IRS Issues Final, Comprehensive 415 Regulations

April 5, 2007 ( - The Internal Revenue Service (IRS) has issued final regulations under Section 415 of the Internal Revenue Code that address new rules under the Pension Protection Act of 2006 (PPA) and include rule changes within other statutes in the years since previous comprehensive regulations were issued.

The regulations provide rules regarding when amounts received following severance from employment are considered compensation for purposes of section 415, and when such amounts are permitted to be deferred pursuant to section 401(k) or section 457(b).

Generally, amounts received following severance from employment are not considered to be compensation for purposes of section 415, but there are exceptions for certain payments made by the later of 2 ½ months following severance from employment or the end of the year in which the severance occurs.

Included in the new regulations are corresponding changes to the regulations under sections 401(k) and 457 that provide that amounts payable following severance from employment can only be deferred if those amounts are within these same exceptions. The rule pursuant to which compensation received after severance from employment is not considered compensation for purposes of section 415 generally does not apply to payments to an individual in qualified military service.

In addition, the regulations address the following modifications to Section 415 made under the PPA:

  • Changes to the interest rate assumptions in section 415(b)(2)(E) that are used for converting certain forms of benefits to an equivalent straight life annuity;
  • Elimination of the active participation requirement in determining a participant’s high-three years of service in section 415(b)(3);
  • Exemption from the section 415(b)(1)(B) compensation limit for certain benefits provided under a defined benefit plan maintained by an organization described in section 3121(w)(3)(A); and
  • Expansion of the definition of qualified participant in section 415(b)(2)(H) to include certain participants in a defined benefit plan maintained by an Indian tribal government.

The new final regulations compile statutory changes made to Section 415 by other mandates in years since the last comprehensive rules were issued:

  • Current statutory limitations under sections 415(b)(1)(A) and 415(c)(1) applicable for defined benefit and defined contribution plans, respectively, as most recently amended by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA),
  • Changes to the rules for age adjustments to the applicable limitations under defined benefit plans, under which the dollar limitation is adjusted for commencement before age 62 or after age 65,
  • Changes to the rules, including specification of parameters, for benefit adjustments under defined benefit plans,
  • The phase-in of the dollar limitation under section 415(b)(1)(A) over 10 years of participation, as added by TRA ’86,
  • Addition of the section 401(a)(17) limitation on compensation that is permitted to be taken into account in determining plan benefits, as added by TRA ’86, and the interaction of this requirement with the limitations under section 415,
  • Exceptions to the compensation-based limitation under section 415(b)(1)(B) for governmental plans and multiemployer plans,
  • Changes to the aggregation rules under section 415(f) under which multiemployer plans are not aggregated with single-employer plans for purposes of applying the compensation-based limitation of section 415(b)(1)(B) to a single-employer plan,
  • Repeal under the Small Business Job Protection Act (SBJPA) of the section 415(e) combined limitation on participation in a defined benefit plan and a defined contribution plan,
  • Changes to section 415(c) that were made in conjunction with the repeal under EGTRRA of the exclusion allowance under section 403(b)(2),
  • Current rounding and base period rules for annual cost-of-living adjustments pursuant to section 415(d), as most recently amended in EGTRRA and WFTRA,
  • Changes to section 415(c) under which certain types of arrangements are no longer subject to the limitations of section 415(c) (such as individual retirement accounts other than SEPs) and other types of arrangements have become subject to the limitations of section 415(c) (such as certain individual medical accounts),
  • The inclusion in compensation (for purposes of section 415) of certain salary reduction amounts not included in gross income,
  • The modification for distributions with annuity starting dates in plan years beginning in years 2004 and 2005 made by PFEA with respect to the interest rate assumptions in section 415(b)(2)(E) for converting certain forms of benefits to an actuarially equivalent straight life annuity.

The final regulations, as published in the April 5 Federal Register, are here .

The IRS has issued clarifications for the Section 415 regulations at  .