SERVICE MODIFIES SECTION 401(l) PERMITTED DISPARITY RULES.
Notice 89-70; 1989-1 C.B. 730
- Institutional AuthorsInternal Revenue Service
- Cross-Reference
EE-159-86; for the full text of the proposed regulations, see the
- Code Sections
- Subject Area/Tax Topics
- Index Termsqualified planintegration levelpension plan, Internal Revenue CodeSocial Securitypermitted disparity
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 1989-4477
- Tax Analysts Electronic Citation1989 TNT 117-8
Notice 89-70
The Tax Reform Act of 1986 (TRA '86) amended section 401(l) of the Internal Revenue Code to provide rules dealing with permitted disparity in contributions or benefits under qualified plans. Proposed regulations were issued under section 401(l) in the Federal Register on November 15, 1988 (53 Fed. Reg. 45917). This notice supplements the proposed regulations by providing additional guidance concerning certain aspects of permitted disparity under section 401(l) of the Code. Specifically, this notice provides (1) a modification of the definition of covered compensation stated in the proposed regulations, (2) additional alternatives for the choice of integration levels in both defined contribution excess plans and defined benefit excess plans, (3) additional alternatives for the choice of an offset in a defined benefit offset plan, (4) guidance concerning reliance on determination letters issued with respect to defined benefit plans that use an integration level other than covered compensation, an offset based on an amount other than covered compensation, or a uniform factor in determining the portion of a participant's benefits attributable to employee contributions, (5) additional methods by which certain types of career average plans may meet the permitted disparity requirements, and (6) additional guidance on adjustments for the payment of retirement benefits before social security retirement age.
I. DEFINITION OF COVERED COMPENSATION
Covered compensation is defined in section 1.401(l)-1(b)(9) of the regulations as the average (without indexing) of the taxable wage bases for the 35 calendar years ending with the year prior to the calendar year an individual attains social security retirement age (as defined in section 415(b)(8) of the Code). The final regulations will modify the definition of covered compensation to be the average of the taxable wage bases for the 35 calendar years ending with the year an individual attains social security retirement age. A 35-year period is used for all individuals regardless of the year of birth of the individual. In determining an individual's covered compensation for any particular plan year, it is assumed that the taxable wage base in effect at the beginning of the plan year will remain the same for all future years. Presented in Attachment I is the covered compensation table for plan years beginning in 1989 (the 1989 Covered Compensation Table).
In lieu of using the definition of covered compensation specified above, plans may use the definition of covered compensation as stated in the proposed regulations for plan years beginning prior to 1995. Thus, for plan years beginning in 1989 through 1994 plans may use the covered compensation table for each such year based upon the definition of covered compensation in the proposed regulations. Alternatively, pursuant to Alternative 2 of section III.B. below, the covered compensation table for 1989 based upon the definition of covered compensation in the proposed regulations may be used for plan years beginning in 1989 through 1994. Attachment II is the covered compensation table for plan years beginning in 1989 based upon the definition of covered compensation in the proposed regulations.
II. INTEGRATION LEVEL - DEFINED CONTRIBUTION EXCESS PLANS
A. The permitted disparity requirements applicable to defined contribution plans are specified in section 1.401(l)-2 of the regulations. One of the requirements of such section is that, for any participant, the excess contribution percentage may not exceed the base contribution percentage by more than the maximum excess allowance. The maximum excess allowance is defined as the lesser of:
(i) the base contribution percentage, or
(ii) the greater of
(A) 5.7%, or
(B) the percentage rate of tax under section 3111(a) of the Code (in effect as of the beginning of the plan year) which is attributable to the old age insurance portion of the Old Age, Survivors and Disability Insurance provisions of the Social Security Act.
