One of the big issues under the new regulations is the coordination of the Section 415 limits. Specifically, the definition of compensation used in determining the participant's highest paid three-years under a defined benefit plan cannot reflect compensation in excess of the Section 401(a)(17) limit. Historically, this had not been required since the 401(a)(17) limit was first applied in 1989. While the Treasury chose to keep this rule as first reflected in the proposed regulations, the final rules grandfather benefits accrued or payable under a plan as of the end of the limitation year immediately prior to the effective date of the final regulations. The grandfathered benefits may be based on compensation in excess of the Section 401(a)(17) limit to the extent consistent with plan provisions that were adopted and in effect before April 5, 2007.

The highly complex proposed rules for determining the 415(b) annual limit under the multiple annuity starting date scenarios have been withdrawn. However, temporary rules have been provided that require that if a participant has benefits commencing under multiple annuity starting dates, the limitations of Section 415 must be satisfied as of each annuity starting date, taking into account all benefits that have been or will be paid at all of the annuity starting dates. (Confused by exactly what is required? You are far from alone.)

The proposed regulations had modified, by the “incorporation by reference”, rules that had existed since the regulations were last released in 1981. The final regulations reverse the proposed rules to maintain the 1981 rules. Thus, annual increases in the 415(b) limit that become effective after a participant's severance from employment (or, if earlier, after the annuity starting date in the case of a participant who has commenced receiving benefits) are not applicable to such participants unless the plan specifically provides for such application.

The final regulations reflect the change made by PPA when it comes to the calculation of the three-year high average compensation. The proposed regulation would have only counted years in which the participant was an active participant in the plan as opposed to all years of a participant's service. This change would have had a dramatic impact on plans of small employers, where the plan first becomes effective closer to the owner's retirement than earlier in their career. With the reduction in earned income for plan contribution amounts, it is possible that some small employer's would have seen a dramatically lower limit applied to their plan. ASPPA campaigned against the proposed change in Congress and won that battle.

Section 415(b) has historically not taken into account the survivor annuity portion of a qualified joint and survivor annuity when applying the annual limit. However, if the benefit was paid only partially as a QJSA and partially in another form, then the survivor annuity was counted against the limit. Under the proposed regulations, the QJSA portion even if only a part of the payment would be excluded from the annual limit. The final regulations included this same provision.

Following the provisions of the proposed regulations, the final regulations clarify that a social security supplement is included in determining the annual benefit. The rationale is that a social security supplement is payable upon retirement as a form of retirement income.

The determination of the age-adjusted dollar limitation under these regulations reflects the rules enacted in EGTRRA. Applying rules that are similar to those used for determining actuarial equivalence among different forms of benefits, the regulations generally use the plan's determinations for the actuarial equivalence of early or late retirement benefits (before age 62 and after age 65). However, the regulations override those determinations where the use of the specified statutory assumptions result in a lower limit.