102 KAR 1:230 - Limitations on benefits
RELATES TO: KRS 161.611, 26 C.F.R. 1.415, 26 U.S.C. 125, 132(f)(4), 402, 414, 415, 417, 457, 3401, 6041, 6051, 6052
NECESSITY, FUNCTION AND CONFORMITY: KRS 161.310(1) requires the board of trustees to promulgate administrative regulations for the administration of the funds of the retirement system and for the transaction of business. KRS 161.716 requires the board of trustees to promulgate administrative regulations as are necessary to remove any conflicts with federal laws and to protect the interests of the members and survivors of members of the retirement system. This administrative regulation establishes the limitations on benefits required by 26 U.S.C. 415.
Section 1. Definitions.
(1) "415(b) limit" means the limitation on
benefits established by
26
U.S.C. 415(b).
(2) "415(c) limit" means the limitation on
annual additions established by
26
U.S.C. 415(c).
(3) "Annual benefit" means, for purposes of
the 415(b) limit, a benefit payable annually in the form of a straight life
annuity (without ancillary benefits) without regard to the benefit attributable
to after-tax employee contributions (except pursuant to
26
U.S.C. 415(n)) and to
rollover contributions (as defined in
26
U.S.C. 415(b)(2)(A)) . The
"benefit attributable" is determined in accordance with 26 C.F.R.
1.415(b).
(4) "Defined benefit
dollar limitation" means $160,000, as adjusted, effective January 1 each year,
in the manner established by the Secretary of the United States Treasury
pursuant to
26
U.S.C. 415(d), and payable
in the form of a straight life annuity. A limitation as adjusted under
26
U.S.C. 415(d) applies to
limitation years for which the adjustment applies.
(5) "Limitation year" means the calendar
year.
(6) "Nonqualified service
credit" means, effective for permissive service credit contributions made in
limitation years beginning after December 31, 1997, permissive service credit
other than that allowed with respect to:
(a)
Service as an employee of the Government of the United States or any state,
agency, or political subdivision thereof (other than military service or
service for credit that was obtained as a result of a repayment described in
26
U.S.C. 415(k)(3);
(b) Service as an employee, other than as an
employee described in paragraph (a) of this subsection, of an education
organization described in
26 U.S.C.
170(b)(1)(A)(ii) that is a
public, private, or sectarian school that provides elementary education or
secondary education through grade twelve (12), or a comparable level of
education as determined pursuant to the applicable law of the jurisdiction in
which the service was performed;
(c) Service as an employee of an association
of employees described in paragraph (a) of this subsection; or
(d) Military service, other than qualified
military service pursuant to
26 U.S.C.
414(u), recognized by the
retirement system.
Section
2. Adjustments and Limitations.
(1) If the member has fewer than ten (10)
years participation in the plan, the defined benefit dollar limitation shall be
multiplied by a fraction.
(a) The numerator
shall be the number of years (or part thereof) of participation in the plan,
and the denominator shall be ten (10).
(b) The reduction established in this
subsection shall not apply to preretirement death and disability
benefits.
(2) If the
benefit of a member begins prior to age sixty-two (62), and because the plan
provides an immediately commencing straight life annuity payable both at age
sixty-two (62) and the age of benefit commencement, the defined benefit dollar
limitation shall be the lesser of paragraph (a) or (b) of this subsection:
(a) The actuarial equivalent (at the earlier
age) of the defined benefit dollar limitation (adjusted pursuant to subsection
(1) of this section if necessary), with actuarial equivalence computed using a
five (5) percent interest rate and the applicable mortality table for the
annuity starting date as specified by the system actuary (and expressing the
member's age in completed calendar months as of the annuity starting date);
or
(b) The defined benefit dollar
limitation (adjusted pursuant to subsection (1) of this section if necessary)
multiplied by a ratio of the annual amount of the immediately commencing
straight life annuity pursuant to the plan at the member's annuity starting
date to the annual amount of the immediately commencing straight life annuity
pursuant to the plan at age sixty-two (62), both determined without applying
the 415(b) limit.
1. Any decrease in the
defined benefit dollar limitation determined in accordance with this subsection
shall not reflect a mortality decrement if benefits are not forfeited upon the
death of the member.
