibit 4.72.6-2 for the table of factors used to adjust the DB compensation limit for a participant who separated from service before January 1 of calendar years 1995 through 2017.

  5. For individuals whose benefits under a plan are limited by IRC 415(b) where the plan allows benefits to be escalated as the IRC 415(b) DB dollar limit increases, benefits may only be increased beginning in the calendar year the increased IRC 415(b) limit becomes effective. The participant’s benefits for prior years aren’t retroactively increased because of benefit increases in the current year. See 26 CFR 1.415(d)-1(a)(3).

    Example 3:

    Company A has Plan Z, a DB plan, with a plan year and limitation year that both end on June 30. The DB dollar limit for the limitation year ending June 30, 2013 is $205,000 (use the 2013 limit because it applies to the limitation year that ends during calendar year 2013). Benefits accrued or distributed under the plan may not exceed the 2012 dollar limit ($200,000) until on or after January 1, 2013. See 26 CFR 1.415(d)-1(a)(3).

  6. To calculate a participant’s benefit as a single-sum distribution, you can’t use anticipated COLA increases in the dollar and compensation limits.

  7. For plan formulas that provide that a participant’s benefit to be increased each year by a COLA which is a function of the Consumer Price Index (CPI), a participant receiving a single-sum must:

    1. Receive projections of the CPI increases (based on reasonable actuarial assumptions) as part of the single-sum.

    2. But only up to the amount the single-sum doesn’t exceed the actuarial present value of the lesser of the current dollar compensation limit.

      Example 4:

      In 2012, Mr. Burton retired at age 65 and began receiving benefits under Plan K, a DB plan. His benefit at retirement age, prior to adjusting for the IRC 415(b) limit 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 limit of $200,000. 26 CFR 1.415(b)-1(a)(3) requires a plan to prevent the possibility that a benefit will be accrued, distributed or otherwise payable in an optional form that exceeds the IRC 415 limits. Plan K’s terms use the adjusted dollar limit under IRC 415(b) and (d). In 2013, the plan is amended to give retiree benefits a 3 percent COLA adjustment. How will this affect Mr. Burton’s benefit in 2013?

      Solution: Mr. Burton’s accrued benefit at his 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 IRC 415(b) limit because basing the increase on the benefit prior to applying IRC 415 violates 26 CFR 1.415(b)-1(a)(3). In 2013, Mr. Burton can receive a 3% increase in his benefit, as long as the increase doesn’t cause his benefit to exceed either IRC 415(b) limit for 2013 (and as long as the increase doesn’t violate any other plan qualification requirement, such as the nondiscrimination requirement of IRC 401(a)(4)). Therefore, in 2013 Mr. Burton’s benefit is $206,000 (1.03 (1 year x 3 percent) x $200,000) and then limited to $205,000, the 2013 IRC 415(b) dollar limit.

  8. When a plan terminates, use the dollar limit in effect as of the termination date to determine the maximum annual benefit that the plan pays to any participant from the terminated plan, even if the benefits are distributed in a later year.

    Note:

    This is because in order to increase the amount payable as the IRC 415(b) limits increase, the plan must permit this increase.

    Caution:

    Each time there is an “automatic” increase, a plan amendment is deemed to have occurred. Because the “amendment” increases the accrued benefit permitted at the date of plan termination, this amendment disqualifies the plan.

    Example 5:

    Plan Y, a DB plan with a calendar year plan year and limitation year was terminated on August 8, 2012, but wasn’t able to make single-sum distributions to participants until February 2013. Use the dollar limitation in effect on the date of termination ($200,000) to calculate the maximum accrued benefit distributed under the plan in an optional form (the maximum lump-sum). Adjust this amount if the plan pays interest on late distributions.

Examination Steps
  1. Determine the plan’s limitation year.

  2. Determine the IRC 415(b) dollar limit for that year.

  3. Verify that the plan used the correct dollar limit to apply IRC 415 limits.

  4. If a DB plan is terminated in one limitation year and paid benefits as a single-sum in the following limitation year, verify the plan used the IRC 415(b) limit in effect at the time of termination to demonstrate that IRC 415 limits are satisfied.

  5. Verify, if the plan increases retiree benefits as the IRC 415(b) limit increases, the plan terms specifically permit these post- retirement increases but not in excess of the IRC 415(b) limits.

  6. Verify, if the plan increases the IRC 415 compensation limit for terminated participants each year for cost-of-living increases, the plan terms explicitly permits these increases. Verify the plan applies the increases correctly.

Average Compensation for High Three Years

  1. The IRC 415(b)(1)(B) compensation limit uses a participant’s average compensation for their high three years. A participant’s “high three years” is the period of consecutive calendar years (not more than three) during which the participant had the greatest aggregate compensation from the employer (IRC 415(b)(3)).

  2. To determine 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, if uniformly and consistently applied per plan terms (26 CFR 1.415(b)- 1(a)(5)).

  3. If an employee has a severance from employment and is subsequently rehired, disregard as a break in service, any calendar year (or other 12-month period the plan uses to measure compensation years for which the employee):

    1. Performed no service.

    2. Received no compensation from the employer maintaining the plan. If the break in service rule applies, treat the year that immediately follows the break in service period as consecutive with the year immediately before the break. See 26 CFR 1.415(b)-1(a)(5)(iii).

      Note:

      Because the regulations allow plans to use a participant’s high three consecutive years of service (rather than participation), the plan may use his/her high three years even if they occur before the plan’s effective date or before the employee becomes an active participant in the plan, and the plan will still meet IRC 415(b).

  4. The plan must use a definition of compensation under IRC 415(c)(3) to determine whether a participant’s annual benefit exceeds the DB compensation limit. This may be a different definition of compensation used to calculate benefit accruals.

  5. A plan that incorporates IRC 415 by reference must specify which definition of compensation it uses. See Treas. Regs. 1.415(c)-2 and IRM 4.72.7, Employee Plans Technical Guidelines, Examination Guidelines for IRC 415(c) for IRC 415 compensation definitions.

  6. 415 Compensation includes:

    1. For years beginning after December 31, 1997

      • Any elective deferral (per IRC 402(g)(3))

      • Any amount contributed or deferred by the employer at the election of the employee and not includible in the gross income of the employee per IRC 125 or IRC 457

    2. For limitation years beginning after December 31, 2000: any elective amounts not includible in the employee’s gross income per IRC 132(f)(4) (i.e., qualified transportation fringes).

