Fields letter (Posted on August 20, 1991 by )


Carol V. Calhoun, Counsel
Venable LLP
575 7th Street, NW
Washington, DC 20004
Phone: (202) 344-4715
Fax: (202) 344-8300
Mobile: (202) 441-5592
E-mail: Click here to send e-mail.
Carol V. Calhoun

Mr. August D. Fields
Godwin, Carlton & Maxwell
NCNB Plaza, Suite 3400
901 Main Street
Dallas, TX 75202-3714

Aug. 20, 1991

Dear Mr. Fields:

This letter is in response to your request for general information, dated June 15, 1991, regarding the application of the limitations of section 415 under the Internal Revenue Code to state and local governmental plans, as defined in section 414(d) of the Code. First, you ask about several issues concerning section 415 in general, such as the inclusion of certain items as compensation, the application of the limits to disability and death benefits, and the treatment of employee and pick-up contributions. Second, you ask several questions concerning the special limitation under section 415(b)(10) of the Code, as added by the Technical and Miscellaneous Revenue Act of 1988.

Section 1. The following questions address certain provisions generally under section 415 of the Code.

Question 1. May contributions described under sections 403(b), 414(h)(2), or 457 of the Code be included in the definition of compensation for purposes of determining the limits under section 415?

A. No. Section 1.415-2(d)(2)(i) of the Income Tax Regulations excludes from the definition of compensation employer contributions to a deferred compensation plan to the extent that the contributions are not includible in the gross income of the employee in the year contributed. Because section 403(b) contributions, pick-up contributions under section 414(h)(2), and contributions to a section 457 plan that are not includible in gross income when contributed are employer contributions, or are treated as employer contributions, to a deferred compensation plan, they are excluded from the definition of compensation for purposes of determining the limits under section 415.

Question 2. May distributions from a deferred compensation arrangement described in section 457 of the Code be included in the definition of compensation in the year included in gross income for purposes of determining the limitations under section 415 in the year the distributions are includible in gross income?

A. Yes. Section 1.415-2(d)(2)(i) of the regulations excludes from the definition of compensation any distributions from a deferred compensation plan, except that any taxable amounts received by an employee pursuant to an unfunded nonqualified plan may be considered as compensation. Consequently, the definition of compensation for purposes of determining the section 415 limits may include distributions from a section 457 plan in the year the distributions are includible in gross income.

Question 3. Are pre-retirement disability benefits subject to the section 415 limitations?

A. No. Under Code section 415(b)(1)(B) and regulation section 1.415-3(c)(2)(ii), the value of pre-retirement disability benefits generally is not taken into account in making adjustments to the retirement benefit for purposes of applying the limitations under section 415 to the annual benefit of the participant. In the case of a private retirement plan, pre-retirement disability benefits are disregarded only if they are not part of the normal retirement benefit. Section 411(a)(9) of the Code states that the normal retirement benefit is determined without regard to disability benefits not in excess of the “qualified disability benefit” within the meaning of section 401(a)(9). Section 411(e) of the Code provides that the provisions of section 411 shall not apply to a governmental plan within the meaning of section 414(d). Consequently, pre-retirement disability benefits under a governmental plan are not taken into account under section 415, even if they exceed the section 411(a)(9) limits. Note, however, that such disability benefits are required to comply with Rev. Rul. 72-3, 1972-1 C.B. 105, which prohibits a pension plan benefit from exceeding 100 percent of the employee’s compensation.

Question 4. Are post-retirement disability benefits subject to the section 415 limitations?

A. Yes. The Code and regulations do not exempt post-normal retirement age disability benefits from the section 415 limits. Therefore, a participant’s disability benefits, whether or not characterized as an accrued benefit under section 411, must be taken into account for section 415 purposes at normal retirement age.

Question 5. Are pre-retirement death benefits subject to the section 415 limitations?

A. No. Section 1.415-3(c)(2)(ii) of the regulations provides that pre-normal retirement age death benefits are not taken into account in the adjustment of benefits for section 415 purposes. The definition of a pension plan under section 1.401-1(b)(1)(i), however, requires that benefits separate from, or in excess of, the normal retirement benefit be “incidental” to the retirement benefit. Consequently, while pre-normal retirement age retirement benefits under a governmental plan are exempt from the section 415 limitations, they must meet the incidental benefit requirement.

Question 6. Are post-retirement death benefits subject to the section 415 limitations if they would meet the requirements for qualified joint and survivor annuity (QJSA) benefits within the meaning of section 401(a)(11) of the Code if the governmental plan were subject to that section?

