IRS Revenue Ruling
1998-1

Code Secs. 415, 417

Status: Modified by 2001-51

<<FULL TEXT>>

(Also section 417.)

LIMITATIONS ON BENEFITS AND CONTRIBUTIONS. Questions and answers on the
limitations on benefits and contributions under section 415 of the Code,
as amended by the Uruguay Round Agreements Act, and taking into account
the applicable provisions of the Small Business Job Protection Act of
1996, are set forth.


REV. RUL. 98-1

This revenue ruling modifies and supersedes Rev. Rul. 95-29, 1995-1
C.B. 81, which provided questions and answers on the limitations on
benefits and contributions under section 415 of the Internal Revenue Code
(Code), as amended by the Uruguay Round Agreements Act, Pub. L. No.
103-465 (GATT), which includes the Retirement Protection Act of 1994 (RPA
'94). This revenue ruling takes into account the applicable provisions of
the Small Business Job Protection Act of 1996, Pub. L. No. 104-188
(SBJPA), after the technical correction made by the Taxpayer Relief Act of
1997, Pub. L. No. 105-34 (TRA '97).

Until further guidance is issued, the guidance provided by these
questions and answers may be relied on to administer plans. If, and to the
extent, future guidance is more restrictive than the guidance in this
revenue ruling, the future guidance will be applied without retroactive
effect. No inference should be drawn regarding issues not raised that may
be suggested by a particular question and answer or as to why certain
questions, and not others, are included.


BACKGROUND

Section 415 provides that benefits accrued or payable under a qualified
defined benefit plan may not exceed certain specified limitations. In
general, annual benefits are limited to the lesser of $90,000, as adjusted
for cost-of-living increases ($130,000 for 1998) and the 10-year phase-in
under section 415(b)(5)(A) (the section 415(b) dollar limitation), or 100
percent of the participant's average compensation for the participant's
high three consecutive years, as adjusted for the 10-year phase-in under
section 415(b)(5)(B) (the section 415(b) compensation limitation).

Section 415(b)(2)(B) provides, with certain exceptions, that, if a
benefit is payable other than as an annual straight life annuity, the
benefit must be actuarially adjusted to an equivalent annual straight life
annuity. Sections 415(b)(2)(C) and (D) require that, if a benefit is
payable beginning at an age other than the participant's social security
retirement age (SSRA), the section 415(b) dollar limitation at that age
equals the annual benefit that is actuarially equivalent to the section
415(b) dollar limitation at the participant's SSRA.

Section 415(b)(2)(E) provides rules regarding the actuarial assumptions
to be used in making the adjustments required under sections 415(b)(2)(B),
(C), and (D). Section 415(b)(2)(E)(i) generally requires that, for
purposes of adjusting any limitation or benefit under section 415(b)(2)(B)
or (C), the interest rate assumption shall not be less than the greater of
5 percent or the rate specified in the plan. Section 415(b)(2)(E)(iii)
generally requires that, for purposes of adjusting any limitation under
section 415(b)(2)(D), the interest rate assumption shall not be greater
than the lesser of 5 percent or the rate specified in the plan.

Section 417(e)(3) provides rules regarding the actuarial assumptions to
be used to determine the present value of a participant's accrued benefit.

Sections 415(b)(2)(E) and 417(e)(3) of the Code were amended by section
767 of RPA '94. Section 767(a) provided a specific mortality table and
changed the applicable interest rate that must be used to determine the
present value of a benefit subject to section 417(e)(3) (section 417(e)(3)
changes). Section 767(b) added section 415(b)(2)(E)(v), which requires the
mortality table prescribed by the Secretary to be used for adjusting any
benefit or limitation under section 415(b)(2). Section 767(b) also revised
the interest rates used for adjusting a benefit or limitation in the case
of a form of benefit subject to section 417(e)(3) by inserting a new
section 415(b)(2)(E)(ii), which required that in such a case the
applicable interest rate be substituted for the 5 percent interest rate
specified in section 415(b)(2)(E)(i).

The amendments made by section 767(b) of RPA '94 were modified by
section 1449 of SBJPA. The amendments made by section 1449 of SBJPA are
effective as if included in section 767 of RPA '94.

In general, section 1449(a) of SBJPA provides that, in the case of
plans adopted and in effect before December 8, 1994, the provisions of
section 767(b) shall not be required to be applied with respect to
benefits accrued before the later of the date a plan amendment applying
the amendments made by section 767(b) is adopted or made effective, but
not later than the first day of the first limitation year beginning after
1999. Section 1449(a) further provides that determinations under section
415(b)(2)(E) before such date are made with respect to such benefits on
the basis of section 415(b)(2)(E) and the provisions of the plan as in
effect on December 7, 1994, but only if such provisions of the plan meet
the requirements of section 415 as in effect on December 7, 1994. (Section
1604(b)(3) of TRA '97 deleted superfluous parenthetical language from this
rule.) Section 1449(d) of SBJPA provides that if, within one year of the
enactment of SBJPA, an amendment made to conform the plan to the
requirements of section 767 of RPA '94 is repealed, the original amendment
is not taken into account for purposes of applying section 1449(a).

Section 1449(b) of SBJPA amended section 415(b)(2)(E) to provide that
in the case of a form of benefit subject to section 417(e)(3), the
applicable interest rate is substituted for 5 percent solely for purposes
of adjusting the benefit (and not for purposes of adjusting the section
415(b) dollar limitation). Thus, regardless of the form of benefit, the
interest rate used to reduce the section 415(b) dollar limitation for
benefits payable before SSRA is determined under the rules of section
415(b)(2)(E)(i) (that is, it cannot be less than the greater of 5 percent
or the rate specified in the plan).

Section 415(d)(1)(B) provides that the section 415(b) compensation
limitation is adjusted annually for cost-of-living increases in the case
of participants who have separated from service. Section 732 of GATT
changed the periods used to compute increases in the cost of living for
purposes of these adjustments.

Rev. Rul. 95-29 provided guidance on limitations on benefits and
contributions under section 415 of the Code, as amended by GATT, including
RPA '94. This revenue ruling modifies and supersedes Rev. Rul. 95-29.

Rev. Proc. 97-41, 1997-33 I.R.B. 51, provides guidance to sponsors of
plans that are qualified under section 401(a) of the Code with respect to
the date by which they must adopt amendments to comply with changes in the
law made by GATT and SBJPA.


QUESTIONS AND ANSWERS

The following terms are used in this revenue ruling:

Section 415(b) compensation limitation. See Background.

Section 415(b) dollar limitation. See Background.

Section 415(b)(2)(E) changes. See Q&A-1.

Section 417(e)(3) changes. See Background.

Section 1449(b) revisions. See Q&A-11.

Age-adjusted dollar limit. See Q&A-7.

Applicable interest rate. See Q&A-4.

Applicable mortality table. See Q&A-6.

Final implementation date. See Q&A-12.

Old-law benefits. See Q&A-12.

Old-law limitations. See Q&A-13.

Participant's freeze date. See Q&A-13.

Plan rate and plan mortality table. See Q&A-7

Repealing amendment. See Q&A-16.

RPA '94 section 415 effective date. See Q&A-1.


(1) GENERAL RULES AND EFFECTIVE DATES

Q-1. When are the changes to section 415(b)(2)(E) made by section
767(b) of RPA '94 (section 415(b)(2)(E) changes) effective?

