N.J. Admin. Code § 17:1-17.7

Current through Register Vol. 56, No. 23, December 2, 2024

Section 17:1-17.7 - Compliance with 26 U.S.C. 415 limitations on contributions and benefits

(a) The provisions of 43:3C-9.2 shall be applied as specified in this section. Except as otherwise provided in this section, this section applies to limitation years beginning on and after January 1, 2010.

(b) For purposes of 43:3C-9.2 and compliance with 26 U.S.C. § 415, the "limitation year" shall be the calendar year.

(c) The following is the basic 415(b) Limitation for the Defined Benefit Retirement Systems:

1. For purposes of 26 U.S.C. § 415(b), the "annual benefit" means a benefit payable annually in the form of a straight life annuity (with no 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" shall be determined in accordance with 26 CFR 1.415(b)-1(b)2.

2. Before January 1, 1995, a member may not receive an annual benefit that exceeds the limits specified in 26 U.S.C. § 415(b), subject to the applicable adjustments in that section. On and after January 1, 1995, a member may not receive an annual benefit that exceeds the dollar amount specified in 26 U.S.C. § 415(b)(1)(A), subject to the applicable adjustments in 26 U.S.C. § 415(b) and subject to any additional limits that may be specified in the retirement system. In no event shall a member's benefit payable under the system in any limitation year be greater than the limit applicable at the annuity starting date, as increased in subsequent years pursuant to section 415(d) of the Federal Internal Revenue Code and the regulations there under.

(d) Adjustments to basic 26 U.S.C. § 415(b) limitation for form of benefit shall be as follows:

1. If the benefit under the system is other than the form specified in (c)1 above, then the benefit shall be adjusted so that it is the equivalent of the annual benefit, using factors prescribed in 26 CFR 1.415(b)-1(c).

i. 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 (d)1 above is applied by either reducing the 26 U.S.C. § 415(b) limit applicable at the annuity starting date or adjusting the form of benefit to an actuarially equivalent amount (determined using the assumptions as specified in 26 CFR 1.415(b)- 1(c)(2)(ii)) that takes into account the additional benefits under the form of benefit as follows:

2. For a benefit paid in a form to which 26 U.S.C. § 417(e)(3) does not apply, the actuarially equivalent straight life annuity benefit that is the greater of:

i. The annual amount of the straight life annuity (if any) payable to the member under the system commencing at the same annuity starting date as the form of benefit to the member; or

ii. 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 percent interest assumption (or the applicable statutory interest assumption) and the applicable mortality tables described in 26 U.S.C. § 417(e)(3)(B) (Notice 2008-85 or any subsequent Federal Internal Revenue Service guidance implementing 26 U.S.C. § 417(e)(3)(B) ).

3. For a benefit paid in a form to which 26 U.S.C. § 417(e)(3) applies, the actuarially equivalent straight life annuity benefit that is the greatest of:

i. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the system for actuarial experience;

ii. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5 percent interest assumption (or the applicable statutory interest assumption) and the applicable mortality tables described in 26 U.S.C. § 417(e)(3)(B) (Notice 2008-85 or any subsequent Federal Internal Revenue Service guidance implementing 26 U.S.C. § 417(e)(3)(B) ); or

iii. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable (computed using the applicable interest rate for the distribution under 26 CFR 1.417(e)-1(d)(3), using the rate in effect for the first day of the plan year with a one-year stabilization period) and the applicable mortality tables described in 26 U.S.C. § 417(e)(3)(B) (Notice 2008-85 or any subsequent Federal Internal Revenue Service guidance implementing 26 U.S.C. § 417(e)(3)(B) ), divided by 1.05.

4. The actuary may adjust the 26 U.S.C. § 415(b) limit at the annuity starting date in accordance with (d)2 and 3 above.

(e) Benefits for which no adjustment of the 26 U.S.C. § 415(b) limit is required is as follows:

1. For purposes of this subsection, the following benefits shall not be taken into account in adjusting the limits in (d) above:

i. Any ancillary benefit that is not directly related to retirement income benefits;

ii. That portion of any joint and survivor annuity that constitutes a qualified joint and survivor annuity;

iii. Any other benefit not required under 26 U.S.C. § 415(b)(2) and 26 CFR 1.415(b)-1(c)(4) to be taken into account for purposes of the limitation of 26 U.S.C. § 415(b)(1).

(f) Other adjustments in 26 U.S.C. § 415(b) limitation shall be as follows:

1. In the event the member's retirement benefits become payable before age 62, the limit prescribed by this section shall be reduced in accordance with 26 CFR 1.415(b)-1(d) promulgated pursuant to 26 U.S.C. § 415(b), so that such limit (as so reduced) equals an annual straight life benefit (when such retirement income benefit begins), which is equivalent to a $ 160,000 (as adjusted) annual benefit beginning at age 62.

