Understanding Section 415 Limits
This section provides an overview of 415 limits and discusses:
Use of 415 limits results.
Incorporation of 415 limits into a jobstream.
Development of strategies for implementing 415 limits.
There are limits placed on the amount of annual contributions that can be made on behalf of a defined contribution plan participant or the amount of benefits that can be paid to a participant in a defined benefit plan. These limits are determined under Section 415 of the Internal Revenue Code. This PeopleBook generally refers to Section 415 limits as "415 limits."
Pension Administration deals with Section 415(b) limits on the total benefit from all defined benefit plans. For historical calculations effective prior to the implementation of the Small Business Job Protection Act of 1996 (SBJPA), the system can also apply Section 415(e) limits on the amount employees can receive from defined benefit plans relative to benefits received from their defined contribution plans.
Because 415 limits apply to multiple plans, the calculation handles this function somewhat differently from any other. You create a single 415 limits function result for all plans.
The 415 limits function produces a second set of optional forms results for every optional formset subject to these limits. If a limited result is present, the system uses this amount when you pay your retirees.
To see whether 415 limits were applied, compare the limited and unlimited optional forms results. Both sets of results are shown on the Review Calculation Results - Optional Forms page.
To see the actual limit, a list of the benefits subject to the limit, and the unlimited and limited amount single life annuity value of each of those benefits, go to the Review Main Results - 415 Limits page.
Section 415 limits apply to multiple plans. Because the 415 limits function must process all plans together, you create a single 415 limits function result for all plans. Do not create one per plan. Create only one for the entire application.
Normally the calculation processes each plan in the order you specify on the Plan Order page. Within each plan, the calculation processes function results in the order that you specify on the Plan Implementation page. Your 415 limits function result is an important exception to this rule.
When the calculation encounters a 415 limits function result in a plan, processing for that function result is delayed. The calculation continues with any remaining processing for that plan and with any subsequent plans until it encounters a nonqualified plan (or finishes processing all plans, if all plans are qualified). At this point, the system processes the 415 limits. Nonqualified plans are processed after the 415 limits.
Note: To ensure proper 415 limits processing, order your plans so that all qualified plans run before all nonqualified plans.
When 415 limits are processed, the optional forms reflect both the limited and unlimited amounts. However, benefit formula results are not adjusted to show the limits. Because the benefit formula is not adjusted, you cannot reference the unlimited amount if you want to find the difference between the limited and unlimited benefit—for example, if you have a nonqualified plan that makes up the difference.
Because the 415 limits function always runs at a specific point in the calculation, you have some flexibility as to which plan houses your 415 limits function result. You do need to put it in one of the plans before the 415 limits processing point—that is, into one of your qualified plans.
As you set up your 415 limits, a key issue is where the 415 definition gets some of the data it needs—for example, how much participation service an employee has and what are the average earnings for the high three years.
In order to set up the 415 definition, you identify function results that provide this data. Some function results, such as the participation service, may already be part of your plan implementation. Other function results, such as the average earnings, probably have to be set up especially for 415 limits processing.
When you set up your 415 limits processing, make sure you put the 415 limits function result and all of its component function results into the same plan. There are two approaches:
Incorporate the function results into an existing qualified plan.
Set up a dummy plan for 415 and put all the function results there.
Incorporation of 415 Limits Processing into Existing Plans
Incorporating 415 limits processing into existing plans works best if you have a single qualified plan because elements such as "participation service" are unambiguous for a single plan, and you can reuse the plan's existing function results. One aspect of this strategy is that you now have an extra final average earnings function result in the plan (unless the plan uses the same rules as the 415 limits), and the results from this function result appear on the calculation worksheet and in the calculation results pages. You can modify the worksheet and results pages so that they do not show this result.
Setup of Dummy Plan for 415 Limits Processing
Implementing 415 limits processing in a dummy plan is the better strategy if the component function results are all 415-specific and cannot be borrowed from your existing plans. When you know that employees will not exceed the limits, setting up a dummy plan enables you to avoid 415 limits processing and to run 415 limits processing only for your highly compensated employees. This approach also neatly separates all the 415-specific function results from those with direct impact on the benefit.
A 415 dummy plan requires its own plan eligibility processing. One approach to setting up eligibility for the dummy plan is to blend the requirements from all other qualified plans to create a single timeline showing when an employee was eligible and ineligible for any plan. You can thus accrue participation service based on eligibility for the dummy plan.
Another approach is to reference the eligibility results from other plans. In this case, the dummy plan has to be the last qualified plan on the Plan Order page. Remember that the eligibility results from the other plans can be Y (yes), N (no), or P (previously eligible). Your dummy plan eligibility should pick up Y and Pvalues. In this scenario, the dummy plan eligibility cannot build an eligibility timeline. This is because the Y, N, and P values are not effective-dated. Therefore, all employees would appear to have always been eligible for the dummy plan. This means that you cannot set up accruals based on eligible and ineligible periods of time. You have to calculate 415 participation service using another method.
Application of 415 Limits to Contributory Plans
Section 415 limits only apply to the employer-paid portion of a benefit. Because the 415 limits function obtains the unlimited amount from optional forms, you need optional forms for the employer-paid benefit.
When 415 limits are applied to the employer-paid benefit, only optional forms based on that benefit reflect the limits. A subsequent benefit formula that recombines the employee-paid and employer-paid benefits is not recalculated after 415 limits are applied, nor are any optional forms based on the total benefit amount.
Warning! The system does not support recombining employee-paid and employer-paid benefits for highly compensated employees.
You can work around the limitation by running an initial calculation to find the limited employer-paid portion, then running a second calculation where you override the employer-paid benefit with that limited amount in order to provide the appropriate amount to the combined benefit formula and optional forms.