print this page

August 20, 1999

THE IMPACT OF THE REPEAL OF SECTION 415(e)

1. Overview

In brief, Notice 99-44:

• Confirms that the pensions of people who retired or otherwise terminated service before January 1, 2000 can go up as a result of the repeal of Section 415(e), if they were previously limited by that provision;

• Describes how plans may be amended either to eliminate language that imposes the Section 415(e) limitation or to preserve the limit, as a matter of plan design, and
• Explains the interaction between this change and the nondiscrimination rules, as well as other technical requirements, for qualified plans.

2. Background

Section 415(e) is the complex set of limits that applies to someone who is covered by both a defined benefit and a defined contribution plan sponsored by the same employer. It was repealed in 1996 by the Small Business Job Protection Act (SBJPA), but with a delayed effective date: the year 2000. Starting January 1, 2000, Section 415(e) will no longer apply. Since almost all but the smallest plans have provided for the pension (rather than the defined contribution account) to be reduced if the combined benefits go over the Section 415(e) limit, the administrative impact of eliminating that limit will be greatest for defined benefit plans.

Under IRS regulations, multiemployer plans are not required to be combined or aggregated with one another for §415 purposes. Therefore Section 415(e) has had almost no impact on multiemployer plans, and its repeal should be of equally little relevance to them.

3. Impact on Retirees' Pensions

Notice 99-44 confirm that, when the repeal of Section 415(e) takes effect in 2000, defined benefits that were cut back in earlier years because of that limitation can go up to where they would have been if Section 415(e) had not applied. This is true for retirees and terminated vested employees, as well as current employees. However, the increase in the statutory limits is not retroactive: it does not include an allowance for extra payments to make up for benefits that were not paid in earlier years because of Section 415(e).

The Notice gives examples that show how to calculate the pension increases under various circumstances, taking into account, for example, COLA increases in the Section 415 dollar limit since the person retired.

According to Notice 99-44, if a participant's pension has been fully paid out (in a lump sum, for example) before the repeal of Section 415(e) takes effect, the pension cannot retroactively be increased to take account of the repeal.

4. Plan Amendments

a) To raise benefits as high as possible. Notice 99-44 points out that no change in plan language may be needed for a plan to take into account the repeal of Section 415(e) if the plan has incorporated the Section 415 limits by reference. This would be the case if the plan says something along the lines of, "benefits under this plan will never exceed the limits imposed by IRC Section 415." Other plans may include more specific Section 415 language, but with a proviso that the limits apply "to the extent required by law." In those cases benefits are automatically adjusted when the statutory limits go up, as they will when Section 415(e) no longer applies. No amendment is needed for the increase to go into effect.

By contrast, a plan whose terms spell out the Section 415 limits will have to be amended to remove Section 415(e), if the plan sponsor wants to do so. That amendment can be adopted by the end of the 2000 plan year, effective as of January 1, 2000.

b) To limit the effect of the repeal of the combined plan limit. If a plan sponsor wants to keep the combined-plan limit in effect for some or all participants, it can do so with a plan amendment. Notice 99-44 warns that an amendment preserving the applicability of the Section 415(e) limit may need to be adopted before 2000 to avoid an illegal cutback. It includes model language that can be adopted quickly, to preserve the status quo, for employers that want more time to decide.

In some cases, retirees whose benefits were cut because of Section 415(e) may have been compensated for it by a payment from the employer's nonqualified plan ("SERP"). That will be the main reason why plan sponsors will not want to increase qualified-plan benefits to reflect the repeal of the limit.

5. Nondiscrimination Implications

When the repeal of Section 415(e) is put into effect, it will be treated as a benefit increase for various purposes under the Internal Revenue Code. Notice 99-44 lays out some special rules to simplify compliance with the nondiscrimination requirements under certain standardized conditions.

a) Benefit safe harbors. The Notice states that a plan will not fail the uniformity tests of the nondiscrimination safe harbors if it puts the increase into effect as of January 1, 2000. This is also true for plans that keep the Section 415(e) combined-plan limit in effect into the future, for some or all highly compensated employees, as long as it no longer applies to the non-highly compensated employees.

b) General benefit tests. Benefit accruals (or defined contribution allocations) that go up because of the repeal of Section 415(e) are taken into account in general nondiscrimination testing for the plan year in which the repeal takes effect, which will typically be the 2000 plan year.

c) Benefit increases. Whether or not a formal plan amendment is needed to remove the restrictions of the Section 415(e) combined-plan limit, the elimination of the limit is treated as a benefit increase under the nondiscrimination rules. Notice 99-44 says that the increase will be deemed to be nondiscriminatory if it takes effect as of January 1, 2000 and applies either to all participants under the plan (i.e., active employees, terminated vesteds and retirees) as of December 31, 1999, or to all participants who have an hour of service under the plan after that date.

If the plan puts the change into effect in another way, such as by further limiting the group of participants to which it applies or delaying its application, the regular nondiscrimination rules will apply.

6. Other Implications for Plan Qualification

Notice 99-44 points out that the plan qualification rules include a number of special provisions that make allowances for Section 415. For example, certain suspense accounts and refunds of employees' deferrals are permitted for amounts above the Section 415 limits. Although, as a matter of design, a plan may impose benefit and contribution limits that are lower than the Section 415 limits, these special rules are triggered only when contributions or deferrals go over the statutory limits.

As a result, plan administrative procedures and controls may need to be modified to take into account the repeal of Section 415(e), even if the sponsor decides to keep the limit in place for determining benefits.

7. Plan Funding

The Notice confirms that benefit increases that result from the elimination of Section 415(e) are treated as plan amendments increasing benefits for purposes of the Funding Standard Account under ERISA and the IRC.

8. Definition of "Compensation" for Section 415

In addition to repealing Section 415(e), the SBJPA expanded the definition of "compensation" for Section 415 purposes generally, to include salary-reduction amounts under Section 125, 401(k), 403(b) and 457 plans. This change took effect for the 1998 plan year. Notice 99-44 provides a one-year grace period for defined contribution plans that may not yet have modified their systems to take this higher limit into account. It says that a plan will not be disqualified if, for the 1998 plan year, it used the older, narrower definition of "compensation" in applying Section 415 and, as a result, cut back participants' defined contribution allocations more sharply than the new rule would require.

Back to Top