The base contribution percentage with respect to a defined contribution excess plan is defined in the regulations as the percentage of compensation at which employer contributions (and forfeitures) are allocated to the accounts of participants with respect to compensation of participants at or below the integration level specified in the plan. The excess contribution percentage with respect to a defined contribution excess plan is the percentage of compensation at which employer contributions (and forfeitures) are allocated to accounts of participants with respect to compensation of participants above the integration level specified in the plan. Section 1.401(l)-2(b)(4) of the regulations specifies that, in order to meet the permitted disparity requirements for defined contribution plans, the integration level of a plan must equal the taxable wage base in effect as of the beginning of the plan year. (See section 1.401(l)-1(b)(5) for the definitions of integration level and taxable wage base).
B. Pursuant to this notice, the following two alternative approaches for determining integration levels may be used in lieu of the taxable wage base:
(1) Provided all other permitted disparity requirements are met, an acceptable integration level is a uniform dollar amount for all participants no greater than the greater of $10,000 or 1/5 of the taxable wage base in effect as of the beginning of the plan year.
(2) Provided all other permitted disparity requirements are met, any uniform dollar amount greater than the amount in (1), above, that is less than the taxable wage base (TWB) in effect as of the beginning of the plan year is an acceptable integration level provided the limitation on the maximum excess allowance stated in section 1.401(l)-2(b)(5)(ii)(A) of the regulations (and II.A.(ii)(A) of this notice) of 5.7% is reduced in accordance with the table set forth below. A proportionate reduction is made in the limitation of section 1.401(l)-(b)(5)(ii)(B) (and II.A.(ii)(B) of this notice) relating to the old age portion of the OASDI tax.
___________________________________________________________________
If the integration level the 5.7
________________________ percent factor
in the maximum
Is more But not more excess allowance
than than is reduced to -
____________________________________________________________________
X* 80% of TWB*** 4.3%
80% " " Y** 5.4%
____________________________________________________________________
* X = the greater of $10,000 or 20% of the TWB.
** Y = any amount more than 80% of the TWB but less than 100% of
the TWB.
*** The 1989 taxable wage base is $48,000.
EXAMPLE. Employer X maintains a profit-sharing plan that has a plan year beginning July 1 of each year. For the plan year beginning July 1, 1989, the plan uses an integration level for all participants of $30,000, which is 62.5% of the taxable wage base of $48,000 for the 1989 calendar year. Consequently, in applying the permitted disparity requirements, the 5.7% factor must be replaced by 4.3%.
III. INTEGRATION LEVEL - DEFINED BENEFIT EXCESS PLANS
A. The permitted disparity requirements applicable to defined benefit excess plans are stated in section 1.401(l)-3(b) of the regulations. One of the requirements of such section is that the excess benefit percentage may not exceed the base benefit percentage by more than the maximum excess allowance. The maximum excess allowance is defined as:
(A) With respect to employer-derived benefits provided under the plan for any year of credited service, the lesser of 3/4 of 1%, or the base benefit percentage for the plan year, and
(B) With respect to total employer-derived benefits provided under the plan for all years of credited service, the lesser of the 3/4 of 1% limitation determined under (A) multiplied by the participant's total years of credited service (not in excess of 35) or the base benefit percentage with respect to the total employer-derived benefit.
The base benefit percentage with respect to a defined benefit excess plan is the percentage of compensation at which employer- derived benefits are accrued with respect to compensation of participants at or below the integration level specified in the plan for the plan year. The excess benefit percentage with respect to a defined benefit excess plan is the percentage of compensation at which employer-derived benefits are accrued with respect to compensation of participants above the integration level specified in the plan.
The 3/4 of 1% limitation applies to benefits commencing at a participant's social security retirement age (as defined in section 415(b)(8) of the Code). If benefits commence prior to social security retirement age, the 3/4 of 1% factor is reduced depending on the age at which benefits commence and the participant's social security retirement age. The appropriate reductions are specified in section 1.401(l)-3(e) of the regulations, relating to early benefit commencement.
In addition, the 3/4 of 1% factor is applicable if the integration level for each participant is such participant's covered compensation.