2. If any
benefits are forfeited upon death, the full mortality decrement shall be taken
into account.
(3) The reductions provided for in subsection
(2) of this section shall not apply to preretirement disability benefits or
preretirement death benefits.
(4)
If the benefit of a member begins after the member attains age sixty-five (65),
and because the plan provides an immediately commencing straight life annuity
payable both at age sixty-five (65) and the age of benefit commencement, the
defined benefit dollar limitation shall be the lesser of paragraph (a) or (b)
of this subsection:
(a) The actuarial
equivalent (at the later age) of the defined benefit dollar limitation
(adjusted pursuant to subsection (1) of this section if necessary), with
actuarial equivalence computed using a five (5) percent interest rate
assumption and the mortality table specified by the system actuary (and
expressing the member's age based on completed calendar months as of the
annuity starting date); or
(b) The
defined benefit dollar limitation (adjusted pursuant to subsection (1) of this
section if necessary), multiplied by the ratio of the annual amount of the
adjusted immediately commencing straight life annuity pursuant to the plan at
the member's annuity starting date to the annual amount of the adjusted
immediately commencing straight life annuity pursuant to the plan at age
sixty-five (65), both determined without applying the 415(b) limit. For this
purpose, the adjusted immediately commencing straight life annuity pursuant to
the plan at the member's annuity starting date shall be the annual amount of
such annuity payable to the member, computed disregarding the member's accruals
after age sixty-five (65) but including actuarial adjustments even if those
actuarial adjustments are used to offset accruals, and the adjusted immediately
commencing straight life annuity pursuant to the plan at age sixty-five (65)
shall be the annual amount of the annuity that would be payable pursuant to the
plan to a hypothetical member who is age sixty-five (65) and has the same
accrued benefit as the member.
(5) If the benefit pursuant to the retirement
system is other than an annual benefit, then the benefit shall be adjusted so
that it is the equivalent of the annual benefit, using factors established in
26 C.F.R. 1.415(b).
(6) If the form
of benefit without regard to the automatic benefit increase feature is not a
straight life annuity or a qualified joint and survivor annuity, then
subsection (5) of this section shall be applied by either reducing the section
415(b) limit applicable at the annuity starting date or adjusting the form of
benefit to an actuarially equivalent amount determined using the assumptions
established in 26 C.F.R. 1.415(b)-1(c)(2)(ii) that takes into account the
additional benefits pursuant to a benefit paid in a form to which
26
U.S.C. 417(e)(3) does not
apply, a monthly benefit, the actuarially equivalent straight life annuity
benefit that is the greater of (or the reduced 415(b) limit applicable at the
annuity starting date that is the "lesser of", if adjusted in accordance with
the assumptions established in paragraph (a) or (b) of this subsection):
(a) The annual amount of the straight life
annuity (if any) payable to the member pursuant to the retirement system
commencing at the same annuity starting date as the form of benefit to the
member; or
(b)
1. The annual amount of the straight life
annuity commencing at the same annuity starting date that has the same
actuarial present value as the form of benefit payable to the member, computed
using a five (5) percent interest assumption (or the applicable statutory
interest assumption) and:
2.
a. For limitation years prior to January 1,
2009, the applicable mortality tables described in 26 C.F.R. 1.417(e)-1(d)(2);
and
b. For limitation years after
December 31, 2008, the applicable mortality tables described in
26
U.S.C.
417(e)(3)(B).
(7) Effective on and
after January 1, 2009, for purposes of applying the 415(b) limit to a member:
(a) A member's applicable 415(b) limit shall
be applied to the member's annual benefit in the member's first limitation year
without regard to any automatic cost of living adjustments; and
(b)
1. To
the extent that the member's annual benefit equals or exceeds the 415(b) limit,
the member shall no longer be eligible for cost of living increases until the
benefit plus the accumulated increases are less than the 415(b)
limit;
Section 3. Participation in Other Qualified
Plans: Aggregation of Limits.
(1) The 415(b)
limit with respect to any member who has ever been a member in any other
defined benefit plan as defined in
26 U.S.C.
414(j) maintained by the
member's employer in a retirement system shall apply as if the total benefits
payable from all these defined benefit plans in which the member has been a
member were payable from one (1) plan.
