Section 415 Amendments for Plan Documents Coming Soon

During the second half of 2008, employers that sponsor qualified retirement plans have started receiving amendment packages from their plan document providers.  The reason for this is that the final Internal Revenue Code (IRC) §415 regulations must be incorporated into retirement plan documents by the due date of the employer's tax return (including extensions) for the year in which the change is effective.

Due Dates for Section 415 Regulations for Plan Documents

These new regulations are effective for the first limitation year (most often defined as the plan year) beginning on or after July 1st 2007.  Thus for a sponsor whose plan year, limitation year and fiscal years are all on a calendar year basis, the due date would be sometime in 2009 based on the employer's 2008 tax return filing.

Compensation Paid After Termination of Employment

The significance of these regulations is whether or not compensation paid after termination of employment can be counted as compensation for the purposes of IRC §415. Retirement plans may utilize many forms of compensation, (such as W-2, 3401(a), etc.), however, a qualified retirement plan must utilize §415 compensation for purposes of Highly Compensated Employee (HCE) determination, top heavy minimum contributions, and checking annual additions limitations.  Employers should be aware that regardless of their plan's definition of compensation, all plans are required to amend for the §415 regulations.

Review Plan Document for Section 415 Regulations

To help ensure a plan's operational compliance with the §415 regulations, employers should review the §415 amendment's provisions with their plan document provider or other professionals in the qualified retirement plan industry. The §415 amendment will commonly state that pure severance pay can never be treated as §415 compensation, but other forms of compensation, including accrued vacation, unused sick time and others, may be counted if it is paid by the later of the following dates:

1. The date that is 2.5 months after the employee's termination, or
2. The last date of the plan year in which termination occurs

Example:  An hourly paid employee terminates employment on Friday, November 28, 2008.  He receives a paycheck that day, but it only reflects earnings through November 21, 2008.  On December 12, 2008, a final paycheck is issued for the period November 22-December 5.  Previously, the plan could exclude these earnings paid after termination.  Now, the plan must consider these amounts for §415 purposes and likely allow deferrals against them.

Questions or Concerns?

Employers with qualified retirement plans who would like to discuss how this amendment affects their plan's qualified status can contact Christine K. Hootman, CPA, Baden, Gage & Schroeder at 260-969-2515 or Robert M. Congdon, Baden Retirement Plan Services at 260-969-2646 for more information.