Certain alternative integration levels are permitted under section 1.401(l)-3(b)(4) of the regulations. In order to use some of the alternative integration levels, it is necessary that the plan satisfy the demographic tests stated in sections 1.401(l)- 3(b)(4)(iii)(B) and (C) of the regulations. However, the use of an integration level for any participant other than such participant's covered compensation may result in an adjustment to the 3/4 of 1% factor. Rules for determining the adjustment are stated in section 1.401(l)-3(d)(1) of the regulations. Adjustments required under paragraphs (d)(l) and (e) of section 1.401(l)-3 are cumulative. (The safe harbor integration level for a plan year of a uniform dollar amount not exceeding the greater of $10,000 or one-half of the covered compensation of an individual attaining social security retirement age in the plan year does not require the use of the demographic tests and is not affected by this notice.)
B. Pursuant to this notice, the following additional alternatives for determining an integration level are acceptable provided all other permitted disparity requirements are met:
ALTERNATIVE 1
Any uniform dollar amount that is greater than the safe harbor integration level of the greater of $10,000 or one-half of the covered compensation of an individual attaining social security retirement age in the plan year and that does not exceed the taxable wage base in effect as of the beginning of the plan year is an acceptable integration level, provided the limitation on the maximum excess allowance of 3/4 of 1% is reduced to the lesser of (a) the adjusted amount determined in accordance with section 1.401(l)- 3(d)(1) of the regulations, or (b) 80% of the otherwise applicable limitation determined without regard to section 1.401(l)-3(d)(1). The reduced limitation so determined is used in place of the 3/4 of 1% limitation for all purposes in determining whether the permitted disparity rules for defined benefit excess plans are met. (Of course, any reduction to the 3/4 of 1% factor required under section 1.401(l)-3(e) must also be made.)
EXAMPLE. Employer X maintains a noncontributory defined benefit excess plan. The plan has a normal retirement age of 65. The plan uses the calendar year as its plan year. For the 1989 plan year, the plan uses an integration level of $20,000, which is 117.87% of the 1989 covered compensation of $16,968 for an individual reaching social security retirement age in 1989 (see Attachment I). Pursuant to this notice, such an integration level is acceptable without meeting the demographic tests specified in the regulations, provided the adjustment required under this alternative to the 3/4 of 1% factor is made. Because the integration level exceeds the covered compensation of an individual reaching social security retirement age in the plan year but is not more than 125% of such covered compensation, the 3/4 of 1% factor is replaced by .69% pursuant to section 1.401(l)-3(d)(1) of the regulations, relating to adjustments to the 3/4 of 1% factor when the integration level is something other than the covered compensation of each participant. The .69% factor is 92% of the 3/4 of 1% factor. Because the lesser of 80% and 92% is 80%, the 3/4 of 1% factor is reduced to .6 of 1% (80% of 3/4 of 1%) under this alternative. Such factor applies to benefits commencing at age 65 for a participant with a social security retirement age of 65. In determining projected benefits for participants with social security retirement ages of 66 or 67, the applicable factors for benefits commencing at age 65 are, respectively, .56 of 1% (80% of .7 of 1%) and .52 of 1% (80% of .65 of 1%).
Of course, an integration level of a uniform dollar amount may be used without the reduction in the 3/4 of 1% factor required under this alternative provided the demographic tests of both sections 1.401(l)-3(b)(4)(iii)(B) and (C) are met.
ALTERNATIVE 2 (FROZEN COVERED COMPENSATION TABLE)
An amount for a participant equal to a participant's covered compensation for a plan year prior to the current plan year is an acceptable integration level for the participant, provided the plan year used is the same for all participants and is not earlier than the later of (1) the plan year 5 years prior to the current plan year, and (2) the plan year beginning in 1989. This alternative may be used without satisfying the demographic tests of section 1.401(l)- 3(b)(4)(iii)(B) and (C) of the regulations. In addition, no adjustment to the 3/4 of 1% factor is required under either section 1.401(l)-3(d)(1) of the regulations or this notice. However, pursuant to section 1.401(l)-1(c) of the regulations, any change in the integration level is subject to sections 411(d)(6) and 411(b)(1)(G) of the Code regarding impermissible reductions in accrued benefits. (Plans must include language that would prevent violations of sections 411(d)(6) or 411(b)(1)(G) resulting from changes in integration levels.)
