January 28, 2000

The Honorable Charles O. Rossotti
Internal Revenue Service
Room 3000
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Subject: Notice 99-44 and the Repeal of Section 415(e)

Dear Commissioner Rossotti:

I am writing on behalf of the Association of Private Pension and Welfare Plans (APPWP - The Benefits Association) regarding Notice 99-44, which provides guidance on the repeal of Internal Revenue Code (the Code) Section 415(e) limitations on benefits and contributions under qualified retirement plans. APPWP is a public policy organization representing principally Fortune 500 companies and other organizations that assist companies of all sizes in providing benefits to employees. Collectively, APPWP's members either sponsor directly or provide services to retirement and health plans that cover more than 100 million Americans. APPWP respectfully requests the IRS to provide additional guidance on the issues described below.

Section 415 of the Code imposes limitations on contributions and benefits under qualified plans. Section 415(e) imposed limitations that apply to an individual who participates in both a defined benefit plan and a defined contribution plan maintained by the same employer. Section 1452(a) of the Small Business Jobs Protection Act of 1996 (SBJPA) repealed §415(e) of the Code, effective for limitation years beginning on or after January 1, 2000. Notice 99-44, 1999-35 I.R.B., was issued on August 30, 1999, and the notice provides guidance as to benefit increases that may be provided upon repeal of §415(e), plan amendments that may be adopted, and other issues related to the repeal of §415(e).

APPWP supported the repeal of §415(e), and we appreciate and applaud the guidance provided to date by the IRS. However, many plan sponsors are facing troubling issues as they adjust their plans and benefits for the repeal, and they are anxious to receive as much guidance as they can.

APPWP believes that certain issues related to the repeal of §415(e) have not been addressed in Notice 99-44 and that, in the absence of guidance, these issues will impose substantial burdens on plan administrators. Specifically, there are two issues that merit further guidance. The first issue involves the calculation of benefits where the participant's accrued benefit as of the effective date of certain significant law changes was restricted by the rules of §415(e). The second issue involves the effect of §401(a)(26) on plan amendments adopting the repeal of §415(e). These issues are discussed in more detail below.

1. Certain law changes have reduced the benefits payable from qualified pension plans. As of January 1, 1983, the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) reduced the §415(b) defined benefit limit from $136,425 to $90,000. Effective for the 1989 plan year, §401(a)(17) restricted pensionable compensation to $200,000. Effective for the 1994 plan year, the §401(a)(17) limit was further reduced to $150,000. Benefits accrued immediately prior to each of these changes are protected. Under the TEFRA change, benefits are frozen until subsequent increases in the §415(b) limit permit future accruals. Under the two §401(a)(17) changes, future accruals, restricted by the reduced compensation limits, may be added on to the protected benefits. How should plan administrators calculate benefits after the repeal of §415(e) given that the protected benefit as of the effective date of any of these prior law changes would have been restricted by the rules of §415(e) then in effect?

   APPWP recommends that the IRS permit calculations to be made as if §415(e) never existed as long as plans comply with all other applicable limitations and rules. Any other approach would impose an unreasonable administrative burden on plan sponsors and would run counter to the intent of the §415(e) repeal. Reflecting §415(e) in the calculation of protected benefits could potentially force plan sponsors to continue to maintain the §415(e) database for an extended period of time in order to calculate and update the defined contribution plan fraction for affected participants. Elimination of this database maintenance was one of the main purposes of the §415(e) repeal.

   A related issue, which may be affected by the repeal of §415(e), is how ad-hoc retiree cost-of-living adjustments (COLA) affect participants with protected benefits. For example, if a retired participant's accrued benefit is based, in part, on pay in excess of the 401(a)(17) limits, may that participant receive a cost of living adjustment on the entire benefit to the extent otherwise permitted by §415? Does the answer to this question change if the protected benefit was affected by §415(e)? If a complete pay history is unavailable for all employees retiring before 1994, some of whom may have earned in excess of the 401(a)(17) limits, does this preclude the sponsor from implementing an across the board COLA?

   APPWP recommends that the IRS permit nondiscriminatory cost of living increases for retirees as long as the resulting benefits do not exceed the limitations of §415 currently in effect.

2. Granting increases to retirees to reflect the repeal of §415(e) can result in problems under §401(a)(26). In general, §401(a)(26) requires that any plan amendment improving benefits for former participants must benefit at least the lesser of 50 former employees or 40 percent of all former employees. We understand that some IRS representatives have indicated that a plan could fail to comply with §401(a)(26) if increases attributable to the 415(e) repeal affect an insufficient number of former participants. In such case, the employer would have to grant de minimis increases to additional former participants solely for the purpose of passing §401(a)(26). Such de minimis increases would not provide meaningful benefits to those affected, and the time and expense of providing such increases outweigh any gain from them.

   APPWP recommends that the IRS provide relief from the application of §401(a)(26) when an employer provides a benefit increase that satisfies the guidelines of Notice 99-44.

APPWP respectfully requests that the IRS provide additional guidance relating to the situations described above. We would be pleased to provide any assistance in this matter. Please do not hesitate to contact me or James Delaplane, APPWP's Vice President, Retirement Policy, if we may be of further assistance.

Sincerely,

James A. Klein
President