journal of pension planning & compliance - Kluwer Law International

SUMMARY OF CODE SECTION 415(M) PLANS / 15
otherwise would have been contributed by the employer on behalf of
such participants pursuant to the money purchase plan but which were
not contributed because of the limitations on contributions imposed
by Code Section 415. No employee contributions to the excess benefit
arrangement were allowed. Participation in the excess benefit
arrangement was automatic and mandatory for money purchase plan
participants whose plan contributions exceeded Code Section 415(c).
Participants could not make an election at any time to defer compensation.
The trust for the excess benefit arrangement was maintained as a
grantor trust (separate from the money purchase plan’s trust) for the
purpose of holding the contributions made by the employer under the
arrangement, paying benefits under the arrangement, and paying any
administrative expenses.
The IRS concluded, among other things, that the excess benefit
arrangement qualified under Code Section 415(m)(3) as a qualified
governmental excess benefit arrangement, that the benefits under the
arrangement would be included in the gross income of a recipient in
the year in which such benefits were actually paid or otherwise made
available to the recipient, that the contribution limits in Code Sections
457(b)(2) and 457(c) did not apply to contributions under the arrangement,
that contributions to the arrangement would not be taken into
account in determining whether any other employer plan was an eligible
deferred compensation plan under Code Section 457(b), and that
participants in the arrangement would not be taxed pursuant to Code
Section 457(f) on any amounts contributed to or held or distributed
under the arrangement by the trust.
A question that is not answered by these PLRs or other PLRs that
the IRS has issued is whether the QEBA benefits are subject to FICA or
whether they are exempt from FICA as “exempt governmental deferred
compensation plans” as described in Code Section 3121(v)(3).
These letter rulings cannot be cited as precedent, but they are
examples of how the requirements of the Code, revenue rulings, and
Treasury Regulations have been applied in recent situations in which
QEBAs were established by governmental entities.
A QEBA may be an attractive option for governmental employers.
It offers flexibility in the sense that it can be drafted to meet an employer’s
specific needs. A QEBA also creates goodwill between the employer
and plan participants because participants are being compensated for
benefits they would not otherwise be able to receive under the retirement
plan because of the limits under Code Section 415, notwithstanding
the provisions of the applicable statutes. In some cases, the QEBA
is a necessary tool to ensure compliance with state or local law in the
face of the Code Section 415 limits. Given recent IRS statements about