EXAMPLE. Employer X maintains a noncontributory defined benefit excess plan. The plan has a calendar plan year. For the 1989 plan year, the plan provides that the integration level for any participant is the covered compensation of the participant determined using the 1989 covered compensation table. The plan may continue to use the 1989 covered compensation table (provided the terms of the plan so specify) for each subsequent plan year through the 1994 plan year, without any adjustment to the 3/4 of 1% factor for the use of an integration level other than current covered compensation and without meeting the demographic tests of the regulations. (Of course, the adjustments of section 1.401(l)-3(e) relating to benefits commencing prior to the social security retirement age must continue to be made.) To meet the requirements of section 401(l) of the Code (and this Alternative) the integration level would have to be changed for the 1995 plan year. Such a change in the integration level in the 1995 plan year is subject to sections 411(d)(6) and 411(b)(1)(G) of the Code regarding reductions in accrued benefits pursuant to 1.401(l)-1(c) of the regulations.
IV. DEFINED BENEFIT OFFSET PLANS
A. The permitted disparity requirements applicable to defined benefit offset plans are stated in section 1.401(l)-3(c) of the regulations. A defined benefit offset plan is a defined benefit plan that is not an excess plan and that provides that each participant's employer- derived benefit is reduced or offset by an amount specified (either directly or by formula) in the plan or by a specified percentage of the participant's final average compensation. A participant's final average compensation, as of a plan year, is the average of the participant's annual compensation from the employer for the 3- consecutive-year period ending with or within the plan year. For this purpose, compensation in excess of the taxable wage base for any year may not be considered.
The permitted disparity requirements applicable to defined benefit offset plans are stated in section 1.401(l)-3(c) of the regulations. One of the requirements of such section is that no participant's benefit is reduced by an offset that exceeds the maximum offset allowance.
The maximum offset allowance for any plan year is equal to:
(A) With respect to employer-derived benefits provided under the plan for any year of credited service, the lesser of
(1) 3/4 of 1% multiplied by the participant's final average compensation (up to covered compensation), or
(2) one-half of the employer-derived benefit that would be provided, prior to the application of the offset, with respect to the participant's average annual compensation not in excess of the participant's final average compensation (up to covered compensation), and
(B) With respect to total employer-derived benefits provided under the plan for all years of credited service, the offset determined under (A)(1), above, multiplied by the participant's total years of credited service (not in excess of 35).
The 3/4 of 1% factor is applicable to benefits commencing at a participant's social security retirement age (as defined in section 415(b)(8) of the Code). If benefits commence prior to social security retirement age, the 3/4 of 1% factor is reduced depending on the age at which benefits commence and the participant's social security retirement age. The appropriate reductions are specified in section 1.401(l)-3(e) of the regulations.
In addition, the 3/4 of 1% factor is applicable if the offset for each participant is based on such participant's final average compensation up to covered compensation. Certain alternatives to the use of a participant's covered compensation in determining the offset applicable to a participant are permitted under section 1.401(l)- 3(c)(4) of the regulations. In order to use some of the alternatives, it is necessary that the plan satisfy the demographic tests stated in sections 1.401(l)-3(c)(4)(iii)(B) and (C) of the regulations. (The safe harbor offset in the regulations based on final average compensation up to a uniform dollar amount not exceeding the greater of (1) $10,000 or (2) one-half of the covered compensation of an individual attaining social security retirement age in the plan year does not require the use of the demographic tests and is not affected by this notice). However, if the offset to a participant's benefit is based on final average compensation up to an amount other than the participant's covered compensation, an adjustment to the 3/4 of 1% factor may need to be made. Rules for determining the adjustment are stated in section 1.401(l)-3(d)(2) of the regulations. Adjustments required under paragraphs (d)(2) and (e) of section 1.401(l)-3 are cumulative.