  7. Qualified DB plans are limited under IRC 401(a)(17) to an annual compensation limit on the amount of a participant’s compensation it can use to determine benefit accruals. Because a plan can’t base benefits on compensation in excess of this limit, a plan’s 415 compensation definition isn’t permitted to use compensation that exceeds the IRC 401(a)(17) limit for that year. See 26 CFR 1.415(c)-2(f) and 26 CFR 1.415(b)-1(a)(5)(i).

    Exception:

    Plans may base benefits accrued or payable as of the end of the limitation year immediately before July 1, 2007 (the effective date of the 2007 Treasury regulation) on compensation in excess of the IRC 401(a)(17) compensation limit if consistent with plan provisions adopted and effective before April 5, 2007.

    Note:

    These plan provisions must meet the applicable requirements of the statutory provisions, regulations, and other published guidance effective at the time. See 26 CFR 1.415(a)-1(g)(4).

    Example 6:

    Mr. Holler began work on January 1, 2013, at age 55, and immediately participated in Plan M, his employer’s DB plan. Plan M’s normal retirement benefit at age 65 (before applying the IRC 415(b) limit) = years of service (not to exceed 10) x 10 percent x final average compensation. The plan calculates final average compensation using the participant’s high three consecutive years average compensation. Mr. Holler’s 2013 compensation is $300,000. To calculate Mr. Holler’s benefit, limit his compensation to the 2013 IRC 401(a)(17) compensation limit of $255,000.

Examination Steps
  1. Verify the plan:

    1. Specifies which definition it uses for IRC 415(c)(3) compensation.

    2. Uses an IRC 415(c)(3) definition of compensation to determine whether participants benefits exceed IRC 415 limits.

    3. Includes elective deferrals in compensation it uses for IRC 415 testing (i.e., IRC 415(c)(3) compensation).

    4. Considers an employee’s compensation from all members of a controlled group (or from all members of an affiliated service group).

    5. Correctly calculates a participant’s average high three years compensation for the IRC 415(b) compensation limit.

    6. Considers the IRC 401(a)(17) limit when determining a participant’s three high year average compensation.

Annual Benefit

  1. The IRC 415(b)(1) limits apply to a participant’s benefits expressed in terms of an “annual benefit.” An annual benefit is a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) under a plan to which employees:

    1. Don’t contribute

    2. Don’t make rollover contributions into. See 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) for rollover contributions. See IRC 415(b)(2)(A) and Treas. Regs. 1.415(b)-1(b).

  2. Unlike a DC plan, which limits the amount of a participant’s plan year annual additions, a DB plan must limit the annual benefit that a participant may accrue or a plan may pay at any time. To determine the annual benefit, don’t count these:

    1. Mandatory or voluntary employee contributions.

    2. Rollover contributions.

    3. Elective transfer of an immediately distributable benefit from another plan (either a DB or a DC plan) per 26 CFR 1.411(d)- (4), Q&A 3 (c). See 26 CFR 1.415(b)-1(b)(3)(ii).

    4. Assets or liabilities transferred from one qualified plan to another, to the extent the benefits transferred plan are required to be counted to determine whether the transferor plan satisfies the IRC 415(b) limits. See 26 CFR 1.415(b)-1(b)(3).

Employee Contributions
  1. In general, the DB limits apply to employer-provided benefits under the plan. Disregard benefits attributable to employee contributions when you apply the DB limits. In general, the employee contribution amounts are treated as a separate DC plan subject to IRC 415(c) limits.

  2. For IRC 415(b) rules, don’t treat the following amounts as employee contributions. See 26 CFR 1.415(b)-1(b)(2)(ii).

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

    2. Participant loan repayments.

    3. Repayment of a previously distributed lump sum amount (per IRC 411(a)(7)(B)), in accordance with IRC 411(a)(7)(C).

    4. Repayment of employee contribution withdrawals (per IRC 411(a)(3)(D)) as provided under IRC 411(a)(3)(D).

    5. With respect to c. and d. above, amounts repaid that would have been within the time period allowed even if the plan does not restrict the time limit for repayment.

Mandatory Contributions
  1. If a DB plan has mandatory contributions, don’t consider the annual benefit attributable to these contributions in testing the IRC 415(b) limits. Determine the portion of the annual benefit attributable to the mandatory contributions using the rules under IRC 411(c)(2)(B). See 26 CFR 1.415(b)-1(b)(2)(iii).

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

Voluntary Contributions
  1. Voluntary contributions are, generally, kept in a separate account with the participant having a nonforfeitable right to the actual account balance, and include the participant’s contributions plus any earnings on these contributions. Accordingly, treat the portion of the plan to which voluntary employee contributions are made as a DC plan per IRC 414(k). See 26 CFR 1.415(b)-1(b)(2)(iv).

  2. If the plan uses voluntary contributions to purchase annuities for part of the retirement benefit, the part of the total benefit provided by voluntary contributions isn’t subject to the IRC 415(b)(1) limit.

Rollover Contributions
  1. If the plan provides a benefit from a rollover contribution (other than the benefit derived from a having a separate account for the rollover contribution), then to apply the IRC 415(b) limit, determine the annual benefit attributable to a rollover contribution the same way as the annual benefit attributable to mandatory employee contributions, regardless of the plan’s assumptions it uses to compute the benefit amount attributable to the rollover contribution.

  2. If a plan provides an annuity resulting from the rollover determined using more favorable actuarial basis than required under IRC 411(c)(2)(B), then the excess (the part of the benefit attributable to the rollover as calculated by the plan versus IRC 411) is:

    1. Subject to the non-forfeiture rules that apply to benefits derived from employer contributions.

    2. Included in the annual benefit for purposes of IRC 415(b). See 26 CFR 1.415(b)-1(b)(2)(v) and Rev. Rul. 2012-4.

  3. Treat benefits attributable to rollover contributions kept in a separate account as a DC plan. They aren’t subject to IRC 415(b) limits.