A-1. Under section 767(d)(1) of RPA '94, the section 415(b)(2)(E)
changes are generally effective as of the first day of the first
limitation year beginning in 1995, except that an employer may elect to
treat the section 415(b)(2)(E) changes as being effective on an earlier
date that is on or after December 8, 1994. For purposes of this revenue
ruling, the date described in the preceding sentence is the RPA '94
section 415 effective date.

Plan amendments that apply the section 415(b)(2)(E) changes must be
effective as of the RPA '94 section 415 effective date. However, section
1449(a) of SBJPA provides a rule under which the section 415(b)(2)(E)
changes are not required to be applied to certain benefits even after the
RPA '94 section 415 effective date. See Q&A-12.

Q-2. What plan benefits are subject to the interest rate prescribed by
section 415(b)(2)(E)(ii)?

A-2. The interest rate prescribed by section 415(b)(2)(E)(ii) applies
in the case of a form of benefit subject to section 417(e)(3). See section
417(e)(3) and the Income Tax Regulations thereunder to determine whether a
form of benefit is subject to section 417(e)(3).

Q-3. Are plans that are not subject to section 417(e)(3) subject to the
requirements for assumptions under sections 415(b)(2)(E)(ii) and (v)?

A-3. Plans that are not subject to section 417(e)(3), such as
governmental plans and certain church plans, are not subject to the
interest rate requirement under section 415(b)(2)(E)(ii), but are subject
to the mortality table requirement under section 415(b)(2)(E)(v).

Q-4. What is the applicable interest rate, as defined in section
417(e)(3), as referenced by section 415(b)(2)(E)(ii)?

A-4. The regulations under section 417(e)(3) (currently section
1.417(e)-1T(d)(3)(i)) provide that the applicable interest rate under
section 417(e)(3) is the annual interest rate on 30-year Treasury
securities as specified by the Commissioner.

Q-5. What is the time for determining the applicable interest rate?

A-5. A plan that has been amended to reflect the section 417(e)(3)
changes must use the same date for determining the applicable interest
rate for purposes of applying the section 415(b)(2)(E) changes as it uses
for purposes of section 417(e)(3). A plan that has not yet been amended to
reflect the section 417(e)(3) changes may use any date for determining the
applicable interest rate for purposes of applying the section 415(b)(2)(E)
changes that is permitted under section 417(e)(3) and the regulations
thereunder (currently section 1.417(e)-1T(d)-(4)) for use in determining
the applicable interest rate for purposes of section 417(e)(3).

Q-6. What mortality table must be used to make adjustments to benefits
and limitations under section 415(b)(2)(E)?

A-6. Section 415(b)(2)(E)(v), added by RPA '94, provides that, for
purposes of adjusting any benefit or limitation under section
415(b)(2)(B), (C), or (D), the mortality table used shall be the table
prescribed by the Secretary. Rev. Rul. 95-6, 1995-1 C.B. 80, provides the
mortality table (applicable mortality table) which generally must be used
for these purposes. For purposes of adjusting any limitation under section
415(b)(2)(C) or (D), to the extent that a forfeiture does not occur upon
death, the mortality decrement may be ignored prior to age 62 and must be
ignored after SSRA. See Q&A G-3 and Q&A G-4 of Notice 83-10, 1983-1 C.B.
536.

Q-7. How are the section 415(b) limitations applied to a benefit under
a defined benefit plan that is not payable in the form of an annual
straight life annuity within the meaning of section 415(b)(2)(A) and that
is not subject to section 417(e)(3)?

A-7. The determination as to whether such a benefit satisfies the
section 415(b) limitations generally is made by comparing the equivalent
annual benefit determined in Step 1 with the lesser of the age-adjusted
dollar limit determined in Step 2 and the section 415(b) compensation
limitation determined in Step 3.

Step 1: Under section 415(b)(2)(B), determine the annual benefit in the
form of a straight life annuity commencing at the same age that is
actuarially equivalent to the plan benefit. In general, sections
415(b)(2)(E)(i) and (v) require that the equivalent annual benefit be the
greater of the equivalent annual benefit computed using the interest rate
and mortality table, or tabular factor, specified in the plan for
actuarial equivalence for the particular form of benefit payable (plan
rate and plan mortality table, or plan tabular factor, respectively) and
the equivalent annual benefit computed using a 5 percent interest rate
assumption and the applicable mortality table. This step does not apply to
a benefit that is not required to be converted to a straight life annuity
pursuant to section 415(b)(2)(B) (for example, a qualified joint and
survivor annuity).

Step 2: Under section 415(b)(2)(C) or (D), determine the section 415(b)
dollar limitation that applies at the age the benefit is payable
(age-adjusted dollar limit). The age-adjusted dollar limit is the annual
benefit that is actuarially equivalent to an annual benefit equal to the
section 415(b) dollar limitation payable at the participant's SSRA.

If the age at which the benefit is payable is 62 or greater, and less
than the participant's SSRA, the age-adjusted dollar limit is determined
by reducing the section 415(b) dollar limitation at the participant's SSRA
using adjustment factors that are consistent with the factors used to
reduce old-age insurance benefits under the Social Security Act. Pursuant
to Q&A-5 of Notice 87-21, 1987-1 C.B. 458, the section 415(b) dollar
limitation at the participant's SSRA is reduced by 5/9 of 1 percent for
each of the first 36 months by which benefits commence before the month in
which the participant's SSRA is attained and by 5/12 of 1 percent for each
additional month.

If the age at which the benefit is payable is less than 62, the
age-adjusted dollar limit is determined by reducing the age-adjusted
dollar limit at age 62 on an actuarially equivalent basis. In general,
sections 415(b)(2)(E)(i) and (v) require that the reduced age-adjusted
dollar limit be the lesser of the equivalent amount computed using the
plan rate and plan mortality table (or plan tabular factor) used for
actuarial equivalence for early retirement benefits under the plan and the
amount computed using 5 percent interest and the applicable mortality
table (used to the extent described in Q&A-6).

If the age at which the benefit is payable is greater than the
participant's SSRA, the age-adjusted dollar limit is determined by
increasing the section 415(b) dollar limitation at the participant's SSRA
on an actuarially equivalent basis. In general, sections 415(b)(2)(E)(i)
and (v) require that the increased age-adjusted dollar limit be the lesser
of the equivalent amount computed using the plan rate and plan mortality
table (or plan tabular factor) used for actuarial equivalence for late
retirement benefits under the plan and the equivalent amount computed
using 5 percent interest and the applicable mortality table (used to the
extent described in Q&A-6).

Step 3: Determine the participant's section 415(b) compensation
limitation. This limitation is equal to the participant's compensation
averaged over the consecutive three-year period producing the highest
average, as provided in section 415(b)(3).

The plan does not satisfy the section 415(b) limitations unless the
equivalent annual benefit determined in Step 1 is no greater than the
lesser of the age-adjusted dollar limit determined in Step 2 and the
section 415(b) compensation limitation determined in Step 3.

Q-8. How is section 415(b)(2)(B) applied to a benefit under a defined
benefit plan that is in a form of benefit subject to section 417(e)(3)?