(2) The 415(c) limit with respect to any
member who has ever been a member in any other defined contribution plan as
defined in
26 U.S.C.
414(i) maintained by the
member's employer in a retirement system shall apply as if the total annual
additions under all these defined contribution plans in which the member has
been a member were payable from one (1) plan.
Section 4. Effect on Members.
(1) Benefit increases resulting from the
increase in the limitations of
26
U.S.C. 415(b) shall be
provided to all current and former members, with benefits limited by
26
U.S.C. 415(b), who have an
accrued benefit pursuant to the plan immediately prior to the effective
date.
(2) These benefit increases
shall not be provided to current and former members who have an accrued benefit
resulting from a benefit increase solely as a result of the increases in
limitations pursuant to
26
U.S.C. 415(b).
Section 5. Benefits Not Taken into
Account for 415(b) Limit. The benefits established in this section shall not be
taken into account in applying these limits:
(1) Any ancillary benefit that is not
directly related to retirement income benefits; and
(2) That portion of any joint and survivor
annuity that constitutes a qualified joint and survivor annuity.
Section 6. 415(c) Limit. Except as
provided in Section 7 of this administrative regulation, after-tax member
contributions or other annual additions with respect to a member shall not
exceed the lesser of $40,000 (as adjusted pursuant to
26
U.S.C. 415(d)) or 100
percent of the member's compensation.
(1)
(a) Annual additions shall be defined to mean
the sum (for any year) of employer contributions to a defined contribution
plan, post-tax member contributions, and forfeitures credited to a member's
individual account.
(b) Member
contributions shall be determined without regard to rollover contributions and
to picked-up employee contributions that are paid to a defined benefit
plan.
(2) For purposes
of applying the 415(c) limits only, the definition of compensation, if
applicable, shall be compensation actually paid or made available during a
limitation year, except as noted in subsection (3) of this section and as
permitted by 26 C.F.R. 1.415(c)-2, except, that member contributions picked up
pursuant to
26 U.S.C.
414(h), shall not be treated
as compensation.
(3) Unless another
description of compensation that is permitted by 26 C.F.R. 1.415(c)-2 is
specified by a retirement system, compensation shall be described as wages
within the meaning of
26
U.S.C. 3401(a) and all other
payments of compensation to an employee by an employer for which the employer
is required to furnish the employee a written statement pursuant to
26 U.S.C.
6041(d),
6051(a)(3)
and
6052
and shall be determined without regard to any rules pursuant to
26
U.S.C. 3401(a) that limit
the remuneration included in wages based on the nature or location of the
employment or the services performed (such as the exception for agricultural
labor in
26
U.S.C. 3401(a)(2)) .
(a)
1. For
limitation years beginning on and after January 1, 1998, compensation shall
also include amounts that would otherwise be included in compensation but for
an election pursuant to
26 U.S.C.
125(a),
402(e)(3),
402(h)(1)(B),
402(k),
or
457(b).
2. For limitation years beginning on and
after January 1, 2001, compensation shall also include any elective amounts
that are not includible in the gross income of the employee by reason of
26 U.S.C.
132(f)(4).
(b) For limitation years beginning
on and after January 1, 2009, compensation for the limitation year shall also
include compensation paid by the later of two and one-half (2 1/2) months after
an employee's severance from employment or the end of the limitation year that
includes the date of the employee's severance from employment if:
1. The payment is:
a. Regular compensation for services during
the employee's regular working hours;
b. Compensation for services outside the
employee's regular working hours, such as overtime or shift differential; or
c. Commissions, bonuses, or other
similar payments; and
2.
Absent a severance from employment, the payments would have been paid to the
employee while the employee continued in employment with unused accrued bona
fide sick, vacation, or other leave that the employee would have been able to
use if employment had continued.
(c) Back pay, within the meaning of 26 C.F.R.
1.415(c)-2(g)(8), shall be treated as compensation for the limitation year to
which the back pay relates to the extent the back pay represents wages and
compensation that would otherwise be included pursuant to this
description.
(d) If the annual
additions for any member for a plan year exceed the 415(c) limit, the excess
annual addition shall be corrected as permitted pursuant to the Employee Plans
Compliance Resolution System (or similar IRS correction program).