Transfer of Assets or Liabilities
  1. When one qualified plan transfers assets or liabilities to another, and the transferor plan must consider the benefits it transferred to the transferee plan under IRC 415(f) and 26 CFR 1.415(f)-1, the transferor plan doesn’t have to consider the transferred benefits in applying the IRC 415 limits. See 26 CFR 1.415(b)-1(b)(3).

    Note:

    If both plans are maintained by the same employer, then both plans’ benefits would have to be considered for IRC 415 limits.

    Exception:

    See, however, the non- duplication rules in 26 CFR 1.415(f)-1(d)(1).

  2. When one DB plan transfers benefits to another DB plan, regardless of whether the transferor or transferee plans are aggregated, the transferee plan must consider the transferred benefits for IRC 415(b). See 26 CFR 1.415(b)-1(b)(3)(i)(C).

    Exception:

    If the transfer is an elective transfer of an immediately distributable benefit per 26 CFR 1.411(d)-4, Q&A 3(c), treat the amount transferred the same as a rollover contribution to the transferee plan.

Qualified Domestic Relations Orders (QDROs) and IRC 415
  1. A domestic relations order must satisfy rules to be treated as a QDRO. Aggregate benefits for participants’ alternate payees with participants’ benefits to apply IRC 415(b) (26 CFR 1.415(a)-1(f)(6)).

    Example 7:

    In 2007, Mr. Hill, age 59, and his wife, age 54, divorce. Under the terms of a QDRO, Mrs. Hill begins to receive a portion of Mr. Hill’s 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 begin his benefit. In 2013, the IRC 415(b) limit is $205,000. Therefore, Mr. Hill’s annual benefit may not exceed $155,000, ($205,000-50,000) per year because of the prior QDRO payment ($50,000).

Limiting the Accrued Benefit
  1. A plan must preclude the possibility that it will distribute or pay in any optional form of benefit, or any participant will accrue at any time, any annual benefit exceeding the IRC 415(b) limit. See 26 CFR 1.415(b)-1(a)(3).

    Exception:

    This doesn’t apply to plans not subject to IRC 411.

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

    1. Determine the projected benefit under the plan formula, apply the IRC 415 limit 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 IRC 415(b) limit to obtain the participant’s accrued benefit. This second method is sometimes described as the “project, prorate, and limit” method.

  3. First, apply the IRC 415(b) limits to the accrued benefit. Then, apply reductions or adjustments for optional forms of benefits, such as qualified joint and survivor benefits.

    Example 8:

    Mr. Johnson’s formula benefit under a plan is $400,000 per year payable at age 65, before the 2013 IRC 415 dollar limit of $205,000 per year. Mr. Johnson retires in 2013 at age 62 and elects a 100 percent 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 plan’s formula benefit to the benefit payable at age 62 as a 100 percent QJSA. Then, apply the IRC 415 limit. Benefit payable at age 62 as a 100 percent QJSA = $400,000 x. 85 x .90 = $306,000. Then limit this benefit to the dollar limit of $205,000. The benefit payable at age 62 as a 100 QJSA is $205,000. First, adjust the plan’s formula benefit to the benefit payable at age 62 as a 100 percent QJSA. Then, apply the IRC 415 limit. Benefit payable at age 62 as a 100 percent QJSA = $400,000 x .85 x .90 = $306,000. Then limit this benefit to the dollar limit of $205,000. The benefit payable at age 62 as a 100 QJSA is $205,000.

    2. First, apply the IRC 415 dollar limit to the plan’s formula benefit at age 65. 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:

      If the plan has an unreduced 100 percent QJSA form of payment, then you wouldn’t adjust for form of payment (.90).

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

Multiple Annuity Starting Dates
  1. The 415 Regulations help to determine a participant’s annual benefit for multiple annuity starting dates (26 CFR 1.415(b)-1(b)(1)(iii)). Under this rule, the IRC 415(b) limits must be satisfied as of each annuity starting date, considering the benefits that have been or will be provided at all of the annuity starting dates.

  2. Multiple annuity starting dates occur when:

    1. The participant had received or is receiving a distribution from another plan that is aggregated with a plan in which he/she receives current accruals.

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

    3. Benefit payments are increased due to either:

      • Plan terms

      • A plan amendment for a COLA or similar benefit increase, unless the increase complies with one of the Regulation’s safe harbors.

      Note:

      See 26 CFR 1.415(b)-1(b)(1)(iii)(A) and (B).

  3. To determine the annual benefit for a participant as of a particular annuity starting date, the plan must actuarially adjust the past and future distributions for benefits that commenced at the other annuity starting dates. This rule doesn’t specify calculation methods, so there’s some room for a good faith interpretation.

Examination Steps
  1. Determine if any of the DB plans permit voluntary or mandatory employee contributions, rollover contributions, or amounts transferred from another DB plan.

  2. If a plan permits employee contributions, verify:

    1. The IRC 415(b) limits are applied only to the employer provided portion of a participant’s benefit.

    2. The portion of the benefit attributable to employee contributions is calculated correctly.

    3. The employee contributions are treated as a separate DC plan, and when aggregated with contributions under any of the employer’s other DC plans satisfy IRC 415(c).

  3. Determine if there are any QDROs for plan benefits. If so:

    1. Determine if the plan has previously distributed benefits to any alternate payee per a QDRO.

    2. Verify that the plan aggregated QDRO benefits with benefits accrued or distributed to the participant.

    3. Determine if the plan properly applied the IRC 415 limits to the aggregated benefit.

  4. Determine how the plan applies the IRC 415 limits. Verify the plan applies the limits to the accrued benefits, not to the optional form of benefits.

  5. Determine if the plan has multiple annuity starting dates. See IRM 4.72.6.3.3.6 (2). If it does, contact a field actuary.

Adjustments for Optional Benefit Forms

  1. The plan’s annual benefit can’t exceed the IRC 415(b)(1) maximum. To measure against the IRC 415(b) limit, the plan benefit must be in the form of a straight life annuity payable annually.

  2. If a DB plan provides a retirement benefit in any form other than a straight life annuity, the benefit must be converted to a straight life annuity using the rules and actuarial equivalents under IRC 415(b)(2)(B) and 26 CFR 1.415(b)- 1(c).