A-8. If a defined benefit plan provides a benefit in a form that is
subject to section 417(e)(3), the determination of the equivalent annual
benefit is the same as in Q&A-7, Step 1, except that, under section
415(b)(2)(E)(ii), the applicable interest rate is substituted for the 5
percent interest rate under section 415(b)(2)(E)(i). Thus, the equivalent
annual benefit must be the greater of the equivalent annual benefit
computed using the plan rate and plan mortality table (or plan tabular
factor) and the equivalent annual benefit computed using the applicable
interest rate and the applicable mortality table.

Example: Plan A provides that single-sum distributions are determined
as the actuarial present value of the annual straight life annuity payable
at the actual retirement date. Plan A provides that a participant's single
sum is determined as the greater of the present value using 6 percent
interest and the UP-1984 Mortality Table and the present value using the
applicable interest rate and applicable mortality table. In accordance
with section 417(e) and the regulations thereunder, Plan A provides that
the single sum is not less than the actuarial present value of the normal
retirement benefit using the applicable interest rate and the applicable
mortality table. The plan has been amended to apply the section
415(b)(2)(E) changes and, in accordance with that amendment, the section
415(b)(2)(E) changes are applied to all accrued benefits for all
participants under the plan.

Participant M, whose SSRA is age 65, retires at age 60 from Plan A and
elects to receive a distribution in the form of a single sum. Under the
plan formula, and before the application of section 415 under the plan,
the amount of the single sum is $950,000, which is the present value of
the early retirement benefit based upon 6 percent interest and the UP-1984
mortality table. This benefit must be converted to an actuarially
equivalent straight life annuity commencing at age 60 in order to apply
section 415 under the plan. Assuming that the plan's applicable interest
rate under section 417(e)(3) is 8 percent, the conversion is made as
follows:

First, divide $950,000 by an immediate straight life annuity purchase
rate at age 60 using the plan rate and plan mortality table for
determining single sums. Based on 6 percent interest and the UP-1984
Mortality Table, the equivalent annual benefit is $950,000/10.596, or
$89,656. Second, divide $950,000 by an immediate straight life annuity
purchase rate at age 60 using the applicable interest rate and the
applicable mortality table. Based on 8 percent interest and the applicable
mortality table, the equivalent annual benefit is $950,000/10.098, or
$94,078. The equivalent annual benefit for purposes of section 415 is the
greater of the two resulting amounts, or $94,078.

Q-9. How is the age-adjusted dollar limit determined under section
415(b)(2)(C) when a benefit is payable before SSRA in a form subject to
section 417(e)(3)?

A-9. If a defined benefit plan provides a form of benefit subject to
section 417(e)(3) and the benefit is payable before a participant's SSRA,
the age-adjusted dollar limit is determined in the same manner as in
Q&A-7, Step 2. Thus, the section 415(b) dollar limitation at the
participant's SSRA is reduced by 5/9 of 1 percent for each of the first 36
months by which benefits commence before the month in which the
participant's SSRA is attained and by 5/12 of 1 percent for each
additional month and, if the age at which the benefit is payable is less
than 62, is further reduced in accordance with section 415(b)(2)(E)(i) and
(v).

Example: Plan A described in Q&A-8 also provides that early retirement
annuity benefits are equal to the normal form of annuity benefit payable
at age 65, reduced by 4 percent for each year by which the early
retirement age is less than 65. Participant M's retirement age is age 60,
and Participant M has more than 10 years of plan participation at age 60.
The age-adjusted dollar limit at age 60 is computed as follows:

<<END RULING>>


The age-adjusted dollar limit at age 62 is determined by reducing the
section 415(b) dollar limitation at SSRA (assumed to be $125,000) by a
factor of 5/9 of 1 percent for 36 months. This results in an age-adjusted
dollar limit of $100,000 at age 62, which is further reduced as described
below.

First, using the plan tabular factor for early retirement reductions of
4 percent per year, the benefit adjustment factor at age 62 would be 88
percent (100%-(4% x 3)). At age 60, the factor would be 80 percent
(100%-(4% x 5)). Accordingly, the actuarially equivalent benefit at age 60
reduced in accordance with plan factors is equal to $100,000 x 80%/88%, or
$90,909.

Second, even though Participant M's distribution is in the form of a
single sum which is subject to section 417(e)(3), the age-adjusted dollar
limit at age 62 is now reduced using an interest rate of 5 percent and the
applicable mortality table. Assuming no mortality decrement is applied
prior to age 62 (which is permitted because plan benefits are not subject
to forfeiture upon death prior to the annuity starting date), the
actuarially equivalent benefit at age 60 is $86,661.

The age-adjusted dollar limit at age 60 is the lesser of $90,909 and
$86,661, or $86,661. Because the equivalent annual benefit of $94,078
exceeds the age-adjusted dollar limit at age 60, the single-sum benefit
determined in Q&A-8 does not satisfy the section 415(b) limitations.

Q-10. Does a plan amendment that applies the section 415(b)(2)(E)
changes violate section 411(d)(6)?

A-10. In general, a plan amendment that changes the interest rate or
mortality table taken into account in determining a participant's accrued
benefit is subject to the anti-cutback rules under section 411(d)(6) of
the Code. However, under section 767(d)(2) of RPA '94, a participant's
accrued benefit is not considered to be reduced in violation of section
411(d)(6) merely because the plan is amended to apply the section
415(b)(2)(E) changes. Therefore, a plan amendment that merely applies the
section 415(b)(2)(E) changes will not violate section 411(d)(6) even if
the amendment applies those changes to previously accrued benefits,
including benefits accrued before the RPA '94 section 415 effective date.
Similarly, a plan amendment that merely applies the section 415(b)(2)(E)
changes will not violate section 411(d)(6) even if the amendment applies
those changes to distributions made on or after the RPA '94 section 415
effective date and before the amendment. In addition, an amendment that
merely repeals an original section 415(b)(2)(E) amendment, as described in
Q&A-16, will be treated as an amendment to apply the section 415(b)(2)(E)
changes for purposes of section 767(d)(2) and, therefore, will not violate
section 411(d)(6).

Q-11. How is the relief provided under section 767(d)(2) of RPA '94
affected by the retroactive amendment to section 415(b)(2)(E) made by
section 1449(b) of SBJPA (the section 1449(b) revisions)?

A-11. As described in Q&A-10, the section 411(d)(6) relief provided by
section 767(d)(2) applies only to the extent that a reduction in accrued
benefits results from a plan amendment that merely applies the section
415(b)(2)(E) changes. For this purpose, a plan amendment is considered to
apply the section 415(b)(2)(E) changes only if either the plan, as
amended, reflects the section 1449(b) revisions for all distributions for
periods on and after the RPA '94 section 415 effective date or the plan,
as amended, reflects the section 1449(b) revisions for all distributions
for periods after August 20, 1996. Thus, the relief under section
767(d)(2) does not apply to a plan amendment that fails to reflect the
section 1449(b) revisions for distributions for periods after August 20,
1996. Consequently, a plan that has been amended to apply the section
415(b)(2)(E) changes without regard to the section 1449(b) revisions must
be further amended, within the remedial amendment period under section
401(b) for disqualifying provisions under SBJPA and GATT, to reflect the
section 1449(b) revisions (that is, it must use the greater of 5 percent
and the plan rate in determining the age-adjusted dollar limit for early
retirement) for distributions for periods after August 20, 1996. As
described in Q&A-18, plan operations must be conformed to the terms of the
plan. Accordingly, distributions for periods on or after the RPA '94
section 415 effective date may have to be redetermined.