A. No. Section 1.415-3(c)(2)(i) of the regulations provides generally that the value of a QJSA is not taken into account for section 415 purposes. However, post-normal retirement age death benefits under a governmental plan are not required to satisfy the survivor benefit requirements of sections 401(a)(11) and 417 of the Code. A governmental plan may apply the exception in regulation section 1.415-3(c)(2)(i) if such plan satisfies the requirement regarding the QJSA amount, as described under section 417(b), even if other QJSA requirements, such as spousal consent, notice, benefits commencement, are not satisfied.

Question 7. In view of the fact that section 411(c) of the Code does not apply to governmental plans, what rules are used in determining the portion of the contributions to such a plan to be treated as employer contributions and the portion to be treated as employee contributions for purposes of section 415?

A. Section 1.415-3(d) of the regulations provides that employee contributions made to a defined benefit plan that are not made to a separate account are considered a separate defined contribution plan and reduce the benefit under the defined benefit plan tested against the section 415(b) limit. The section further provides that the annual benefit attributable to mandatory contributions is determined by using the factors described in Code section 411(c)(2)(B) and section 1.411(c)-1(c) of the regulations, regardless of whether section 411 applies to that plan. Consequently, a governmental defined benefit plan providing for employee contributions that are not made to a separate account must use the rules in section 1.411(c)-1(c) for apportioning the benefit between employer and employee contributions for section 415 purposes.

Question 8. Are pick-up contributions, as described in section 414(h)(2) of the Code, considered annual additions to a separate defined contribution plan for purposes of section 415?

A. No. Section 414(h)(2) of the Code provides that, in the case of a governmental plan, where the contributions of an employing unit are designated as employee contributions but where the employing unit picks up the contributions, the contributions so picked up are treated as employer contributions. Because pick-up contributions are treated as employer contributions under section 414(h)(2) of the Code, they are not annual additions to a separate defined contribution plan for purposes of section 415 of the Code. The benefit attributable to these unallocated contributions is subject to the defined benefit limitations under Code section 415(b) and regulation section 1.415-3(a).

Question 9. How is the “employer” determined for purposes of the aggregation rules under section 415(f) of the Code where separate governmental plans are maintained by different governmental entities?

A. Where separate governmental plans are maintained by different governmental units, the governmental units are treated as a single employer for purposes of the aggregation requirement under section 415(f) pursuant to a reasonable and good faith interpretation of the rules and definitions under sections 414(b), (c), (m), and (o) of the Code. The controlled group definition under Notice 89-23, 1989-1 C.B. 654 (the 80 percent control or funding test), is considered a reasonable (but not exclusive) interpretation of these definitions consistent with the unique nature of governmental entities.

Question 10. Would section 415 of the Code be violated if a governmental plan transferred amounts in excess of the section 415 limits to a nonqualified arrangement for distribution to the participant who had the excess?

A. Yes. Governmental plans would violate section 415 by transferring amounts that exceed section 415 under a qualified plan from that plan to a nonqualified arrangement, and distributing those benefits from the nonqualified arrangement. Such a spin-off of qualified funds may also violate other qualification requirements, such as the exclusive benefit rule under section 401(a)(2).

Section 2. The following questions concern the special limitation under section 415(b)(10) of the Code.

Question 1. May a state amend a plan to elect the treatment permitted by section 415(b)(10) of the Code on behalf of all the political subdivisions or other governmental units maintaining that plan?

A. Section 415(b)(10)(C) provides that each employer maintaining a plan must make the election to have the special limitation apply. A state legislature, however, may amend a state-administered plan to elect the special limitation for all political subdivisions or other governmental units maintaining the plan, whether or not it considers itself the employer with respect to those entities. The exclusion from the special limitation of an entity maintaining the plan that is not a subdivision, agency or instrumentality of a state, or one of its subdivisions, and therefore is not eligible for the election permitted by section 415(b)(10) of the Code, does not defeat the requirement that each employer maintaining the plan must make the election to have the special limitation apply.

Question 2. If a state does not make the election permitted by section 415(b)(10) of the Code for the governmental units maintaining a plan, may a governmental unit make that election for its own employees even if other governmental units maintaining the same plan do not make the election?

A. If a state does not make the election for the special limitation for the governmental units maintaining a plan, each governmental unit may independently elect the special limitation for its own employees, if it determines that it is the employer for purposes of the election. Such a determination must be consistent with the state’s treatment of the plan. An independent election under these conditions would not defeat the election for any remaining employers maintaining the plan. Each employer would then be treated as maintaining a separate plan for purposes of the election.