Optional Forms for Which No Adjustments Required
  1. These alternate forms of benefits aren’t required to be converted to a straight life annuity form before applying IRC 415(b) limits:

    1. Survivor benefits payable to a surviving spouse under a QJSA, if these benefits wouldn’t be payable if the participant’s benefit weren’t paid as a QJSA. See 26 CFR 1.415(b)-1(c)(4)(i)(A). See also 26 CFR 1.415(b)-1(c)(4)(ii)(B) for QJSAs combined with other distributions.

    2. Ancillary benefits not directly related to retirement benefits, (e.g. preretirement disability benefits not in excess of the qualified disability benefit, preretirement incidental death benefits (including a QPSA), and post-retirement medical benefits. See 26 CFR 1.415(b)-1(c)(4)(i)(B). See IRM 4.72.6.3.4.2 (3), Optional Benefit Forms for Which Adjustments Are Required, for the requirement to adjust the IRC 415 limits for Social Security supplements.

    3. Certain automatic benefit increase features. Don’t adjust a benefit paid in a non- straight life annuity to include an automatic benefit increase feature, per 26 CFR 1.415(b)-1(c)(5)(ii), if both:

      1. The benefit is paid in a form to which IRC 417(e)(3) doesn’t apply.

      2. The plan satisfies other conditions of the automatic increase feature per 26 CFR 1.415(b)-1(c)(5)(iii).

  2. With respect to the prior paragraph, any adjustments to convert an alternate form of payment to an annual benefit payable as a single life annuity are made without:

    1. Automatic benefit increase.

    2. Including the value of any ancillary benefits.

    Example 9:

    Plan M accrues benefits based on the plan’s normal form of benefit - a QJSA. The plan may distribute a QJSA retirement benefit to a participant retiring at age 65 in 2013 in the amount of $205,000 annually if it states that it doesn’t adjust the benefit to recognize the QJSA form. Assume the participant’s DB compensation limit isn’t lower than the DB dollar limit. However, if the participant elects a single-sum payment, then the limit on the single-sum benefit is the actuarial equivalence of a single life annuity of $205,000, not the actuarial equivalence of the QJSA benefit of $205,000.

Optional Benefit Forms for Which Adjustments Are Required
  1. If a DB plan offers a benefit other than as a straight life annuity or a QJSA, it must adjust it to an actuarially equivalent straight life annuity beginning at the same age at which the plan benefit is payable. See IRC 415(b)(2)(B) and 26 CFR 1.415(b)-1(c)(4)(i)(A).

    Exception:

    The plan doesn’t have to adjust plan benefit/features in IRM 4.72.6.3.4.1.

  2. For a benefit paid in a form to which IRC 417(e)(3) doesn’t apply, the actuarially equivalent straight life annuity benefit is the greater of:

    1. 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 optional form.

    2. The annual amount of the straight life annuity commencing at the same annuity starting date that has the same actuarial present value as the optional form, computed using a five percent interest rate assumption and the applicable mortality table 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 26 CFR 1.415(b)-1(c)(2).

      Note:

      In general, for annuity starting dates on or after January 1, 2008, use the mortality table provided in Rev. Rul. 2007-67, as updated by Notice 2008-85 (for valuation dates during 2009 through 2013), Notice 2013-49 (for valuation dates during 2014 and 2015), Notice 2015-53 (for valuation dates during 2016), and Notice 2016-50 (for valuation dates during 2017) to make actuarial adjustments for amounts 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:

    1. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the optional form, computed using the plan’s interest rate and mortality table or tabular factor for actuarial equivalence.

    2. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the optional form, computed using a 5.5 percent interest rate assumption and the applicable mortality table for the distribution under IRC 417(e)(3)(B).

    3. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the optional form 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 (Don’t divide by 1.05 for plans sponsored by an “eligible employer” per 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).

      Note:

      See IRC 415(b)(2)(E)(ii), IRC 415(b)(2)(E)(v), IRC 415(b)(2)(E)(vi), and 26 CFR 1.415(b)-1(c)(3). See IRC 417(e)(3) and its regulations to determine whether a form of benefit is subject to IRC 417(e)(3).

    Example 10:

    Mr. Burns retired in 2013 at age 65 after 20 years of participation in Plan W, a DB plan. Plan W isn’t sponsored by an eligible employer per IRC 408(p)(2)(C)(i) and provides that participants may elect a single-sum which is the actuarial equivalent of their annual benefit under the Plan, calculated using the plan’s actuarial equivalent factors. Using those plan assumptions, Mr. Burns’ benefit in the form of a single-sum, before IRC 415 limits, is $2,500,000, based on a normal retirement benefit payable as a single life annuity at 65 of $170,953. Mr. Burns’ high three average compensation is $210,000. Assume that the applicable interest rates under IRC 417(e)(3) for 2013 (after PPA ’06, called “segment interest rates”) are 1.00 percent, 3.57 percent and 4.77 percent. Determine how to apply the IRC 415(b) limit to his single-sum benefit.

    Solution: Mr. Burns’ benefit under IRC 415(b)(1) can’t exceed the lesser of:

    1. $205,000 (2013 dollar limit) or

    2. 100 percent of his average high three year average compensation.

    Mr. Burn’s 415(b) limit is $205,000 because his high three average compensation of $210,000 exceeds the 2013 dollar limit of $205,000.

    Apply reductions or adjustments for optional forms of benefits. Because a single sum is a form of benefit other than a straight life annuity for which an adjustment is required, and because the lump- sum form is a form of payment to which IRC 417(e) applies, the actuarially equivalent straight life annuity equals $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 26 CFR 1.415(b)-1(c)(6).

    1. A Social Security supplement is generally a benefit that:

    1. Begins and terminates before the age when a participant is entitled to old- age insurance benefits.

    2. Doesn’t exceed the old-age insurance benefit that the participant will receive at the applicable age.

    3. Is paid in addition to the regular benefit paid to the participant.

    4. Is directly related to retirement benefits and, therefore, is taken into account for IRC 415 purposes, although not for accrued benefits under IRC 411.

      Note:

      A Social Security supplement isn’t the same thing as a Social Security leveling option where the participant’s benefit is adjusted so that the monthly benefit paid before Social Security begins, is the same as the sum of the monthly benefit from the plan and Social Security payments after Social Security begins. See 26 CFR 1.411(a)-7(c)(4) and 26 CFR 1.415(b)-1(c)(4)(ii)(A).