B. Pursuant to this notice, provided all other permitted disparity requirements are met, the offset to a participant's benefit may be determined based on a participant's final average compensation up to the amount specified in the following alternatives:
ALTERNATIVE 1
Any uniform dollar amount that is greater than the safe harbor amount of the greater of $10,000 or one-half of the covered compensation of an individual attaining social security retirement age in the plan year and that does not exceed the taxable wage base in effect as of the beginning of the plan year, provided the 3/4 of 1% factor is reduced to the lesser of (a) the adjusted factor determined in accordance with section 1.401(l)-3(d)(2) of the regulations, or (b) 80% of the otherwise applicable limitation determined without regard to section 1.401(l)-3(d)(2). The reduced limitation is used in place of the 3/4 of 1% limitation for all purposes in determining whether the permitted disparity rules are satisfied. In addition, any reduction to the 3/4 of 1% factor required under paragraph 1.401(l)-3(e) must also be made.
Of course, an offset based on final average compensation up to a uniform dollar amount may be used without the reduction of the 3/4 of 1% factor required under this alternative provided the tests of both paragraphs 1.401(l)-3(c)(4)(iii)(B) and (C) are met.
ALTERNATIVE 2 (FROZEN COVERED COMPENSATION TABLE)
An amount for a participant equal to the participant's covered compensation for a plan year prior to the current plan year, provided the plan year used is the same for all participants and is not earlier than the later of (1) the plan year 5 years prior to the current plan year, or (2) the plan year beginning in 1989. This alternative may be used without satisfying the demographic tests of sections 1.401(l)-3(c)(4)(iii)(B) and (C) of the regulations. In addition, no adjustment to the 3/4 of 1% factor is required under either section 1.401(l)-3(d)(2) of the regulations or this notice. However, pursuant to section 1.401(l)-1(c) of the regulations, any change in the offset is subject to sections 411(d)(6) and 411(b)(1)(G) of the Code regarding impermissible reductions in accrued benefits. (Plans must include language that would prevent violations of section 411(d)(6) or 411(b)(1)(G) resulting from changes in offsets.)
V. RELIANCE WITHOUT ANNUAL DEMOGRAPHIC TESTS
A. Section 1.401(l)-3(b)(4) of the regulations provides alternatives for specifying an integration level in a defined benefit excess plan. Section 1.401(l)-3(c)(4) provides alternatives for specifying an offset in a defined benefit offset plan. Some of the alternatives require that the plan satisfy certain demographic tests stated in sections 1.401(l)-3(b)(4)(iii)(B) and (C) of the regulations for excess plans and sections 1.401(l)-3(c)(4)(iii)(B) and (C) for offset plans.
Section 1.401(l)-3(g) of the regulations states that benefits attributable to employee contributions in a defined benefit excess plan or a defined benefit offset plan are not taken into account in applying the permitted disparity requirements. Two methods were provided for determining the portion of a participant's benefit deemed attributable to employee contributions. The method in section 1.401(l)-3(g)(2) involved the use of a uniform factor. The proper uniform factor for a plan and the ability to use a uniform factor depended on the satisfaction of certain demographic standards.
B. An individually designed plan that (1) uses an integration level in an excess plan or an offset in an offset plan requiring the satisfaction of the demographic tests of the regulations, or (2) uses a uniform factor pursuant to the demographic standards of section 1.401(l)-3(g) of the regulations for determining the portion of a participant's benefits deemed attributable to employee contributions, and (3) receives a favorable determination letter based on employee census data for a particular plan year may rely on the favorable letter for subsequent plan years unless, effective for such year, there is a plan amendment or change in law affecting the application of the permitted disparity requirements to the plan. However, the reliance provided in this notice is not applicable if there is a significant change in material fact, such as a significant change in the workforce, in subsequent years. In addition, the reliance provided in this notice with respect to the use of a uniform factor for determining the portion of a participant's benefits deemed attributable to employee contributions does not apply to plan years ending after the sixth anniversary of the last day of the plan year for which the favorable determination letter was obtained.
