NJ COLA Orals (3) – Internal Revenue Code Mashup

Does this make any sense?


Internal Revenue Code (IRC) section 415 limits the maximum benefits that a participant can get in a qualified plan and is there so that deductions for pension plans wouldn’t be ridiculously huge.  In a defined benefit plan it limits the benefits a participant can get (and fund for) to the greater of 100% of their average salary or some arbitrary amount that usually gets increased annually (except when they change the law and cut it back arbitrarily to generate what they hope will be more tax money).  It has absolutely nothing to do with the issues in Berg.

This handy summary lists IRC sections that relate to government plans and includes:

401(a)(16) Limitations on contributions and benefits of section 415. Applicable in modified form to governmental plans.

Also, for a private employer, employee contributions to a defined benefit plan are treated as annual additions under section 415(c), but the benefit generated by them is excluded in applying the maximum benefit limitations of section 415(b). In the context of a governmental plan, this is true only for after-tax employee contributions. Picked-up contributions under section 414(h)(2) are treated as if they were not part of the employee’s compensation for purposes of the section 415 limits, and picked-up contributions to a defined benefit plan are not part of the annual addition. However, benefits generated by picked-up contributions to a defined benefit plan are subject to the limits of section 415(b).

These rules may be a source of problems for governmental plans, e.g., Rhode Island, where a court held that an attempt to roll back benefits to comply with the section 415 limits violated state constitutional provisions. Since courts in approximately two-thirds of the states have held that federal or state constitutions impose some sort of prohibition on rolling back even future benefit accruals for existing employees, a problem in this area can be hard to correct.

Excess benefit plans may provide one way of getting around section 415 problems. However, they contain a number of pitfalls, and raise a variety of legal issues.

That’s it. Nothing about anti-cutback rules.  Those would fall under 411(d)(6):

Accrued benefit not to be decreased by amendment: In general a plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412(d)(2), or section 4281 of the Employee Retirement Income Security Act of 1974.

But that’s for most private-sector plans.  Later in IRC 411(e)(1)(A) we have:

…(e) Application of vesting standards to certain plans
……..(1) The provisions of this section (other than paragraph (2)) shall not apply to—
………….(A) a governmental plan (within the meaning of section 414(d))

2 responses to this post.

  1. Posted by Rex the Wonder Dog! on March 16, 2016 at 12:43 pm

    Yehaw!!!!!!!!!!! Geddy up Pony!


  2. A rough transcript of the video — feel free to use in the post (and delete my comment):

    MAN: …section 2, deals with IRC section 415, which sets maximum benefits and maximum contributions.

    Well if you look at that law, COLAs are included when you’re talking about what is the maximum benefit that an employee can get in a pension — that’s base benefits plus COLAs.

    So for the purposes of the Internal Revenue Code, COLAs were treated the same as base pensions.

    WOMAN: I would like to address Mr. Mintz’s argument concerning the Internal Revenue Code. He suggests, he’s talking about section 9.2 of Chapter 113 section 2, and he said that COLAs are included there in the IRC.

    They’re not, your honors. Two points:

    1. IRC section 415(k) does describe how qualified COLAs are treated under the plan. However, a COLA is a qualified COLA only if employees may elect to contribute towards it. So it’s inapplicable here.

    2. Also, section 415(d) does mention the word COLA, but that provides that the secretary shall annually increase the $160,000 limit by a COLA. It does not address whether or not COLAs are a part of the plan.


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