Examination Steps
  1. Determine the plan’s normal form of benefit.

  2. Verify, if a plan provides for optional forms of benefit, other than in the form of a single life annuity or a QJSA, the plan terms state the actuarial assumptions to use to determine actuarial equivalence for other forms of benefit.

  3. Verify that amounts under optional forms of benefit which require IRC 415 limit adjustments are correctly converted to an actuarially equivalent single life annuity commencing at the same age. Verify that the actuarial assumptions used to convert the optional form to a single life annuity satisfy IRC 415(b)(2)(E).

Adjustments for Early or Late Benefit Commencement

  1. Adjust the DB dollar limit for early and late commencement of benefits.

  2. Don’t adjust the DB compensation limit for early or late commencement of benefits.

Adjustments When Benefits Commence Before Age 62
  1. If plan benefits begin before a participant is age 62, reduce the dollar limitation so that the reduced limit (payable beginning when the benefit begins) is equivalent to a $160,000 (adjusted for COLA) annual straight life annuity benefit beginning at 62. Then compare the plan benefit to the reduced dollar limit to determine if it satisfies IRC 415(b). See IRC 415(b)(2)(C) and 26 CFR 1.415(b)-1(d).

  2. When reducing the dollar limit for early commencement of benefits:

    1. Determine the participant’s age based on completed calendar months as of the annuity starting date of the participant’s benefit.

    2. Compute the actuarially equivalent straight life annuity using a five percent interest rate and the applicable mortality table under IRC 417(e)(3)(B) that’s effective for the annuity starting date of the participant’s benefit.

  3. If the plan has an immediately commencing straight life annuity payable at age 62 and the participant’s age is younger than 62, then the dollar limit equals the lesser of the amount in IRM 4.72.6.3.5.1 (2) (b) above and the amount determined under plan factors. 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.

  4. In general, when determining the actuarially equivalent amount for early commencement of benefits, if a forfeiture doesn’t occur upon the participant’s death before the annuity starting date, don’t adjust the benefit for the probability of the participant’s death between the annuity starting date and the participant’s attainment of age 62, unless the plan provides this adjustment. If a forfeiture occurs upon the participant’s death before the annuity starting date, adjust the benefit for the probability of the participant dying between the annuity starting date and his/her reaching age 62.

    Example 11:

    Participant A will begin receiving benefits in the form of a single life annuity at age 60 in 2013. Assume that, for purposes of adjusting the dollar limit, a participant’s death before retirement doesn’t result in a forfeiture of benefit. At age 62, the DB dollar limit for benefits in 2013 is $205,000. Determine the IRC 415 DB dollar limit that applies to A’s benefits.

    Solution:The dollar limit that applies to benefits payable as a single life annuity commencing at age 60, assuming no other adjustments (e.g., for less than 10 years plan participation) is $178,065, determined using the 2013 applicable mortality table and a five percent interest rate. You wouldn’t make a mortality adjustment reflect the probability of the participant’s death between age 60 and age 62 because the participant’s death before the annuity starting date doesn’t 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 wouldn’t apply because it’s greater than the dollar limit that applies to a straight life annuity at age 60, $178,065. For additional examples, see 26 CFR 1.415(b)-1(d)(7).

Adjustments When Benefits Commence After Age 65
  1. If plan benefits begin after a participant attains age 65, increase the dollar limit so that the increased limit (payable beginning when benefits begins) is equivalent to a $160,000 (adjusted for COLAs) annual straight life annuity benefit beginning at 65. Then compare the plan benefits to the increased dollar limit to determine whether it meets the 415(b) limit. See IRC 415(b)(2)(D) and 26 CFR 1.415(b)-1(e).

  2. When increasing the dollar limits for delayed commencement of benefits:

    1. Determine the participant’s age based on completed calendar months as of the annuity starting date of the participant’s benefit.

    2. Compute the actuarially equivalent straight life annuity 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.

  3. If the plan has an immediately commencing straight life annuity payable at age 65 and the age of benefit commencement, then the dollar limit equals the lesser of the amount in IRM 4.72.6.3.5.2 (2) (b) above and the amount determined under plan factors. The amount determined under plan factors equals the dollar limit, multiplied by the ratio of the adjusted immediately commencing straight life annuity to the adjusted age 65 straight life annuity.

  4. In general, when determining the actuarially equivalent amount for delayed commencement of benefits, if a forfeiture doesn’t occur upon the participant’s death before the annuity starting date, don’t adjust the benefit for 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 this adjustment. If a forfeiture occurs upon the participant’s death before the annuity starting date, adjust the benefit for the probability of the participant dying between him/her at age 65 and the annuity starting date.

    Example 12:

    Mr. Ellis was eligible to retire under Plan P, a DB plan, at his normal retirement age of 65 in 2011, but chose to continue working. He retired in 2013 at age 67. Plan P’s terms state 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 Plan P, there’s no forfeiture of Mr. Ellis’ accrued benefit should he die after age 65, but before actual retirement. Determine the DB dollar limit that applies to Mr. Ellis for benefits payable in the form of a single life annuity.

    Solution: The dollar limit that applies to 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 a $205,000 annuity at age 65, at five percent interest and the applicable mortality table. You wouldn’t adjust for the probability of Mr. Ellis dying between age 65 and age 67 because if he died before the annuity starting date, his benefit wouldn’t be forfeited.

    Per 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 (6 percent x 2 years). Using plan factors, the age 65 dollar limit of $205,000 is increased by 12 percent to $229,600. Mr. Ellis’ IRC 415(b) dollar limit equals the lesser of the amount in IRM 4.72.6.3.5.2 (2)(b) above (five percent, applicable mortality table, $205,000) and the amount determined under plan factors ($229,600). Mr. Ellis’ IRC 415(b) limit is $205,000 for benefits at age 67. For additional examples, see 26 CFR 1.415(b)-1(e)(4).

Examination Steps
  1. Determine the plan’s normal retirement age.

  2. Verify, if a participant’s benefit commences before age 62, that the plan correctly adjusted the IRC 415(b) dollar limit. Verify that the actuarial assumptions the plan uses to adjust the IRC 415(b) limit satisfy IRC 415(b)(2)(E).

