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Regulation and Compliance > Federal Regulation > IRS

IRS Treats More Severance Pay As Section 415 Comp

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Officials at the Internal Revenue Service have completed work on regulations that will affect the everyday nuts and bolts of retirement plan administration.

The IRS has released “Limitations on Benefits and Contributions Under Qualified Plans,” a document that combines final regulations with removal of temporary regulations.

The final rule makes many revisions to 1981 regulations implementing Section 415 of the Internal Revenue Code, which deals with limits on benefits under qualified defined benefit plans and on contributions to qualified defined contribution plans.

The new final rule, based on a proposed rule released in May 2005, incorporates years of IRS notices and revenue rulings as well as suggestions made in August 2005 at a public hearing.

Topics addressed in the final rule include matters such as inclusion of private Social Security supplements in annual benefit totals, mortality adjustments used in computing the dollar limits on a participant’s annual benefit for distributions commencing before age 62, and how to compute the annual benefit for a retiree with multiple annuity benefit distribution starting dates.

IRS officials also have affected many different types of retirement plan computations by broadening the definition of “compensation” as the term is used in IRC Section 415(c)(3).

In the proposed regulations published in May 2005, IRS officials suggested creating specific guidelines for deciding when to include severance benefits from Section 415 compensation.

Originally, the IRS was going to include up to 2.5 months of post-severance compensation in Section 415 compensation.

“Some commentators requested a lengthening of the 2.5-month period to as long as a year, or exceptions from the 2.5-month rule under certain circumstances (such as teacher pay that is paid on a 12-month basis for each 9-month school year, or residual payments that are made to entertainment industry employees years after the services are performed),” officials write in a preamble to the new final rule, which appears today in the Federal Register.

In the end, officials decided to set the usual cut-off for including severance pay in Section 415 compensation at 2.5 months, but they decided that taxpayers also can include compensation paid by “the end of the limitation year that includes the date of severance from employment.”

Post-severance payments of accrued sick, vacation and other leave that are paid either within 2.5 months or “by the end of the limitation year” will not show up in Section 415 compensation totals unless the plan specifically includes such payments, officials write.

The limits on inclusion of severance pay from Section 415 compensation do not normally include payments made to employees who are serving in the military, officials write.

The final rule expands on the “proposed regulations by adding another exception to the post-severance timing rule for compensation paid to a permanently and totally disabled participant, provided certain conditions are satisfied,” officials write.

A copy of the final regulations is on the Web .


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