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On April 5, 2007, the IRS issued final regulations under Section 415 of the Internal Revenue Code. These regulations address limitations on benefits and contributions under qualified employee benefit plans, and are generally applicable for limitation years beginning on or after July 1, 2007. Thus, for plans on a calendar year, the final regulations will not apply until the plan year beginning January 1, 2008. The final regulations reflect the numerous statutory changes to Section 415 and related provisions that have been made since 1981, the date of the last set of Section 415 regulations. Highlights of the final regulations include:
Certain Modification Made by the Pension Protection Act of 2006
The final regulations make changes to the interest rate assumptions that are used for converting certain forms of benefits to an equivalent straight line annuity and eliminate the active participation requirement in determining a participant's high three years of service.
Post-Termination Payments
The final regulations maintain the provisions contained in the proposed regulations that provide that amounts received following a severance from employment are not compensation for Section 415 purposes. The final regulations do, however, modify the timeframe for the exception for payments made under a bona fide vacation, sick, or other leave program that would have been available had the employee not terminated to the later of 2 ½ months after the severance from employment or the end of the limitation year that includes the severance date.
Section 409A Income Inclusions
The final regulations clarify that Section 415 compensation includes amounts that are includible in the income of an employee under the nonqualified deferred compensation plan rules of Section 409A.
Automatic Increases
For forms of benefits not subject to 417(e)(3), no actuarial adjustment needs to be made to reflect automatic increases if certain requirements are satisfied. Generally, plans must provide that an amount payable in any year cannot be greater than the Section 415(b) limit applicable at the annuity starting date, as increased in subsequent years pursuant to Section 415 (d).
Limits Applicable to Defined Benefit Plans
For defined benefit plans, the annual benefit must not exceed the lesser of $160,000 (as adjusted annually) or 100% of the participant's average compensation for the period of the participant's high three years of service. "High three years of service" is the period of three consecutive calendar years during which the employee had the greatest aggregate compensation from the employer. The $160,000 limit is actuarially adjusted for benefit payments that commence before age 62 or after age 65.
Limits Applicable to Defined Contributions Plans
For defined contribution plans, the annual additions must not be greater than $40,000 (as adjusted annually) or 100% of the participants' compensation for the limitation year. Annual additions include employer and employee contributions as well as forfeitures. Restorative payments allocated to a participant's account do not constitute annual additions for the limitation year.
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