  3. Verify, if a participant’s benefit commences after age 65, that the plan correctly adjusted the IRC 415(b) dollar limit for the late benefit start date. Verify that the actuarial assumptions the plan uses to adjust the IRC 415(b) limit satisfy IRC 415(b)(2)(E).

  4. Verify that the plan’s use of mortality to adjust the dollar limit for early or delayed commencement of benefits satisfies the forfeiture of benefits rules.

Special $10,000 Minimum Benefit

  1. IRC 415(b)(4) provides rules under which a plan may provide a minimum annual benefit. Annual benefits payable to a participant under any DB plan satisfy the IRC 415(b) limits if both:

    1. The annual retirement benefits payable to a participant under the plan and under all other DB plans of the employer don’t exceed $10,000 for the plan year, or for any prior plan year.

    2. The employer hasn’t at any time maintained a DC plan in which the participant participated.

      Note:

      See 26 CFR 1.415(b)-1(f).

    Example 13:

    Mr. Levin participates in Plan X, a DB plan, and reaches the plan’s normal retirement age of 65. He has more than 10 years of service with the employer, and a high three average compensation of $8,900. Under Plan X’s terms, prior to applying the IRC 415 limits, Mr. Levin is 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. Determine the IRC 415 limit that applies to Mr. Levin’s benefit.

    Solution: The IRC 415 limit that applies to Mr. Levin’s annual benefits 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 applies to annual benefits payable under the plan. See 26 CFR 1.415(b)-1(f)(5) for additional examples.

  2. Mandatory employee contributions aren’t considered a separate DC plan for this special limit. So, if a DB plan permits employee contributions, it may still take advantage of this special exception. See 26 CFR 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 paid or the participant’s age. Accordingly this minimum applies:

    1. To any annuity form of benefit including joint and survivor and a life annuity with a certain number of payments guaranteed, and at any age.

    2. Equally to a terminated participant receiving payments at age 25 and a terminated participant receiving payments at age 67.

      Note:

      See 26 CFR 1.415(b)-1(f)(2).

  4. A plan can’t pay an actuarially equivalent lump sum based on this special $10,000 minimum benefit because this would be more than $10,000 paid in one year. See 26 CFR 1.415(b)-1 (f)(2).

    Example 14:

    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 high three year compensation is $6,000. The plan doesn’t have mandatory employee contributions, and he hasn’t been a participant in a DC plan maintained by his employer. Under the plan terms, for the current limitation year, his annual benefit before applying IRC 415(b), is $9,500.

    Because Mr. Carter’s annual payments don’t exceed $10,000, and because he hasn’t participated in a DC plan maintained by his employer, the plan’s annual payments of $9,500 aren’t considered to exceed the IRC 415(b)(1)(B) compensation limit of $6,000.

    This is true even if, under the plan terms, Mr. Carter’s benefit of $9,500 was payable at age 60, if the plan had mandatory employee contributions, or if the benefit was payable in any other form. (See note below on lump-sums which may exceed the IRC 415(b) limit.)

    Note:

    However, now assume that the plan allows Mr. Carter to elect a single-sum having an actuarial equivalent of his $9,500 annual straight life annuity per IRC 417(e)(3) and 26 CFR 1.417(e)-1(d) of $95,000.

    Because $95,000 exceeds $10,000 for the current limitation year, the special rule of IRC 415(b)(4) doesn’t offer an exception from the generally applicable limits of IRC 415(b)(1) for a single-sum distribution. Therefore, the otherwise applicable limits apply and this single-sum distribution of $95,000 wouldn’t satisfy the requirements of IRC 415(b). To satisfy the IRC 415(b) limits, the plan must limit the single-sum distribution to $60,000 (for this example $60,000 is assumed to be the present value of the $6,000 annual annuity benefit limited to the 415(b)(1)(B) compensation limit)). However, limiting the benefit to satisfy IRC 415 results in an impermissible forfeiture under IRC 411(a). So, in this case, the plan shouldn’t provide a single-sum distribution.

  5. See IRM 4.72.6.3.7 for how to prorate the special $10,000 minimum for a participant with less than 10 years of service.

Examination Steps
  1. Determine if the plan refers to the special $10,000 minimum when determining any actuarially equivalent amount for the IRC 415(b) benefit limits.

  2. Verify whether a participant has ever participated in any defined contribution plan sponsored by the employer or any member of the employer’s controlled group when the plan has provided him/her an annual benefit based on the special $10,000 minimum.

Participation or Service of Less Than 10 Years

  1. If a participant has less than 10 years of service or participation, then his/her IRC 415(b) limits are reduced (IRC 415(b)(5) and 26 CFR 1.415(b)-1(g)).

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

    1. Numerator = the number of years (and fractional parts, or one if greater) the participant participated in the DB plan.

    2. Denominator = 10. See 26 CFR 1.415(b)-1(g)(1).

  3. When determining a participant’s years of participation, a participant is credited with a year (or part of a year) for an accrual computation period per 26 CFR 1.415(b)-1(g)(1)(ii):

    1. If plan is established no later than the last day of that accrual computation period in which the participant is:

      1. Credited with the number of hours of service (or period of service if the elapsed time method is used for benefit accrual purposes) required under the plan terms to accrue a benefit.

      2. Included as a plan participant per the plan’s eligibility provisions for at least one day.

      3. Permanently and totally disabled per IRC 415(c)(3)(C)(i) is credited with a year of participation for that period.

  4. Reduce the DB compensation limit $10,000 minimum in the same way except apply the reduction for years of service (less than 10) with an employer rather than years of participation in a plan.

  5. The IRC 415(b)(5)(A) or (B) reductions can’t reduce the IRC 415(b)(1) and IRC 415(b)(4) limits to an amount less than 1/10 of the limit determined not considering IRC 415(b)(5).

    Example 15:

    Mr. Johnson participates in Corporation B’s plan for six years and 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 high three year compensation is $120,000. Determine Mr. Johnson’s IRC 415 limit for annual benefits payable as a single life annuity.

    Solution: The DB dollar limit that applies to Mr. Johnson’s benefit is $123,000, ($205,000 x 6/10, based on his six years of participation). The DB compensation limit that applies to Mr. Johnson’s benefit is $84,000, ($120,000 x 7/10, based on his seven years of service). Therefore, the IRC 415 limit that applies 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 26 CFR 1.415(b)-1(g)(4) for additional examples.