(2) TRANSITION RULES

Q-12. Must the section 415(b)(2)(E) changes be applied to all benefits
under the plan on and after the RPA '94 section 415 effective date?

A-12. The section 415(b)(2)(E) changes generally must be applied to all
benefits under the plan on and after the RPA '94 section 415 effective
date, or, if later, the date the plan becomes effective. However, under
section 767(d)(3)(A) of RPA '94, as amended by section 1449(a) of SBJPA, a
plan adopted and in effect before December 8, 1994, may provide that the
section 415(b)(2)(E) changes do not apply with respect to benefits accrued
before the earlier of (i) the later of the date a plan amendment applying
the section 415(b)(2)(E) changes is adopted or made effective, or (ii) the
first day of the first limitation year beginning after December 31, 1999.
For purposes of this revenue ruling, the date described in the preceding
sentence (the earlier of the dates described in (i) and (ii)) is referred
to as the final implementation date, and the benefits to which the section
415(b)(2)(E) changes are not applied are referred to as old-law benefits.
For purposes of determining the final implementation date, the date in (i)
above that a plan amendment applying the section 415(b)(2)(E) changes is
made effective is the earliest date as of which, under the amendment, the
section 415(b)(2)(E) changes apply to all benefits accruing for the
participants under the plan.

Any amendment that provides that the section 415(b)(2)(E) changes will
not apply to certain benefits must be adopted prior to the end of the
remedial amendment period under section 401(b) for disqualifying
provisions under SBJPA and GATT. In addition, except where an employer
makes a repealing amendment under Q&A-16, once the final implementation
date for a plan resulting from any plan amendment implementing the section
415(b)(2)(E) changes has passed, the extent to which the section
415(b)(2)(E) changes are not applied to certain benefits may not be
changed.

Q-13. How is a participant's old-law benefit determined?

A-13. A participant's old-law benefit is determined as of a date
specified in the plan for the participant (participant's freeze date) that
is before the final implementation date. The plan may provide that the
freeze date for all participants is the day before the final
implementation date for the plan. Alternatively, the plan may specify an
earlier date as the freeze date for some or all participants. The
participant's old-law benefit is determined for each possible annuity
starting date and optional form of benefit based on the participant's
accrued benefit under the terms of the plan as of the participant's freeze
date, after applying section 415 as in effect on December 7, 1994 (old-law
limitations), including the participation requirements under section
415(b)(5).

Under the second sentence of section 767(d)(3)(A) of RPA '94 (as
amended by SBJPA), before the final implementation date the old-law
limitations are applied using all plan terms that were in effect on
December 7, 1994 (that is, without regard to amendments made after
December 7, 1994) and that are relevant in determining actuarial
equivalence under section 415(b)(2)(E). Therefore, except as provided in
Q&A-15, in order to determine the old-law benefit, the section 415(b)
limitations must be applied using the plan's mortality table as in effect
on December 7, 1994 and, except as provided in section 415(b)(2)(D), an
interest rate that is no less than the greater of 5 percent or the plan
rate as in effect on December 7, 1994 to determine actuarial equivalence.
If, as of December 7, 1994, the plan rate for a particular optional form
of benefit was a variable interest rate, the plan rate that would be
compared to 5 percent is the value of the variable rate at the time the
old-law limitations are applied, not the value of the variable rate on
December 7, 1994.

Except as provided in Q&A-15, plan amendments that are adopted after
the participant's freeze date are not taken into account in determining
the old-law benefit, and the old-law benefit is determined without regard
to cost-of-living adjustments that become effective under section 415(d)
after the participant's freeze date.

Example: Plan B has a calendar plan year and limitation year. N is
currently a participant in Plan B and has never participated in any other
plan. Plan B is amended on December 1, 1998, to apply the section
415(b)(2)(E) changes. As amended, the plan specifies that the section
415(b)(2)(E) changes will not apply to benefits accrued as of December 31,
1997 (that is, December 31, 1997, is the freeze date for all
participants). Thus, any optional form of benefit provided under the plan
as of the freeze date (taking into account the old-law limitations) is an
old-law benefit. As of December 7, 1994, the plan provides the normal
retirement benefit in the form of a straight life annuity beginning at age
65. Early retirement benefits are available at any age on or after age 60
with an actuarial reduction. The plan rate and the plan mortality table
used for the reduction are S percent and the UP-1984 Mortality Table,
respectively.

Under the plan, single-sum distributions are available at any permitted
retirement age. Single-sum distributions are calculated as the actuarial
present value of the straight life annuity benefit payable at the actual
retirement age using the PBGC immediate interest rate and the UP-1984
Mortality Table. In accordance with section 417(e) and the regulations
thereunder, the plan further provides that any single-sum distribution
must be at least as great as the actuarial present value of the
participant's accrued normal retirement benefit computed using the PBGC
interest rates for deferred annuities and the UP-1984 Mortality Table. The
plan has not been amended to change the interest rate or mortality table
used for determining single-sum benefits or early retirement reductions at
any time after December 7, 1994.

There is no forfeiture of accrued benefits under the plan on account of
death prior to the annuity starting date. Under the plan, the section
415(b) limitations are applied only after the otherwise determined benefit
has been adjusted for early retirement and for any optional form of
benefit, and the mortality decrement is ignored prior to age 62.

Participant N's SSRA is 65. As of the freeze date, Participant N has 10
years of participation in the plan. Under the plan formula as of N's
freeze date, Participant N's accrued benefit payable at normal retirement
age (before the application of section 415 under the plan) is $110,000.

If Participant N were to retire in 1999 at age 60 and to elect, with
spousal consent, to receive a distribution in the form of a single sum,
then Participant N's single-sum distribution at retirement (before the
application of section 415 under the plan) would equal the single-sum
equivalent of the early retirement annuity benefit under the terms of the
plan. Participant N's early retirement benefit accrued as of N's freeze
date and payable at age 60, determined using the plan rate and plan
mortality table, is $75,242. Under the plan, the single-sum distribution
at age 60 (before the application of section 415 under the plan), which is
based on the immediate annuity of $75,242, the PBGC immediate rate of 6
percent, and the UP-1984 Mortality Table, is $797,264.

The old-law limitations must now be applied under the plan to determine
the old-law benefit for any optional form of benefit elected by N. In this
case, the plan rate used to determine single sums is the PBGC immediate
rate of 6 percent and the plan mortality table is the UP-1984 Mortality
Table. The age-adjusted dollar limit at age 60 determined on the basis of
section 415(b)(2)(E) as in effect on December 7, 1994 (using 5 percent
interest and the UP-1984 Mortality Table) and without taking into account
cost-of-living increases under section 415(d) after the freeze date is
$86,143. Because $75,242 (the annual benefit payable at age 60 that is
actuarially equivalent to $797,264, determined on the basis of section
415(b)(2)(E) as in effect on December 7, 1994) does not exceed $86,143,
the single-sum old-law benefit is $797,264.

Alternatively, if N were to elect to receive a distribution in the form
of a straight life annuity commencing at age 60, then the old-law benefit
for that optional form would be $75,242 because that amount does not
exceed the age-adjusted dollar limit of $86,143.

Q-14. How are the section 415(b) limitations applied to a benefit under
a defined benefit plan if the section 415(b)(2)(E) changes are not applied
to the old-law benefits?