Question 3. If a state makes the election permitted by section 415(b)(10) for all governmental units maintaining a plan, are those governmental units then required to make the election with respect to the plans maintained by each of them?

A. No. Although an election under section 415(b)(10) is effective with respect to all of the plans of an employer, a governmental unit that maintains a plan for which the state has made an election may make the election independently with respect all of the plans that it maintains, if it determines that it is the employer for purposes of the election. For example, where a state elects the special limitation for a municipality with respect to a state-administered municipal retirement plan, the municipality may separately elect or not elect the special limitation with respect to its police and firefighter retirement plan, if it determines that it is the employer maintaining that plan.

Question 4. Who is the employer for purposes of making the election permitted by section 415(b)(10) of the Code?

A. A governmental unit may use a reasonable, good faith interpretation of the relevant rules and definitions under sections 414(b), (c), (m), and (o), and Notice 89-23 in determining whether it is the employer with respect to a particular plan (see Question 9 in Section 1).

Question 5. Is the status of a “qualified participant” under section 415(b)(10)(B) of the Code preserved if such participant rolls over amounts to another governmental plan of a different governmental employer? Is his or her status preserved where there are transfers of assets or liabilities or purchases of service credit between governmental plans maintained by different governmental employers?

A. Section 415(b)(10)(B) provides that the term “qualified participant” means a participant who first became a participant in the plan maintained by the employer before January 1, 1990. A qualified participant is one who was employed by a governmental unit and accrued a benefit with respect to such employment under a governmental plan prior to January 1, 1990. While an employee’s qualified participant status is preserved in the case of a rollover or transfer of assets and liabilities between plans maintained by the same employer, it is not preserved in the case of such rollover or transfer between plans maintained by different employers. Further, the purchase (or reciprocal recognition) of past service credit with one employer by (or for) an employee under the plan of a second employer does not result in the employee’s status as a qualified participant with the first employer carrying over to the second employer.

Question 6. What is meant by the “accrued benefit” that is exempt from section 415 of the Code under section 415(b)(10)?

A. Under section 415(b)(10)(A), the accrued benefit of a qualified participant under a plan that is subject to the special section 415(b)(10) limitation is that benefit based on plan formulas in effect as of October 14, 1987. This means that all future increases in a participant’s accrued benefit are exempt from the limitations of section 415, so long as those increases are not based on amendments made after October 14, 1987. The benefits of a qualified participant that accrue under a plan’s post-October 14, 1987 provisions are subject to the favorable governmental limits under sections 415(b)(2)(F) and (G).

Question 7. How and when may the election permitted by section 415(b)(10) be made?

A. Code section 415(b)(10)(C) provides that the special limitation under section 415(b)(10) shall only apply if an election is made before the close of the first plan year beginning after December 31, 1989, to have section 415(b) (other than paragraph (2)(G)) applied without regard to paragraph (2)(F). Plan amendments that incorporate the election by reference to section 415(b)(10) are treated as a valid election. In addition, a formal resolution enacted by a governmental employer adopting the special limitation is treated as a plan amendment, if there has been operational compliance with section 415(b)(10) since January 1, 1990, and the resolution is irrevocable and promptly reduced to a plan amendment.

Question 8. Are qualified police and firefighters who begin participation under an electing plan after January 1, 1990, exempt from the application of the general limits applicable to other participants who also commence participation after that date?

A. Yes. In accordance with section 415(b)(10)(C), qualified police and firefighters, as defined in section 415(b)(2)(H) of the Code, who begin participation in the plan on and after January 1, 1990, are not subject to the general limitations of section 415(b) otherwise applicable to participants under private retirement plans, but are subject to the limitations under sections 415(b)(2)(F) and (G).

Question 9. When a governmental employer that has made the 415(b)(10) election maintains both a defined benefit plan and a defined contribution plan for the same qualified participants, must a section 415(e) computation be made by using the limitations under section 415(b)(2)(F) and (G)?

A. No. Plans that have made the election under section 415(b)(10) may substitute the grandfathered benefit as determined under the provisions of section 415(b)(10) as the basis for determining the section 415(e) limit for qualified participants.

We believe this information will be of assistance to you. This is not a ruling, however, and may not be relied on with respect to any specific transaction.

Sincerely yours,


Ken Yednock
Chief, Employee Plans
Projects Branch