Final 415 Regulations Contain a Few Surprises

In April, the IRS issued final regulations under Section 415 of the Internal Revenue Code, which places limits on annual additions to defined contribution plans. Generally, the regulations simply codify existing requirements, but they also made some changes worth noting. First, the definition of annual compensation has been clarified to include post-severance payments paid within 2 1/2 months following severance or the end of the limitation year. Regular pay, overtime, bonuses, commissions, etc., must be counted, but other forms of payments, such as for accrued sick leave or military service, are optional. Other types of severance pay, including parachute payments, deferred compensation triggered by severance, and severance pay itself, are not included. In a significant change, the rules state that the annual addition dollar amount must be prorated if the plan is terminated before the end of the limitation year.