A-14. If the section 415(b)(2)(E) changes are not applied to old-law
benefits, the plan can apply the section 415(b) limitations using one of
three methods as outlined below. The plan must specify which of the three
methods is being used.

Method 1: Under this method, the plan applies the section 415(b)
limitations using the steps in Q&A-7, and, if applicable, Q&A-8, except
that, if the benefit is not payable in the form of an annual benefit
within the meaning of section 415(b)(2)(A), the equivalent annual benefit
determined in Step 1 is computed separately with respect to the old-law
benefit (not to exceed the total plan benefit) and the portion of the
total plan benefit that exceeds the old-law benefit. The annual benefit
that is equivalent to the old-law benefit is determined in accordance with
section 415(b)(2)(E) as in effect on December 7, 1994. The determination
of the annual benefit that is equivalent to the portion of the plan
benefit that is in excess of the old-law benefit must reflect the section
415(b)(2)(E) changes. The results of these two separate computations are
added together to determine the equivalent annual benefit, which is then
used in the remaining steps in Q&A-7.

In accordance with section 767(d)(3)(A) as amended by SBJPA, if the
determination is being made before the final implementation date, then the
plan rate and plan mortality table used to determine the annual benefit
that is equivalent to the old law benefit are based on the plan provisions
in effect on December 7, 1994. By contrast, if the determination is being
made on or after the final implementation date, then the plan rate and
plan mortality table used to determine the annual benefit that is
equivalent to the old-law benefit are based on the plan provisions in
effect on the date of determination.

In some cases, the use of the applicable mortality table in adjusting
the section 415(b) dollar limitation under section 415(b)(2)(C) or (D) can
result in an age-adjusted dollar limit lower than the age-adjusted dollar
limit used in determining the old-law benefit. A plan using Method 1 may
provide that in any event the participant will receive no less than the
old-law benefit, limited to the extent required under Q&A-15.

Method 2: Under this method, the plan applies the section 415(b)
limitations, using the steps in Q&A-7 and, if applicable, Q&A-8, to the
total plan benefit, but provides that in any event the participant will
receive no less than the old-law benefit, limited to the extent required
under Q&A-15.

Method 3: Under this method, the plan applies the section 415(b)
limitations by limiting a benefit only to the extent needed to satisfy
either Method 1 or Method 2 described above.

The following examples illustrate the application of Method 1, Method
2, and Method 3, respectively, of this Q&A-14.

Example 1: The facts with respect to Plan B and Participant N are as
described in the example under Q&A-13. In addition, before applying
section 415 under the plan, N's total single-sum benefit payable at age 60
under Plan B is $950,000. This amount is the present value of N's straight
life annuity benefit commencing under Plan B at age 60 and computed using
the PBGC immediate rate of 6 percent and UP-1984 Mortality Table. The
applicable interest rate under section 417(e)(3) and Plan B is 8 percent.

Plan B provides that the section 415(b)(2)(E) changes will not apply to
benefits accrued through December 31, 1997, in accordance with Method 1.
In addition, as allowed by Method 1, Plan B provides that in any event a
participant will receive no less than the benefits accrued through
December 31, 1997, limited to the extent required under Q&A-15.

Under Plan B's terms, the section 415(b) limitations are applied to N's
benefit using the steps in Q&A-7 (as modified in accordance with Q&A-8 for
distributions subject to section 417(e)(3)), except that the equivalent
annual benefit determined in accordance with Step 1 of Q&A-7 is computed
separately with respect to N's single-sum old-law benefit and the portion
of N's total single-sum benefit that exceeds the single-sum old-law
benefit, and these two amounts are added together to determine N's total
equivalent annual benefit.

First, the annual benefit payable at age 60 that is actuarially
equivalent to N's single-sum old-law benefit of $797,264 is determined on
the basis of section 415(b)(2)(E) as in effect on December 7, 1994. If the
determination were before the final implementation date, all plan terms in
effect on December 7, 1994 that are relevant in determining actuarial
equivalence under section 415(b)(2)(E) would be used. In this case, the
section 415(b)(2)(E) changes apply to benefits accruing for all
participants under the plan on and after January 1, 1998. Consequently,
the date the plan amendment applying section 415(b)(2)(E) changes is made
effective (within the meaning of Q&A-12) is January 1, 1998, and the final
implementation date (based on the later of the date the plan amendment is
adopted or made effective) is December 1, 1998.

Because the determination is being made in 1999, which is on or after
the final implementation date, actuarial equivalence is determined taking
into account any amendments that affect the plan rate and plan mortality
table that are adopted or become effective after December 7, 1994.
However, in this case there have been no amendments after December 7,
1994, and the interest rate used for purposes of this adjustment is the
greater of the plan rate for determining single sums (6 percent) or 5
percent. The mortality table used is the plan mortality table for
determining single sums (UP-1984 Mortality Table). The equivalent annual
benefit is $75,242.

Next, the annual benefit payable at age 60 that is actuarially
equivalent to the portion of N's total single-sum benefit of $950,000 that
exceeds $797,264, or $152,736, is determined taking into account the
section 415(b)(2)(E) changes. For this purpose, $152,736 is first
converted to an equivalent annual benefit using the plan rate (6 percent)
and the plan mortality table (UP-1984 Mortality Table). On this basis, the
equivalent annual benefit is $14,415. The additional $152,736 is also
converted to an equivalent annual benefit using the applicable interest
rate (8 percent) and the applicable mortality table. On this basis, the
equivalent annual benefit is $15,125. Under Plan B, the annual benefit
that is equivalent to $152,736 for purposes of section 415 is the greater
of $14,415 and $15,125, or $15,125. Thus, the annual benefit that is
equivalent to the total single sum of $950,000 for purposes of section 415
is $15,125 plus $75,242, or $90,367.

Next, the age-adjusted dollar limit at age 60 is determined taking the
section 415(b)(2)(E) changes into account. Assuming that the section
415(b) dollar limitation effective for the 1999 calendar year is $130,000,
the age-adjusted dollar limit at age 60 is the lesser of the benefit that
is actuarially equivalent to the age-adjusted dollar limit at age 62
($104,000) computed using the plan rate and the plan mortality table for
making early retirement adjustments (5 percent and UP-1984 Mortality
Table, respectively), or $89,588, and the benefit computed using S percent
and the applicable mortality table, or $90,127. Thus, N's age-adjusted
dollar limit at age 60 under Plan B is the lesser of $89,588 and $90,127,
or $89,588.

Because N's total single-sum benefit is greater than the single-sum
old-law benefit and because the equivalent annual benefit ($90,367)
exceeds the age-adjusted dollar limit ($89,588), N's single-sum benefit
under Plan B must be limited to $942,130 ($797,264 + ($89,588 $75,242) x
10.098) in order to satisfy the section 415(b) limitations.

Example 2: The facts are the same as in Example 1, except that the plan
provides that the section 415(b)(2)(E) changes will apply to the total
plan benefit, but that in any event the participant will receive no less
than the old-law benefit, limited to the extent provided in Q&A-15, in
accordance with Method 2.

Under Plan B's terms, the section 415(b) limitations are applied to N's
benefit using the steps in Q&A-7 (as modified in accordance with Q&A-8 for
distributions subject to section 417(e)(3)). Thus, the $950,000 single-sum
benefit is first converted to an equivalent annual benefit using the plan
rate and plan mortality table for determining single sums (6 percent and
UP-1984 Mortality Table, respectively). On this basis, the equivalent
annual benefit is $89,656. The $950,000 single-sum benefit is then
converted to an equivalent annual benefit using the applicable interest
rate (8 percent) and the applicable mortality table. On this basis, the
equivalent annual benefit is $94,078. Under Plan B, the annual benefit
that is equivalent to $950,000 for purposes of section 415 is the greater
of these two amounts, or $94,078.

