Pension Protection Act Blog

ASPPA announced on Friday that Treasury officials informed Congress yesterday that they will enforce the new PPA combined plan deduction limits under Internal Revenue Code section 404(a)(7) in accordance with the language in the proposed PPA technical correction legislation (H.R. 3361/S.1974). Q&A 9 of Notice 2007-28 will not be enforced and, in a defined benefit/defined contribution plan combination situation, if the D.C. contribution was not greater than 6%, Code section 404(a)(7) does not apply to the defined benefit plan. (hat tip to BenefitsLink.com).

For combined plans, this is very important news and more information should be coming from the IRS shortly because ASPPA is reporting two important and immediate effects of this change:

1. Employers who contributed in excess of 25% of compensation to their defined benefit plan (and in excess of Unfunded Current Liability) in 2006 based on an interpretation in conflict with Q&A 9 of Notice 2007-28 need not pay an excise tax; and

2. Employers who move fast for 2006 (who were previously limited by Notice 2007-28) have until Sept. 15th to increase their 2006 deductible contribution.

ASPPA is reporting the Sept. 15th date. They are normally very good about dates but YMMV (Your Mileage May Vary) on this one.

Before ASPPA made this announcement, I had planned on a great Constitution Day with the kids. 220 years ago, on Sept. 17, 1787, the U.S. Constitution was signed and gave us the current system of balance between the 3 branches of government.

ASPPA’s announcement about combined plan deduction limits is the perfect example of how ERISA is very much a constitutional animal. When Congress (the legislative branch) passed PPA last year, it modified the 25% combined defined benefit/defined contribution limit with the intent that employers who sponsor both a defined benefit and a defined contribution plan covering the same participants could make a contribution of up to 6% of the participants’ compensation to the defined contribution plan in addition to the contribution necessary to fund their defined benefit plan. This could allow the total contribution to exceed the previous 25% combined plan deduction limit. I’ve greatly simplified this modification by PPA in order to provide a very general meaning of how important this change was to the combined plan deduction limit.

The IRS (the executive branch) then releases Notice 2007-28, containing Q&A 9, which interpreted this modification to the combined plan deduction limit as being something less than the what Congress seemed to say in the Pension Protection Act. After lobbying by some very knowledgeable organizations, the IRS has seemed to change their interpretation to something more in line with Congress’ modification.

Of course, any participant who does not agree with either interpretation can go to federal court (the judicial branch).

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