Examination Steps
  1. Verify the plan correctly reduces the:

    1. IRC 415(b)(1)(A) dollar limit for participants with less than 10 years of participation.

    2. IRC 415(b)(1)(B) compensation limit for participants with less than 10 years of service.

    3. Special $10,000 limit for participants with less than 10 years of service.

Non-Cash Distributions

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

Annuity Contracts
  1. Qualified plans may purchase annuity contracts for participants who retire or leave employment with rights to a deferred or immediate retirement annuity or when the plan is about to terminate. For these cases, the annuity contract benefit distributions in later years must conform to the benefits that could’ve been provided under the plan terms. In particular, the contracts may not permit distributions in excess of the IRC 415(b) limits that are applicable under the plan. See 26 CFR 1.415(b)-1(a)(3).

  2. If the annuity contract permits a single-sum distribution on or after the date the contract is distributed to the employee, that single-sum is a distribution in a form other than a single life annuity and must satisfy the limits based on assumptions used to convert 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 when added to other distributions under the contract can’t exceed the maximum distribution limits under IRC 415(b). The contract terms should preclude this excess.

  3. If the contract offers 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) limits for each age and form of benefit provided, including restricting assumptions the plan must use to calculate optional benefit forms or benefits commencing at ages other than the participant’s normal retirement age.

Springing Cash Value Life Insurance Policies
  1. Certain qualified plans used to purchase a life insurance product known as a “springing cash value” policy 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. The participant purchased the policy 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. The trust pays advance premiums to purchase the policy. The cash surrender value reported in the policy document for the first few years 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. Therefore, 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 IRS has opined that it doesn’t 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, meets the definition of fair market value for purposes of IRC 402(a).

    3. To check compliance with IRC 415(b), compare the fair market value of the contract 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).

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 this plan are 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. To verify the benefit payable doesn’t exceed IRC 415 limits for these contracts, the initial benefit amount payable under the contract must be adjusted to offset the expected increase in benefits payable in future years.

    1. This adjustment must be made per the rules for adjusting for a form of benefit other than a straight life annuity. See IRC 415(b)(2)(E) and 26 CFR 1.415(b)-1(c).

    2. In general, an adjustment must be made to the initial annual benefit paid under the contract so that the present value of the varying benefit amounts doesn’t exceed the present value of the otherwise applicable maximum level annual benefit that could be paid.

  3. 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 26 CFR 1.415(b)-1(c)(6), Example 10.

Transitional Rules and Protected Benefits

  1. ERISA added IRC 415 to the Code. TEFRA and TRA’ 86 significantly modified the IRC 415(b) limits. Although both TEFRA and TRA ‘86 decreased the ERISA IRC 415 limits for the future, they offered transition rules and protected the current accrued benefit of participants prior to the effective dates of ERISA, TEFRA, and TRA’86.

ERISA Protected Benefits
  1. Before ERISA, benefits were generally limited to 100 percent of the participant’s highest average compensation earned covering any reasonable period of service with the employer establishing the plan. See Rev. Rul. 72-3. Under ERISA, the DB limit on annual benefits 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 when benefits commenced before age 55, by adjusting the limit to the actuarially equivalent of the benefit beginning at age 55.

  2. The IRC 415 limits were effective for years beginning after December 31, 1975. ERISA section 2004(d)(2) provided a transitional rule for DB plans stating that for 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 didn’t exceed 100 percent of his or her annual rate of compensation on the earlier of:

      1. October 2, 1973, or

      2. 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:

      1. All the terms and conditions of the plan in existence on that date had remained in existence until such retirement, and

      2. The participant’s compensation taken into account for determining benefits under the plan for any period after October 2, 1973, didn’t exceed his or her annual rate of compensation on that date.

    3. For 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. Therefore, when ERISA’s limits applicable to DB plans became effective, the benefits of those individuals who were active participants in DB plans before October 3, 1973, were protected and wouldn’t be treated as exceeding IRC 415(b) if permitted under IRM 4.72.6.3.9.1 (2) (a), (b) and (c), 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 limit for these individuals’ benefits and contributions under IRC 415(e) as enacted by ERISA was assumed to be satisfied if benefits weren’t increased, in a DB plan, nor contributions made, in a DC plan, after the date of enactment.

TEFRA Protected Benefits
  1. TEFRA reduced limits on benefits and contributions under qualified retirement plans, effective for limitation years beginning in 1983. TEFRA didn’t change the compensation limit but modified the DB dollar limit (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. Required the dollar limit to be 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. Permitted the dollar limit to 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 used to adjust both the dollar and the compensation limits if a benefit is paid in a form other than a single life annuity.

  2. TEFRA Section 235(g) provided certain transitional rules for these new limits. The new requirement that the $90,000 dollar limit be actuarially reduced for commencement prior to age 62 isn’t applied to reduce the dollar limitation at any age on or after age 55 below $75,000. Also, if the benefit commenced prior to age 55, the applicable dollar limitation isn’t 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 isn’t increased for subsequent COLA changes under IRC 415(d).

  3. TEFRA Section 235(g)(4) 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 on 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 not considering COLAs after July 1, 1982. This Q&A also states that the protection afforded to this current accrued benefit also extends to the plan’s optional benefit forms or early retirement benefits on July 1, 1982.

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

TRA ’86 Protected Benefits
  1. TRA ’86 changed the DB $90,000 limit by stating that it applied to benefit payments commencing at the participant’s Social Security retirement age (SSRA). The limit is reduced when benefits commence prior to a participant’s SSRA. The actuarial equivalence factors used to reduce 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. Maximum benefits were generally reduced under TRA’86.

  2. TRA’86 Section 1106(i)(3) 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, if the plan existed 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. Notice 87-21 listed guidance, in the form of questions and answers, on the new 415 limits on contributions and benefits. Q&A 12 of states to use the rules in Notice 83-10 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 not considering the plan’s changes in the terms and conditions or COLAs after May 6, 1986. The current accrued benefit includes optional benefit forms and early retirement benefits or retirement- type subsidies protected under IRC 411(d)(6).

