Practitioner Views on Section 415 Limits May Need to Be Reconsidered, Actuary Says

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By Florence Olsen  

Employers that sponsor defined benefit plans might need to sit down with their plan actuaries to review how their plans apply the tax code Section 415 rules on annual benefit limits, a conference speaker said April 8.

A discrepancy between what some plan sponsors do and an informal written response from Internal Revenue Service officials in this year's IRS Gray Book question and answers points to “a difference of opinion on this issue,” said Eric A. Keener, a principal and consulting actuary at Aon Hewitt in Norwalk, Conn., speaking during a session of the Enrolled Actuaries Meeting.

A Gray Book answer to a question about applying the Section 415 limit to a benefit calculated to be $400,000 at age 65 indicated that some IRS officials expect actuaries to apply the Section 415 limit before applying plan benefit factors for early retirement and joint-and-survivor annuity benefits, for example.

In the Gray Book example, the plan participant with a $400,000 benefit would receive, at age 62, an annual 75 percent joint-and-survivor benefit of $156,825 instead of a $205,000 benefit, Keener said. For 2013, $205,000 is the Section 415 limit for defined benefit plans.

A $205,000 benefit amount is the result that many actuaries and plan sponsors would have assumed is the correct benefit amount in that example, based on a practice of applying the plan benefit factors to the benefit amount before comparing and, if necessary, reducing it to comply with the Section 415 limit, Keener said.

Gray Book answers are not formal guidance, but plan sponsors “should figure out what, if anything, this is going to mean for their plans,” he said.

Correcting Overpayments

In a separate discussion about correcting overpayments under IRS Revenue Procedure 2013-12 (2 PBD, 1/3/13; 40 BPR 61, 1/8/13), an IRS official said the revenue procedure does not specifically address how to apply segment rates in correcting overpayments.

“In that situation, you are going to have to make a reasonable interpretation of how you would apply those segment rates for the adjustment,” said Tonya B. Manning, an employee plans actuary in IRS's Tax-Exempt and Government Entities Division.

“One thought would be to apply the segment rates based on the number of years that you are applying the interest rates,” Manning said. “If it's less than five years, you would use that first segment rate, for example,” she said.

Keener and Manning spoke during a panel session on late-breaking regulatory developments. The Enrolled Actuaries Meeting is sponsored by the Conference of Consulting Actuaries and the American Academy of Actuaries.

By Florence Olsen