VI. CAREER AVERAGE PLANS
The final regulations will also provide that certain types of career average defined benefit plans that are not covered by the proposed regulations can satisfy the requirements of section 401(l). The types of career average plans are those that determine the retirement benefit of a participant based on each year of service separately and sum the benefit for each year to determine the total retirement benefit. If such plans are excess plans, the integration level for such plans may either be (1) the covered compensation of each participant for the particular year, (2) a uniform dollar amount for all participants that does not exceed the greater of $10,000 or one-half of the covered compensation of an individual who attains social security retirement age in the plan year, (3) a stated dollar amount uniformly applicable to all participants that does not exceed the taxable wage base for each year, provided the demographic tests specified in sections 1.401(l)-3(b)(4)(iii)(B) and (C) of the regulations are met, or (4) a uniform percentage (greater than 100 percent) of each participant's covered compensation (but not in excess of the taxable wage base in effect as of the beginning of the plan year).
If the integration level applicable to a participant for a plan year is not the participant's covered compensation, the adjustments found in the regulations will have to be made. Thus, for example, if the integration level is the taxable wage base, the adjustments in section 1.401(l)-3(d)(1) of the regulations will have to be made to the 3/4 of 1 percent factor.
In addition to the integration levels specified above, a career average plan may determine an integration level using Alternatives I or II of section III.B. of this notice, provided that the adjustments to the 3/4 of 1% factor described in the alternatives are made.
EXAMPLE. Plan A provides that the retirement benefit a participant earns for each year of service is 1 percent of the participant's compensation for that year not in excess of the taxable wage base for such year, plus 1 3/4 percent of the participant's compensation in excess of the taxable wage base for such year. Assume all participants have a social security retirement age of 65. In order to satisfy the requirements of the regulations, the 3/4 of 1 percent difference will have to be reduced as provided in regulations for an integration level in excess of covered compensation.
Similar rules apply to the types of career average plans described above that are offset plans.
VII. EARLY RETIREMENT ADJUSTMENTS
Section 1.401(l)-3(e) of the proposed regulations provides adjustments to the 3/4 of 1 percent factor for benefits payable under a defined benefit excess or a defined benefit offset plan prior to social security retirement age. Section 1.401(l)-3(e)(3) of the proposed regulations provided tables showing the reductions in the 3/4 of 1 percent factor applicable to benefits commencing on or after age 55 for a participant who has a social security age of 65, 66, or 67. The tables in the final regulations will be revised to use a reduction of 1/15 for each of the first five years that the benefits are payable before social security retirement age and a reduction of 1/30 for each of the next five years that the benefits are payable before social security retirement age, with an actuarial reduction used for any additional years. As revised the tables are as follows:
SOCIAL SECURITY RETIREMENT AGE 67
Age at which benefits Annual factor in maximum
commence excess allowance and
maximum offset allowance
(percent)
66 0.70
65 0.65
64 0.60
63 0.55
62 0.50
61 0.475
60 0.45
59 0.425
58 0.40
57 0.375
56 0.344
55 0.316
SOCIAL SECURITY RETIREMENT AGE 66
Age at which benefits Annual factor in maximum
commence excess allowance and
maximum offset allowance
(percent)
65 0.70
64 0.65
63 0.60
62 0.55
61 0.50
60 0.475
59 0.45
58 0.425
57 0.40
56 0.375
55 0.344
SOCIAL SECURITY RETIREMENT AGE 65
Age at which benefits Annual factor in maximum
commence excess allowance and
maximum offset allowance
(percent)
64 0.70
63 0.65
62 0.60
61 0.55
60 0.50
59 0.475
58 0.45
57 0.425
56 0.40
55 0.375
VIII. EARLY RETIREMENT -- EXCESS PLANS
Section 1.401(l)-3(b)(5) of the proposed regulations provides that in a defined benefit excess plan any optional form of benefit, ancillary benefit, actuarial factor or other right, benefit or feature provided under the plan with respect to employer-derived benefits attributable to compensation above the integration level is also provided under the plan on the same basis with respect to employer-derived benefits attributable to compensation at or below the integration level. This notice clarifies that such rights, benefits, or features provided with respect to employer-derived benefits attributable to compensation at or below the integration level may be provided either on the same basis or at least as favorable a basis as that provided with respect to employer derived benefits attributable to compensation above the integration level.