    2. Q&A 12 provides that if a participant’s protected current accrued benefit for a participant is larger than the applicable IRC 415(b)(1)(A) limit, as amended by TRA’86, then use the protected accrued benefit to apply the IRC 415(b) limit, and 415(e) limitation (for limitation years beginning before 2000).

  4. Apply the general considerations to recognize a “protected accrued benefit” as the ones dealing with TEFRA changes. Of course, any protected benefit under TEFRA remains part of the protected benefit under TRA’86.

RPA ’94 (GATT)Old-Law Benefits
  1. IRC 415(b)(2)(E) was amended under RPA ’94 (GATT) as amended by SBJPA, with these 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:

    1. Could protect the method 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).

    2. The freeze date must be 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.

    3. Rev. Rul. 95-29 provided guidance on the RPA ’94 (GATT) changes prior to GATT’s amendment by SBJPA.

    4. 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.

Examination Steps

  1. Determine for a participant receiving her/his benefits in the form of a non-cash distribution, that the amount the plan spent to purchase any contract(s) for the participant doesn’t exceed the maximum distribution permissible under IRC 415(b).

  2. Verify, if a participant’s benefit is provided by an annuity contract:

    1. The benefits in the various distribution forms and ages permitted under the contract comply with IRC 415(b).

    2. Under the contract, all available distributions, including single-sum distributions, premium refunds, and dividends, satisfy the IRC 415(b) limit that applies to the individual.

  3. Verify, if the plan purchases any life insurance policies that the fair market value of the policies don’t exceed the maximum distribution permissible under the terms of the plan and the IRC 415 limit that applies to the individual. See Rev. Proc. 2005-25 for guidance in this area.

  4. Determine when applying the IRC 415(b) limits for a participant’s benefit provided by a variable annuity contract, that the initial benefit under the contract is adjusted properly using actuarial assumptions or adjustment factors that satisfy IRC 415(b)(2).

  5. Determine if the plan takes into account any grandfathered benefits. If so, verify that the plan properly took them into account to comply with IRC 415(b) based on the dates and legislation in the following table.

    For a DB Plan that existed Prior Law that protected benefits which exceed the current IRC 415(b) limit Exam Action: Make Sure
    Before October 3, 1973 ERISA The correct limit is applied to each individual.
    On July 1, 1982 TEFRA The correct limit is applied to each individual.
    On May 6, 1986 TRA ’86 The correct limit is applied to each individual.
    On December 7, 1994 RPA ’94 The old-law benefit is calculated using the correct assumptions under IRC 415(b)(2)(E). The plan uses one of three methods to determine that the benefit satisfies IRC 415(b), where part of a participant’s benefit is an RPA ’94 old- law benefit (plan terms should state which of the three methods it uses).

Funding and Deductibility

  1. Plans can’t consider, to determine the employer’s deductible limits under IRC 404 for that year:

    1. Benefits in excess of IRC 415 limits. See IRC 404(j)(1)

    2. Future increases in the DB dollar and compensation ceiling for separated participants, under COLAs until the year the increase is effective. See IRC 404(j)(2).

Limiting the Projected Benefit

  1. For funding: 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 current dollar limit). Several considerations apply when determining the appropriate limitations that apply to the projected benefit, as described in the following sections below IRM 4.72.6.4.1.1IRM 4.72.6.4.3.

Dollar Limitation
  1. For purposes of limiting the projected benefit at each assumed retirement age and in each assumed form of distribution, adjust the dollar limit 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, compare 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 to the current dollar limit applicable at each expected retirement age and for each assumed benefit form. The greater of these two amounts is the applicable projected limit.

Automatic COLAs
  1. A DB plan may include a provision that automatically adjusts the maximum dollar limit each year for scheduled COLA increases under IRC 415(d) (Treas. Reg 1.415(d)-1(d)).

    Reminder:

    The plan terms may only permit scheduled annual increases in the dollar limit that become effective on or after the adjusted IRC 415(b)(1)(A) dollar limit’s effective date.

  2. Plans can’t use scheduled future increases for calendar years beginning after the current plan. Therefore, a reasonable funding method can’t use anticipated benefit changes. See 26 CFR 1.415(a)-1(d)(3)(v)(B) and 26 CFR 1.412(c)(3)-1(d).

  3. If the plan year isn’t a calendar year, it may take into account the adjusted dollar limit effective under IRC 415(d) on any day of the plan year in full for increases in the maximum dollar benefit assumed accrued or payable for funding purposes (Rev. Rul. 81-215).

Compensation Limitation

  1. Use participants’ projected salary based on their age when benefits are expected to commence to calculate a plan’s projected benefits under a reasonable funding method (26 CFR 1.412(c)(3)-1(c)). If a qualified plan provides benefits based on compensation at separation from service, it may base costs on projected benefits for the participant’s expected salary history to that age, even if those projected benefits exceed the current high three consecutive year average compensation (only if during the actual benefit accrual the accrued benefits don’t actually violate the DB compensation limit).

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) limits. Plan provisions must specify how and which plan will limit accruals to satisfy this requirement.

  2. For DB funding, the plan must take into account projected benefits under all plans using reasonable actuarial assumptions and per the plan(s) provisions. Funding computations must incorporate any required adjustments.

Examination Steps

  1. If you determine during an audit that a participant’s projected benefit for funding purposes exceeds the IRC 415(b) limit at the expected distribution date, check to see if the plan has funded for and deducted this benefit in violation of IRC 404(j).

  2. Determine if the plan anticipates COLA increases in the dollar limit for any purpose. If so, see if it followed the rules in IRM 4.72.6.4.1.1.1.

  3. Determine if participants’ benefits are based on final average salary, that the individual’s currently applicable compensation limit is limited to the lesser of the participant’s projected high three year compensation or the currently effective dollar limit applicable to the individual.

DB Dollar Limits From 1975 Through 2017

IRC 415(b)(1)(A) Dollar Limitations

Year Limit
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 - - January 1, 2016 $210,000
January 1, 2017 $215,000

DB Compensation Limit Adjustment Factors

The table of factors used to adjust the DB compensation limit for a participant who separated from service before January 1 of calendar years 1995 through 2017.

Year Factor
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
2015 1.0178
2016 1.0011
2017 1.0112

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.