<nobr>Apr 4, 2007</nobr>

IRS, Treasury Release Final Section 415 Regulations

The Internal Revenue Service and Treasury Department released in the Federal Register final regulations (T. D. 9319) under Section 415 of the Internal Revenue Code, concerning limits on benefits and contributions under qualified employee plans. These regulations incorporate numerous statutory changes that have been made since 1981, and provide conforming changes to other regulations.

The comprehensive regulations implement with some changes the rules that were first proposed in May 2005, and will be of interest to plan sponsors, third-party administrators, plan participants, and plan beneficiaries. The final rules are effective April 5 and will apply to plan limitation years beginning on or after July 1.

Section 415 was added to the Code to provide a cap on the amount that can be contributed to an employee's account under a defined contribution plan. Under a defined benefit plan, section 415 provides a maximum benefit. These limits are indexed for inflation. Until these final and proposed regulations, the last issuance of comprehensive regulations under Section 415 was in 1981. Except for two changes to the regulations since 1981, the majority of guidance for the statutory changes since that time was provided in IRS notices, revenue rulings, and other guidance.

The regulations also implement the following changes made by the Pension Protection Act of 2006 (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 (section 303 of PPA);



• Elimination of the active participation requirement in determining a participant's high-3 years of service in section 415(b)(3) (section 832 of PPA);



• 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) (section 867 of PPA); 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 (section 906(b) of PPA).


The regulations also provide specific rules regarding when severance payments 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). The regulations generally provide that amounts received following severance from employment are not considered to be compensation for purposes of section 415, but provide exceptions for certain payments made by the later of 2 1/2 months following severance from employment or the end of the year in which the severance occurs.

The regulations also include corresponding changes to the regulations under sections 401(k) and 457, which 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.

415 Regulations

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