As derived in Example 1 above, the age-adjusted dollar limit at age 60
is $89,588. Because the equivalent annual annuity ($94,078) exceeds this
amount and because the total single-sum benefit exceeds the single-sum
old-law benefit, the total single-sum benefit must be limited to $904,660
($89,588 x 10.098) in order to satisfy the section 415(b) limitations.

Example 3: The facts are the same as in Example 1, except that the plan
provides that, in accordance with Method 3, a benefit is limited only to
the extent necessary to satisfy the section 415(b) limitations using
either Method 1 or Method 2.

In the case of Participant N, the maximum benefit that satisfies the
section 415(b) limitations using Method 1 is $942,130, and the maximum
benefit that satisfies the section 415(b) limitations using Method 2 is
$904,660. Thus, the maximum benefit that satisfies the section 415(b)
limitations determined in accordance with Method 3 is $942,130.


Q-15. Under what circumstances does a participant's old-law benefit
change after the participant's freeze date?

A-15. A participant's old-law benefit cannot increase after the
participant's freeze date. However, for any date after the participant's
freeze date, the participant's old-law benefit must be limited if the
old-law limitations as of that later date are less than the old-law
benefit determined as of the participant's freeze date. For example, if,
after the freeze date, annual additions are credited to a participant's
account in an existing defined contribution plan of the same employer for
a limitation year beginning before January 1, 2000, increases in that
participant's defined contribution fraction could result in changes in the
defined benefit fraction that would require a further limitation of the
old-law benefit (depending on the terms of the plans).

Similarly, on or after the final implementation date, the
determinations of actuarial equivalence under section 415(b)(2)(E) that
apply with respect to the old-law benefit must take into account any
changes in plan terms that occur after December 7, 1994, that are relevant
in applying the old-law limitations. If the equivalent annual benefit
determined in this manner exceeds the age-adjusted dollar limit, the
old-law benefit must be limited accordingly.

Finally, the old-law benefit is limited to the extent that the total
plan benefit determined before applying section 415 under the plan is
smaller than the old-law benefit. This could happen, for example, if the
plan is amended to change the interest rate generally used to apply
section 417(e)(3) in a way that would reduce a participant's total plan
benefit, even if the amendment occurs after the participant's freeze date.

Example 1: As of December 7, 1994, Plan C provided that single-sum
distributions were determined using the PBGC interest rates and the
UP-1984 Mortality Table. Plan C also provided that, for purposes of
computing the section 415(b) limitations, an interest rate equal to the
greater of 5 percent or the applicable PBGC interest rate would be used
with the UP-1984 Mortality Table. Under Plan C, the section 415(b)
limitations are applied only after the otherwise determined benefit has
been adjusted for early retirement and for any optional form of benefit.

In order to reflect the section 417(e)(3) changes, Plan C is amended on
January 1, 1996, effective as of that date, to substitute the applicable
interest rate and the applicable mortality table for the original plan
rate and the UP-1984 Mortality Table, respectively, to compute single-sum
benefits under the plan. These new provisions are applied to all plan
benefits (as determined before applying section 415 under the plan),
whether accrued before or after the amendment date.

Plan C is amended July 1, 1999, to apply the section 415(b)(2)(E)
changes. Plan C's terms as amended provide that the section 415(b)(2)(E)
changes will not apply to any benefits accrued under the plan as of
December 31, 1999. Thus, the freeze date for all participants in the plan
is December 31, 1999, and the final implementation date for Plan C is
January 1, 2000.

Because the January 1, 1996 amendment applying the section 417(e)(3)
changes is effective before the freeze date, it will be taken into account
in determining plan benefits before applying section 415. However, that
amendment will not be taken into account in applying the old-law
limitations to determine the old-law benefit until the final
implementation date. Accordingly, in order to apply the old-law
limitations to determine the old-law benefit before the final
implementation date, the interest rate used to convert a single-sum
benefit to an actuarially equivalent straight life annuity is the greater
of 5 percent and the original plan rate.

Plan amendments made after December 7, 1994, including the January 1,
1996 amendment to use the applicable interest rate in determining
equivalent single sums for all accrued benefits, must be taken into
account in applying the old-law limitations on or after the final
implementation date. Therefore, on or after the final implementation date,
in determining the equivalent annual benefit under section 415(b)(2)(B),
the interest rate used is the greater of 5 percent and the new plan rate
under the amendment (the applicable interest rate). If the new plan rate
exceeds the greater of 5 percent and the original plan rate, the old-law
benefit, determined as of the freeze date, might exceed the old-law
limitations when those limitations are applied on or after the final
implementation date. In such a case, the old-law benefit must be further
limited in order to ensure that the old-law benefit does not exceed the
old-law limitations.

Example 2: The facts are the same as in Example 1, except that the
freeze date for a Participant P is December 31, 1994. Participant P's
benefits are being determined as of December 31, 1996. As a result of the
January 1, 1996 amendment, before applying section 415 under the plan, P's
total plan benefit as of December 31, 1996 (which includes accruals after
the freeze date) is smaller than P's old-law benefit. Therefore, the
old-law benefit must be limited so that it does not exceed the total plan
benefit. Although, as described in Example 1, the January 1, 1996 plan
amendment is not taken into account in applying the old-law limitations
until the final implementation date of January 1, 2000, the reduction in
the total plan benefit resulting from the January 1, 1996 amendment is
taken into account immediately for purposes of determining old-law
benefits.

Example 3: As of December 7, 1994, Plan D provided that single-sum
benefits were determined using the lesser of 6 percent and the PBGC
interest rate, and the UP-1984 Mortality Table. Plan D also provided that
for purposes of computing benefit adjustments under section 415, an
interest rate equal to the greater of 5 percent and the lesser of 6
percent or the PBGC interest rate would be used with the UP-1984 Mortality
Table.

In order to reflect the section 417(e)(3) changes, Plan D is amended on
December 1, 1996 to substitute the applicable interest rate and the
applicable mortality table for the PBGC interest rate and the UP-1984
Mortality Table, respectively, but only with respect to benefits accruing
after December 31, 1996. Plan D is amended July 1, 1999 to apply the
section 415(b)(2)(E) changes. Plan D's terms as amended provide that the
section 415(b)(2)(E) changes will not apply to any benefits accrued under
the plan as of December 31, 1994. Thus, the final implementation date for
Plan D is July 1, 1999.

Because the amendment to reflect the section 417(e)(3) changes only
applies with respect to benefits accruing after December 1, 1996, it has
no effect on the plan rate and plan mortality table used with respect to
benefits accrued under Plan D as of the freeze date (December 31, 1994).
Thus, even on or after the final implementation date, when the plan rate
and plan mortality table must be determined taking into account plan
amendments made after December 7, 1994, the plan rate and plan mortality
table that are used to apply the old-law limitations will be unaffected by
the December 1, 1996 amendment to reflect the section 417(e)(3) changes,
and the old-law benefit will not have to be limited because of that
amendment.


