April 2000


By David Langer, David Langer Company, Consulting Actuaries

IRC section 415(e) requires that contributions under a defined contribution plan [e.g., a profit sharing or 401(k) plan] or benefits under a defined benefit plan may need to be reduced if a participant is covered by both types of plans. This generally applies to highly paid employees that are near the contribution or benefit limits under section 415. For plan years commencing in 2000, IRC section 415(e) is repealed by the Small Business Job Protection Act of 1996. The IRS issued guidance in Notice 99-44 regarding the repeal, summarized below.

* Full limit applicable for each plan. For plan years beginning in 2000, an active participant can be credited with up to a $30,000 maximum contribution (or 25% of salary, if less) in a defined contribution plan (DCP) and up to a $130,000 maximum benefit (or 100% of average salary, if less) in a defined benefit plan (DBP), even if covered by both types of plans.

* Inactive participants. For retirees receiving benefits or terminated participants entitled to future benefits, the DBP benefit can be increased to the level it would have been if section 415(e) had never been in effect. The participant must have been entitled to benefits as of December 31, 1999; those that were paid out through lump sum distributions and have no outstanding benefits (ignoring the effect of the repeal) are not entitled to any additional benefits.

* Action required. Plans that include section 415(e) indirectly by reference (i.e., without including its language in the plan) need do nothing for the repeal to be effective. Plans that include section 415(e) language must adopt the language of the repeal in order for it to be effective.

* When effective. The repeal can be effective either for active employees only (employees that have a least one hour of service after the first day of the 2000 plan year) or for both active employees and former employees that have a benefit as of such date. The amendment should be made effective as of the first day of the 2000 plan year in order not to run afoul of the antidiscrimination rules dealing with highly compensated employees (HCEs).

* If repeal is not desired. If a plan wished to continue applying the combined limitations under section 415(e), it had to take that position before the effective date of the repeal, because the limitations can't be put back into the plan after the effective date without violating anticutback rules.

* Safe harbor impact. Plans that have safe harbor formulas will still be safe harbor plans even though participants' benefits may increase as of the first day of the 2000 plan year. However, plans that continue to apply the combined limitations will no longer be safe harbor plans, unless application of section 415(e) is limited to HCEs.

* DBP liability increases. Increases in DBP liabilities due to the repeal will be treated as an amendment and, if a plan's funding method establishes amortization bases, the increase will be amortized over 30 years.

* Lump sum grandfathering. Participants at or near the maximum benefit level are entitled to have the lump sum value of their accrued benefit grandfathered as of the day before the effective date of the repeal.

Companies that established nonqualified plans to pay benefits that couldn't be paid by the qualified DBP due to section 415(e) will be able to reduce those liabilities as the qualified plans' benefits are increased. Smaller companies that had only a DBP, or that may have frozen their DCPs because a key executive was already at the DBP maximum, will be able to adopt or resume contributions under a DCP as well.

Plan Amendment Date Extended

Sponsors were originally required to amend and restate plans for the effects of the Taxpayer Relief Act of 1997, GATT, and the Small Business Job Protection Act by the end of the 1999 plan years. Other than the amendment for the section 415(e) repeal, the restatement date has been extended to the end of the 2000 plan year. However, this does not delay the adoption and effective dates of provisions that have to become effective on or prior to the first day of the 2000 plan year, such as the use of the GATT interest and mortality rates for determining minimum and maximum lump sum benefits. Until amended and submitted to the IRS, all plans must operate in conformance with the changes. *

Sheldon M. Geller, Esq.
Geller & Wind, Ltd.

Michael D. Schulman, CPA
Schulman & Company

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