EXAMPLE. Employer X maintains a noncontributory defined benefit excess plan with a normal retirement age of 65. The formula for determining benefits under the plan for participants with a social security retirement age of 65 provides a normal retirement benefit (for each year of credited service up to 35 years) of 1.25% of the participant's average annual compensation up to covered compensation plus 2.0% of the participant's average annual compensation in excess of the participant's covered compensation. (Such benefit may also be described as 1.25% of average annual compensation plus .75% of average annual compensation in excess of covered compensation.) The plan also provides an early retirement benefit at age 55 of 1.25% of average annual compensation plus .375% of average annual compensation in excess of covered compensation for each year of credited service up to 35 years. Such early retirement benefit meets the requirements of section 1.401(l)-3(b)(5) of the regulations because the early retirement factor applied to the benefit attributable to compensation below the integration level is at least as favorable as the factor applied to the benefit attributable to compensation above the integration level.
IX. EARLY RETIREMENT -- OFFSET PLANS
Section 1.401(l)-3(e) of the regulations provides that in the case of a benefit payable to a participant commencing at an age before the participant's social security retirement age, the 3/4 of 1 percent factor in the maximum offset allowance is reduced to at least a specified amount. Pursuant to this notice, in the case of a benefit commencing before social security retirement age, an offset plan satisfies the required reduction under paragraph 1.401(l)-3(e)(2) of the regulations if the benefit provided under the formula prior to the application of the offset is reduced by an amount (expressed as a percentage of average annual compensation) that is not less than the amount by which the offset must be reduced (expressed as a percentage of compensation used for determining the offset).
EXAMPLE 1. Employer Y maintains a noncontributory defined benefit offset plan with a normal retirement age of 65. Pursuant to the formula for determining benefits under the plan for participants with a social security retirement age of 65, a participant accrues a normal retirement benefit (for each year of credited service up to 35 years) of 2% of the participant's average annual compensation offset by .75% of the participant's final average compensation (up to covered compensation). The plan also provides that the offset will not exceed 50% of the benefit the participant would have accrued under the plan for any plan year with respect to the participant's average annual compensation (up to covered compensation). The plan provides an early retirement benefit at age 55 for each year of credited service up to 35 years of 2% of average annual compensation offset by .375% of final average compensation (up to covered compensation). Thus, the offset portion of the formula is reduced for early retirement in accordance with the regulations (as modified by this notice), but the formula as stated prior to the application of the offset is not reduced for early retirement. Such early retirement benefit is in violation of the requirements of section IX of this notice. In addition, such early retirement benefit is larger than the normal retirement benefit not reduced for early retirement. Because the larger early retirement benefit is not taken into account in determining accruals prior to early retirement age, the plan's formula violates the accrual requirements of section 411 of the Code.
EXAMPLE 2. Assume the same facts as in Example 1 except that the early retirement benefit at age 55 for each year of credited service up to 35 years is 1.625% of average annual compensation offset by .375% of final average compensation (up to covered compensation).
Because the benefit (prior to the application of the offset) is reduced by .375% (from 2.0% to 1.625%) of average annual compensation and this reduction is the same (determined as .75% to .375%) as that made in the offset expressed as a percentage of compensation used in determining the offset (final average compensation up to covered compensation), the early retirement benefit meets the requirements of section IX of this notice.
ADMINISTRATIVE PRONOUNCEMENT
This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.
FOR FURTHER INFORMATION
The principal author of this notice is John Wade of the Employee Plans Technical and Actuarial Division. For further information regarding this notice, call (202) 566-6783 between 1:30 and 4:00 p.m. Eastern time (not a toll free number). Mr. Wade's number is (202) 535-6228 (also not a toll free number).
