n-05-87.pdf

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Part III – Administrative, Procedural and Miscellaneous

Section 415 Regulations and Preexisting Plans

Notice 2005-87

Purpose
This notice provides that when the final regulations under § 415 of the
Internal Revenue Code are published, the grandfather rule of § 1.415(a)-1(g)(3)
of the proposed regulations for preexisting benefits in defined benefit plans will
be expanded.
Background
Section 415 of the Code provides various limitations on benefits under
qualified defined benefit plans and annual additions under qualified defined
contribution plans. The proposed regulations under § 415, issued May 31, 2005,
provide comprehensive guidance regarding the limitations of § 415, including
updates to the regulations for numerous statutory changes. The regulations are
proposed to apply to limitation years beginning on or after January 1, 2007.
Section 1.415(a)-1(g)(3) of the proposed regulations provides a
grandfather rule for preexisting benefits under which a defined benefit plan will be
considered to satisfy the limitations of § 415(b) for a participant with respect to
benefits accrued or payable under the plan as of the effective date of the final
regulations. This grandfather rule applies only to benefits accrued pursuant to
plan provisions that were adopted and in effect on May 31, 2005, and only if such
plan provisions meet the requirements of statutory provisions, regulations, and
other published guidance in effect on May 31, 2005.
Commentators have expressed concerns about the grandfather provision
of the proposed regulations. Commentators asserted that plan sponsors should
not be required to apply the final regulations before their effective date and noted
that the May 31, 2005, date would effectively require them to apply the final
regulations retroactively (since any benefit provided by a defined benefit plan
adopted after May 31, 2005, or benefits attributable to a post-May 31, 2005,
amendment will not be covered by the grandfather rule).
Expansion of Grandfather Rule for Preexisting Plans

2
The Treasury and Service intend that, when the regulations under § 415
are finalized, the May 31, 2005, date that is in the grandfather rule in §1.415(a)-
1(g)(3) will be replaced with a date that is not earlier than the date of publication
of the final regulations. Thus, in the interim period before final regulations are
published, plan sponsors who adopt new plans and plan amendments will not be
subject to the interpretations set forth in the final regulations with respect to
benefits accrued prior to the effective date of the final regulations, if the plan
provisions relating to § 415(b) meet the requirements of statutory provisions, final
regulations and other published guidance in effect when the new plan or the new
amendment is adopted. Additionally, in the interim period before final regulations
are published, plan provisions will not be treated as failing to satisfy the
requirements of § 415 merely because the plan’s definition of compensation for a
limitation year that is used for purposes of applying the limitations of section 415
reflects compensation for a plan year that is in excess of the limitation under
section 401(a)(17) that applies to that plan year.
Drafting Information
The principal author of this notice is Kathleen Herrmann of the Employee
Plans, Tax Exempt and Government Entities Division. For further information
regarding this notice, please contact the Employee Plans taxpayer assistance
telephone service at (877) 829-5500 (a toll-free number) between the hours of
8:00 a.m. and 6:30 p.m. Eastern Time, Monday Through Friday. Ms. Herrmann
can be reached at (202) 283-9888 (not a toll-free number).