(3) PLAN AMENDMENTS AND OPERATIONAL COMPLIANCE ISSUES

Q-16. How does an employer apply the transitional rule of section
1449(d) of SBJPA to a plan that was amended on or before August 20, 1996,
to apply section 767 of RPA '94?

A-16. Section 1449(d) of SBJPA provides that, if a plan amendment to
apply the section 415(b)(2)(E) changes (original amendment) was adopted or
made effective on or before August 20, 1996, the employer could adopt
another amendment (repealing amendment) to repeal the original amendment,
and the original amendment would not be taken into account in applying
section 767(d)(3)(A) of RPA '94 as revised by section 1449(a) of SBJPA.
Pursuant to section 7 of Rev. Proc. 97-41, an original amendment is not
taken into account in applying section 767(d)(3)(A) of RPA '94 as revised
by section 1449(a) of SBJPA if a repealing amendment is adopted on or
before the last day of the plan's remedial amendment period under section
401(b) for disqualifying provisions under SBJPA and GATT. Thus, an
employer adopting a repealing amendment to a plan has the same options for
that plan as an employer that has not made any plan amendments to apply
the section 415(b)(2)(E) changes.

Q-17. When must qualified plans be amended to apply the section
415(b)(2)(E) changes?

A-17. Under section 6 of Rev. Proc. 97-41, plan amendments to apply the
section 415(b)(2)(E) changes must be adopted by the last day of the plan's
remedial amendment period under section 401(b) for disqualifying
provisions under SBJPA and GATT. For plans other than governmental plans,
section 6 of Rev. Proc. 97-41 extended the remedial amendment period to
the last day of the first plan year beginning on or after January 1, 1999.
For governmental plans, the remedial amendment period is extended to a
later date.

Under section 9 of Rev. Proc. 97-41, if a plan terminates prior to the
date amendments otherwise must be adopted, the plan must be amended to
conform to the applicable section 415(b)(2)(E) changes in connection with
that termination.

Q-18. Must a plan amendment to apply the section 415(b)(2)(E) changes
conform the terms of the plan to the plan's operation prior to the date
the plan is amended?

A-18. No. Except as discussed below, an employer may amend its plan
within the remedial amendment period described in Q&A-17 to apply the
section 415(b)(2)(E) changes in any manner permitted under this revenue
ruling (including an amendment to provide that the section 415(b)(2)(E)
changes will not apply to certain benefits), regardless of whether the
amendment is consistent with the plan's operation prior to the date the
plan is amended. However, this remedial amendment period is available only
if, in accordance with section 401(b) and the regulations thereunder, all
of the provisions of the plan needed to satisfy the qualification
requirements are in effect by the end of the remedial amendment period and
have been made effective for all purposes for the entire period (that is,
beginning with the RPA '94 section 415 effective date). Thus, plan
operations (including prior distributions from the plan) must be changed
to the extent necessary to conform the operations retroactively to the
terms of the plan as retroactively amended for the section 415(b)(2)(E)
changes, including, for example, plan terms that implement the section
1449(b) revisions under Q&A-11.

The following are examples of plan amendments that apply the section
415(b)(2)(E) changes and their effects on prior distributions.

Example 1: Employer X maintains Plan E, a qualified defined benefit
plan that was adopted and effective on January 1, 1985. The plan year and
the limitation year for Plan E are the calendar year. In making
distributions for periods after January 1, 1995, and before August 20,
1996, Employer X applied the section 415(b)(2)(E) changes, but did not
reduce a participant's benefit below the participant's accrued benefit as
of December 31, 1994.

Plan E is amended on December 1, 1999, effective on January 1, 1995, to
apply the section 415(b)(2)(E) changes. The amendment further provides
that the section 415(b)(2)(E) changes do not apply to any benefits accrued
before January 1, 2000, in accordance with Method 2 of Q&A-14. Therefore,
the amendment to apply the section 415(b)(2)(E) changes is made effective
(within the meaning of Q&A-12) on January 1, 2000, and Plan E has a final
implementation date of January 1, 2000.

Under section 767(d)(3)(A), determinations under section 415(b)(2)(E)
with respect to old-law benefits made before January 1, 2000, are based on
section 415(b)(2)(E) and plan terms as in effect on December 7, 1994. Plan
operations must be retroactively conformed to the terms of the plan as
retroactively amended. Therefore, distributions made from Plan E between
January 1, 1995 and August 20, 1996 must be redetermined to reflect the
freeze date used in the December 1, 1999 amendment.

Example 2: Employer Y maintains Plan F, a qualified defined benefit
plan that was adopted and effective on January 1, 1985. The plan year and
the limitation year for Plan F are the calendar year. In making
distributions for periods after January 1, 1995, including distributions
for periods after August 20, 1996, Employer Y applied the section
415(b)(2)(E) changes using section 415(b)(2)(E)(ii) as amended by RPA '94,
but did not take the section 1449(b) revisions into account.

Plan F is amended on November 1, 1999, effective on January 1, 1995, to
apply the section 415(b)(2)(E) changes. The amendment provides, that for
distributions for periods after January 1, 1995, and on or before August
20, 1996, in the case of a form of benefit subject to section 417(e)(3),
the applicable interest rate is substituted for 5 percent in determining
the age-adjusted dollar limits. For distributions for periods after August
20, 1996, the amendment reflects the section 1449(b) revisions. In
accordance with Method 2 of Q&A-14, the amendment further provides that
the benefits of any current or former participant shall not be reduced
below the participant's accrued benefit as of December 31, 1994.
Therefore, the amendment adopted November 1, 1999 to apply the section
415(b)(2)(E) changes is made effective (within the meaning of Q&A-12) on
January 1, 1995, and Plan F has a final implementation date of November 1,
1999.

Plan operations (including distributions made from Plan F on or after
the RPA '94 section 415 effective date) must be retroactively conformed to
the terms of the plan as retroactively amended. In this case,
distributions from Plan F made before the amendment conform to the terms
of the plan except to the extent that distributions for periods after
August 20, 1996 did not reflect the section 1449(b) revisions. Such
distributions will have to be redetermined.

Example 3: Employer Z maintains Plan G, a qualified defined benefit
plan that was adopted and effective on January 1, 1982. The plan year and
limitation year are the calendar year. Plan G is amended on March 1, 1998,
effective on January 1, 1995, to apply the section 415(b)(2)(E) changes.
The amendment provides that in the case of participants who terminate
before February 1, 1998, the section 415(b)(2)(E) changes do not apply to
benefits accrued before January 1, 1995, in accordance with Method 2 of
Q&A-14. The amendment further provides that in the case of participants
who have an hour of service on or after February 1, 1998, the section
415(b)(2)(E) changes do not apply to benefits accrued before January 1,
1999, in accordance with Method 1 of Q&A-14. In making distributions since
January 1, 1995, Employer Z applied the section 415(b)(2)(E) changes, but
did not reduce the participant's benefit below the participant's accrued
benefit as of December 31, 1994.

Plan operations (including distributions made from Plan G on or after
the RPA '94 section 415 effective date) must be retroactively conformed to
apply the plan terms as retroactively amended. In the case of Plan G,
distributions made for participants who terminated prior to February 1,
1998, will conform to the terms of the plan (except to the extent a
distribution for a period after August 20, 1996 might have reflected
section 415(b)(2)(E)(ii), as amended by RPA '94, but before amendment by
section 1449(b) of SBJPA).