Section 7. Service
Purchases Pursuant to
26
U.S.C. 415(n).
(1) Effective for permissive service credit
contributions made in limitation years beginning after December 31, 1997, if a
member makes one (1) or more contributions to purchase permissive service
credit in a retirement system, then the requirements of
26
U.S.C. 415(n) shall be
treated as met only if:
(a) The requirements
of
26
U.S.C. 415(b) are met,
determined by treating the accrued benefit derived from all these contributions
as an annual benefit for purposes of the 415(b) limit; or
(b) The requirements of
26
U.S.C. 415(c) are met,
determined by treating all these contributions as annual additions for purposes
of the 415(c) limit.
(2)
For purposes of applying this section, a retirement system shall not fail to
meet the reduced limit pursuant to
26
U.S.C. 415(b)(2)(C) solely
by reason of this section and shall not fail to meet the percentage limitation
pursuant to
26
U.S.C. 415(c)(1)(B) solely
by reason of this section.
(3)
(a) Permissive service credit shall consist
of service credit:
1. Recognized by a
retirement system for purposes of calculating a member's benefit in a
retirement system;
2. The member
has not received in a retirement system; and
3. That the member may receive only by making
a voluntary additional contribution, in an amount determined pursuant to a
retirement system, which does not exceed the amount necessary to fund the
benefit attributable to the service credit.
(b) Effective for permissive service credit
contributions made in limitation years beginning after December 31, 1997, the
term may include service credit for periods for which there is no performance
of service, and, notwithstanding paragraph (a)2 of this subsection, may include
service credited in order to provide an increased benefit for service credit
that a member is receiving in a retirement system.
(4) The retirement system shall fail to meet
the requirements of this section if:
(a) More
than five (5) years of nonqualified service credit are taken into account for
purposes of this subparagraph; or
(b) Any nonqualified service credit is taken
into account pursuant to this section before the member has at least five (5)
years of participation in a retirement system.
(5) In the case of service described in
Section 1(7)(a), (b), or (c) of this administrative regulation, the service
shall be nonqualified service if recognition of the service would cause a
member to receive a retirement benefit for the same service from more than one
(1) plan.
(6) In the case of a
trustee-to-trustee transfer after December 31, 2001, to which
26 U.S.C.
403(b)(13)(A) or
26
U.S.C. 457(e)(17)(A)
applies, without regard to if the transfer is made between plans maintained by
the same employer:
(a) The limitations of
subsection (4) of this section shall not apply in determining if the transfer
is for the purchase of permissive service credit; and
(b) The distribution rules applicable
pursuant to federal law to a retirement system shall apply to these amounts and
any benefits attributable to these amounts.
(7)
(a) For
an eligible member, the 415(c) limit shall not be applied to reduce the amount
of permissive service credit that may be purchased to an amount less than the
amount that was allowed to be purchased pursuant to the terms of the retirement
system as in effect on August 5, 1997.
(b) For purposes of this subsection, an
eligible member shall be an individual who first became a member in the
retirement system before January 1, 1998.
Section 8. Modification of Contributions for
26
U.S.C. 415(c) and
415(n)
Purposes. The retirement system may modify a request by a member to make a
contribution to a retirement system if the amount of the contribution would
exceed the limits established in
26
U.S.C. 415 by using the following methods:
(1) If the law requires a lump sum payment
for the purchase of service credit, the retirement system may establish a
periodic payment plan for the member to avoid a contribution in excess of the
limits established in
26
U.S.C. 415(c) or
415(n).
(2) If payment pursuant to section (1) of
this subsection shall not avoid a contribution in excess of the limits
established in
26
U.S.C. 415(c) or
415(n),
the retirement system shall either reduce the member's contribution to an
amount within the limits of those sections or refuse the member's
contribution.
Section 9.
Repayments of Cashouts. Any repayment of contributions, including interest
thereon, to the retirement system with respect to an amount previously refunded
upon a forfeiture of service credit under the retirement system or another
governmental plan maintained by the Commonwealth or a local government within
the Commonwealth shall not be taken into account for purposes of the 415(b) or
(c) limits.
Notes
STATUTORY AUTHORITY: KRS 161.310(1), 161.716
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