Employee Benefit Plan: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

IRS Compliance Testing: 415 Limits Testing

In order to ensure that employee benefit plans do not violate certain standards that the DOL and IRS believe are important, plans are subjected to annual compliance tests. These tests are designed to ensure that the amount employees are deferring is within certain maximum limits and that plans are not operating in a manner that discriminates against certain classes of employees. The most common compliance testing performed by defined benefit plans on an annual basis are the ADP and ACP tests, the Top-Heavy test, the 415 Limits testing and the Multiple Use test.

Following we will address 415 Limits testing. The ADP and ACP tests as well as the Top-Heavy test were discussed in previous blogs (see June and August archives) and we will cover the Multiple Use test in future articles.

Internal Revenue Code Section 415 limits the employer-provided benefits that participants can accrue in defined benefit plans and the amounts that can be contributed to defined contribution plans. The code specifies the amount of contributions (annual additions) that may be allocated to an employee for a “limitation year.” Generally, a limitation year is the calendar year, unless otherwise stated in the plan document. Annual additions include employee deferral contributions, employer matching contributions, employer discretionary profit sharing contributions and forfeitures allocated to participants’ account. Third-party administrators perform the 415 limits test annually to determine whether or not participants are within the guidelines set forth by the code. If 415 limits are exceeded, the tax-qualified status of your plan may be jeopardized.

The employee’s compensation, as defined by the plan document, used for the 415 limits test is provided to the third-party administrator by the plan sponsor. The Internal Revenue Service may adjust the 415 limit annually to adjust for cost of living increases. For limitation years ending in 2010, the 415 limit is the lesser of 100% of compensation or $49,000.

Your third-party administrator should provide details of any required actions as a result of any test failures.

Joe Goodmiller