(4) PLAN FUNDING

Q-19. May the section 415(b)(2)(E) changes be taken into account for
purposes of the minimum funding standards under section 412 before the
plan is amended to reflect these changes?

A-19. Except as provided under section 412(c)(12) or by the
Commissioner, changes in plan benefits that become effective after the
first day of the current plan year may not be anticipated for purposes of
section 412. See section 1.412(c)(3)-1(d)(1).

In the case of a plan that is operated in accordance with the section
415(b)(2)(E) changes, the anticipation of a plan amendment applying the
section 415(b)(2)(E) changes is hereby permitted for purposes of section
412 until the final implementation date. For purposes of the preceding
sentence, for plan years beginning before January 1, 1997, the anticipated
plan amendment need not reflect the amendments made to section 415 of the
Code or section 767 of RPA '94 by section 1449 of SBJPA. For plan years
beginning on or after January 1, 1997, a plan amendment applying the
section 415(b)(2)(E) changes may be anticipated only if the plan amendment
is permitted under this revenue ruling and only if it is described in an
attachment to a Schedule B of Form 5500 for the plan year that is filed on
or before the due date (including extensions) for such Schedule B. The
attachment must specify the extent to which the anticipated plan amendment
provides that the section 415(b)(2)(E) changes will not apply to
participants' old-law benefits (including, if applicable, any freeze date
under Q&A-13 and method under Q&A-14). Note that if the section
415(b)(2)(E) changes are retroactively applied to all benefits under the
plan, this must be specified in the attachment. In addition, once a
Schedule B of Form 5500 is filed for a plan year, the anticipated
amendment, if any, that was used in applying section 412 for that year
cannot be changed (for purposes of applying section 412 for that year).


If no such attachment is made to Schedule B of Form 5500 for a plan
year, the employer may not anticipate the section 415(b)(2)(E) changes for
that plan year and must determine the minimum funding standard using the
terms of the plan.

Q-20. What are the implications of a plan being funded on the basis of
plan terms without taking the section 415(b)(2)(E) changes into account?

A-20. If an employer has not yet amended its plan to reflect the
section 415(b)(2)(E) changes, funding on the basis of plan terms could
result in a plan being funded based on benefits that exceed the section
415(b) limitations. Because section 404(j) provides that benefits in
excess of the section 415(b) limitations may not be taken into account in
determining a deduction under section 404, contributions that are made as
a result of benefits that are in excess of the section 415 limits are
nondeductible, regardless of whether they are required under section 412.
Thus, if an employer has not yet amended its plan to apply the section
415(b)(2)(E) changes, the employer could be required to make nondeductible
contributions to the plan to satisfy the minimum funding standards, unless
(in accordance with Q&A-19) a plan amendment to apply the section
415(b)(2)(E) changes is anticipated.

However, for taxable years relating to plan years beginning prior to
January 1, 1997, the Service will not assert a violation of section 404(j)
merely because contributions are made in amounts necessary to satisfy
minimum funding standards calculated based on the terms of the plan,
provided that the terms of the plan satisfy old-law limitations. The
preceding sentence will not apply with respect to a plan year if a
Schedule B of Form 5500 has been filed for that plan year prior to January
12, 1998, for which the minimum funding standards have been calculated by
anticipating an amendment applying the section 415(b)(2)(E) changes.


(5) MISCELLANEOUS

Q-21. Are the RPA '94 section 415 effective date and the final
implementation date for a plan affected by the date the section 417(e)(3)
changes are made effective for the plan?

A-21. No. The RPA '94 section 415 effective date applies regardless of
when the section 417(e)(3) changes are made effective for the plan. In
addition, the final implementation date for a plan may be different from
the date the section 417(e)(3) changes are made effective for the plan.

Q-22. Must a plan provide a uniform freeze date under Q&A-13 and a
uniform method under Q&A-14 for all participants?

A-22. No. A plan may provide different participant freeze dates under
Q&A-13 or different methods under Q&A-14 for different participants in the
plan. In addition, a plan may provide no freeze date for some participants
(that is, the section 415(b)(2)(E) changes apply to the entire accrued
benefit of those participants), while providing a freeze date for other
participants. However, the availability of a specific participant freeze
date under Q&A-13 or method described in Q&A-14 is a benefit, right, or
feature, which must satisfy the nondiscriminatory availability requirement
of section 1.401(a)(4)-4. Furthermore, in accordance with Q&A-11 of Notice
87-21, if a limitation under section 415 may be applied in more than one
manner, the plan must specify the manner in which the limitation is to be
applied.

Q-23. Are fully insured plans that meet the accrued benefit
requirements of section 411(b) by satisfying the requirements of section
411(b)(1)(F) subject to the new requirements under section 415(b)(2)(E) as
amended by RPA '94 and SBJPA?

A-23. Yes, these plans are subject to all of the requirements of
section 415.

Q-24. How is the section 415(b) compensation limitation adjusted for
years beginning after December 31, 1994?

A-24. Section 415(d)(1)(B) provides that the section 415(b)
compensation limitation is adjusted annually for cost-of-living increases
in the case of a participant who has separated from service. Section
732(b) of GATT changed the base period for computing the annual
adjustments.

For a participant separating from service on or before December 31,
1994, the section 415(b) compensation limitation for the 1995 calendar
year is computed by multiplying the participant's compensation limitation,
as adjusted under prior law through the 1994 calendar year, by 1.0217.


PAPERWORK REDUCTION ACT

The collection of information contained in this revenue ruling has been
reviewed and approved by the Office of Management and Budget in accordance
with the Paperwork Reduction Act (44 U.S.C. 3507) under control number
1545-1563.

An agency may not conduct or sponsor, and a person is not required to
respond to, a collection of information unless the collection of
information displays a valid OMB control number.

The collection of information in this revenue ruling is in Q&A-19. This
revenue ruling provides guidance on the limitations on benefits and
contributions under section 415 of the Code and section 767 of RPA '94 as
amended by section 1449 of SBJPA, including the various options that an
employer may elect when implementing the amendment. This information will
be used in determining benefits taken into account for purposes of the
minimum funding requirements for the plan. The collection of information
is required to assure compliance with the minimum funding requirements.
The likely respondents are businesses or other for-profit institutions,
nonprofit institutions, and small businesses or organizations.

The estimated total annual reporting burden is 35,000 hours.

The estimated annual burden per respondent varies from 15 minutes to 45
minutes, depending on individual circumstances, with an estimated average
of 30 minutes. The estimated number of respondents is 70,000. Books or
records relating to a collection of information must be retained as long
as their contents may become material in the administration of any
internal revenue law. Generally, tax returns and tax return information
are confidential, as required by 26 U.S.C. 6103.


EFFECT ON OTHER DOCUMENTS

Rev. Rul. 95-29, 1995-1 C.B. 81, is modified and superseded.


DRAFTING INFORMATION

The principal authors of this revenue ruling are John Heil and Martin
Pippins of the Employee Plans Division. For further information regarding
this revenue ruling, contact the Employee Plans Division's taxpayer
assistance number at (202) 622-6076 (not a toll-free number) between the
hours of 2:30 p.m. and 3:30 p.m., Eastern Time, Monday through Thursday.
Mr. Heil's telephone number is (202) 622-7383 (also not a toll-free
number). Mr. Pippins' telephone number is (202) 622-6261 (also not a
toll-free number).

<<END RULING>>

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