Excess Benefit Plans (Posted on October 8, 1998 by )

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Author(s): Carol V. Calhoun
Given on 10/8/1998 at National Council on Teacher Retirement Annual Convention, Newport Beach, Calif.


Carol V. Calhoun, Counsel
Venable LLP
600 Massachusetts Avenue, NW
Washington, DC 20001
Phone: (202) 344-4715
Fax: (202) 344-8300
Mobile: (202) 441-5592
E-mail: Click here to send e-mail.
Carol V. Calhoun

  1. Background

    1. Internal Revenue Code (“Code”) section 415 prohibits contributions or benefits in a qualified plan in excess of certain limits.

    2. Code section 457(b) provides that a section 457 plan cannot provide for deferrals in excess of certain limits ($7,500 as indexed).

    3. Code sections 83, 402(b), and 457(f) normally provide that amounts contributed to a plan (other than a qualified plan, 403(b) annuity, or 457 plan) will be taxable to a participant when they become vested, even though they may not be paid out until many years later.

    4. These rules caused a problem for governmental plans, many of which were prohibited under state constitutions from imposing new limits on benefits for existing employees.

  2. Mechanics of an excess benefit plan

    1. Only benefits in excess of the Code section 415 limits can be provided through an excess benefit plan. Thus, for a participant whose benefits would otherwise exceed the limits, benefits up to the limits must be provided from the qualified plan, and the excess must be provided through the excess benefit plan.

    2. In order to avoid current taxation of participants on amounts which become vested under the excess benefit plan, the plan must be unfunded, i.e., benefits must be provided directly by an employer or pursuant to a trust which is subject to the claims of the employer’s general creditors. Benefits cannot be paid from the trust under a qualified plan.

    3. The participant cannot have any option to take current cash instead of the excess benefits.

  3. Issues

    1. What is the FICA tax status of excess benefit plans?

      1. Code section 3121(v)(2) imposes FICA taxes on benefits deferred under most nonqualified deferred compensation plans.

      2. Code section 3121(v)(3) provides an exception to the above rule for governmental plans, other than

        1. any plan to which section 83, 402(b), 403(c), or 457(f)(1) applies,

        2. any annuity contract described in section 403(b), and

        3. the Thrift Savings Fund.

      3. By its terms, section 3121(v)(3) would appear to exempt excess benefit plans. However, we understand that IRS is arguing that section 3121(v)(3) was intended to be only a transitional rule for deferred compensation plans in existence before section 457, and should not be applied to excess benefit plans.

    2. In statewide plan, must assets be subject to claims of ALL employers within the state, or is there some kind of apportionment?

    3. If an individual has participated in a statewide plan while employed by multiple employers, the normal rule would be that Code section 415 limits would be applied separately with respect to each employer. Can a statewide system elect to apply such limits on a plan wide basis for purposes of the excess benefit plan?

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