ATTACHMENT I
1989 COVERED COMPENSATION TABLE
CALENDAR YEAR OF 1989 COVERED COMPENSATION
YEAR OF SOCIAL SECURITY
BIRTH RETIREMENT AGE TABLE II TABLE I
1907 1972 4488 4200
1908 1973 4704 4800
1909 1974 5004 4800
1910 1975 5316 5400
1911 1976 5664 5400
1912 1977 6060 6000
1913 1978 6480 6600
1914 1979 7044 7200
1915 1980 7692 7800
1916 1981 8460 8400
1917 1982 9300 9600
1918 1983 10236 10200
1919 1984 11232 11400
1920 1985 12276 12000
1921 1986 13368 13200
1922 1987 14520 14400
1923 1988 15708 15600
1924 1989 16968 16800
1925 1990 18228 18000
1926 1991 19476 19200
1927 1992 20724 21000
1928 1993 21972 22200
1929 1994 23208 23400
1930 1995 24444 24600
1931 1996 25680 25800
1932 1997 26916 27000
1933 1998 28152 28200
1934 1999 29388 29400
1935 2000 30612 30600
1936 2001 31800 31800
1937 2002 32988 33000
1938 2004 35280 35400
1939 2005 36432 36600
1940 2006 37572 37800
1941 2007 38688 38400
1942 2008 39756 39600
1943 2009 40752 40800
1944 2010 41712 42000
1945 2011 42648 42600
1946 2012 43548 43800
1947 2013 44412 44400
1948 2014 45132 45000
1949 2015 45768 45600
1950 2016 46284 46200
1951 2017 46740 46800
1952 2018 47088 46800
1953 2019 47376 47400
1954 2020 47616 47400
1955 2022 47904 48000
1956 OR LATER 2023 OR LATER 48000 48000
ATTACHMENT II
1989 TRANSITIONAL COVERED COMPENSATION TABLE
CALENDAR YEAR OF 1989 COVERED COMPENSATION
YEAR OF SOCIAL SECURITY
BIRTH RETIREMENT AGE TABLE II TABLE I
1908 1973 4488 4200
1909 1974 4704 4800
1910 1975 5004 4800
1911 1976 5316 5400
1912 1977 5664 5400
1913 1978 6060 6000
1914 1979 6480 6600
1915 1980 7044 7200
1916 1981 7692 7800
1917 1982 8460 8400
1918 1983 9300 9600
1919 1984 10236 10200
1920 1985 11232 11400
1921 1986 12276 12000
1922 1987 13368 13200
1923 1988 14520 14400
1924 1989 15708 15600
1925 1990 16968 16800
1926 1991 18228 18000
1927 1992 19476 19200
1928 1993 20724 21000
1929 1994 21972 22200
1930 1995 23208 23400
1931 1996 24444 24600
1932 1997 25680 25800
1933 1998 26916 27000
1934 1999 28152 28200
1935 2000 29388 29400
1936 2001 30612 30600
1937 2002 31800 31800
1938 2004 34128 34200
1939 2005 35280 35400
1940 2006 36432 36600
1941 2007 37572 37800
1942 2008 38688 38400
1943 2009 39756 39600
1944 2010 40752 40800
1945 2011 41712 42000
1946 2012 42648 42600
1947 2013 43548 43800
1948 2014 44412 44400
1949 2015 45132 45000
1950 2016 45768 45600
1951 2017 46284 46200
1952 2018 46740 46800
1953 2019 47088 46800
1954 2020 47376 47400
1955 2022 47784 48000
1956 2023 47904 48000
1957 OR LATER 2024 OR LATER 48000 48000
- Institutional AuthorsInternal Revenue Service
- Cross-Reference
EE-159-86; for the full text of the proposed regulations, see the
- Code Sections
- Subject Area/Tax Topics
- Index Termsqualified planintegration levelpension plan, Internal Revenue CodeSocial Securitypermitted disparity
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 1989-4477
- Tax Analysts Electronic Citation1989 TNT 117-8