2. In the event the member's benefit is based on at least 15 years of service as a full-time employee of any police or fire department or on 15 years of military service, the adjustments provided for in (f)1 above shall not apply.

3. The reductions provided for in (f)1 above shall not be applicable to pre-retirement disability benefits or pre-retirement death benefits.

(g) Less than 10 years of participation. The maximum retirement benefits payable under this section to any member who has completed less than 10 years of participation in the retirement system shall be the amount determined under (c) above, as adjusted under (d) and/or (f) above, multiplied by a fraction, the numerator of which is the number of the member's years of participation and the denominator of which is 10. The reduction provided by this subsection cannot reduce the maximum benefit below 10 percent of the limit determined without regard to this subsection. The reduction provided for in this subsection shall not be applicable to pre-retirement disability benefits or pre-retirement death benefits.

(h) Ten thousand dollar limit; less than 10 years of service. Notwithstanding anything in this section to the contrary, the retirement benefit payable with respect to a member shall be deemed not to exceed the limit set forth in this subsection, if the benefits payable, with respect to such member under one system and under all other qualified defined benefit pension systems to which the member's employer contributes, do not exceed $ 10,000 for the applicable limitation year and for any prior limitation year and the employer has not at any time maintained a qualified defined contribution plan in which the member participated; provided, however, that if the member has completed less than 10 years of service with the employers in a system, the limit under this subsection shall be a reduced limit equal to $ 10,000 multiplied by a fraction, the numerator of which is the number of the member's years of service and the denominator of which is 10.

(i) For purposes of applying the limits under 26 U.S.C. § 415(b) (the Limit) to a member with no lump-sum benefit, the following shall apply:

1. A member's applicable Limit shall be applied to the member's annual benefit in the member's first limitation year without regard to any cost-of-living adjustments under the retirement system;

2. To the extent that the member's annual benefit equals or exceeds the Limit, the member shall no longer be eligible for cost-of-living increases until such time as the benefit plus the accumulated increases are less than the Limit; and

3. In any subsequent limitation year, a member's annual benefit, including any cost-of-living increases under the retirement systems, shall be tested under the then applicable benefit Limit including any adjustment to 26 U.S.C. § 415(b)(1)(A), the dollar limit under 26 U.S.C. § 415(d), and the regulations promulgated thereunder.

(j) Service purchases under 26 U.S.C. § 415(n) shall be treated as follows:

1. Effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, if a member makes one or more contributions to purchase permissive service credit under the plan, then the requirements of 26 U.S.C. § 415(n) shall be treated as met only if:

i. The requirements of 26 U.S.C. § 415(b) are met, determined by treating the accrued benefit derived from all such contributions as an annual benefit for purposes of 26 U.S.C. § 415(b); or

ii. The requirements of 26 U.S.C. § 415(c) are met, determined by treating all such contributions as annual additions for purposes of 26 U.S.C. § 415(c).

2. The system shall not fail to meet the reduced limit under 26 U.S.C. § 415(b)(2)(C) solely by reason of this section and shall not fail to meet the percentage limitation under 26 U.S.C. § 415(c)(1)(B).

3. Effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, such term may include service credit for periods for which there is no performance of service, and, notwithstanding (j)1ii above, may include service credited in order to provide an increased benefit for service credit that a member is receiving under the system.

4. For purposes of this subsection the term "permissive service credit" means service credit:

i. Recognized by the system for purposes of calculating a member's benefit under the system;

ii. Which such member has not received under the system; and

iii. Which such member may receive only by making a voluntary additional contribution, in an amount determined under the system, which does not exceed the amount necessary to fund the benefit attributable to such service credit.

5. The system shall fail to meet the requirements of this section if:

i. More than five years of nonqualified service credit are taken into account for purposes of this subsection; or

ii. Any nonqualified service credit is taken into account under this subsection before the member has at least five years of participation under the system.

6. For purposes of (j)5 above, effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, the term "nonqualified service credit" means permissive service credit other than that allowed with respect to:

i. Service (including parental, medical, sabbatical, and similar leave) as an employee of the Government of the United States, any state or political subdivision thereof, or any agency or instrumentality of any of the foregoing (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);

ii. Service (including parental, medical, sabbatical, and similar leave) as an employee (other than as an employee described in (j)6i above) of an education organization described in 26 U.S.C. § 170(b)(1)(A)(ii), which is a public, private, or sectarian school that provides elementary or secondary education through grade 12, or a comparable level of education, as determined under the applicable law of the jurisdiction in which the service was performed;

iii. Service as an employee of an association of employees who are described in (j)6i above; or

iv. Military service other than qualified military service under 26 U.S.C. § 414(u) recognized by the system. In the case of service described in (j)6i, ii, or, iii above, such service shall be nonqualified service if recognition of such service would cause a member to receive a retirement benefit for the same service under more than one plan.

7. In the case of a trustee-to-trustee transfer after December 31, 2001, to which 26 U.S.C. §§ 403(b)(13)(A) or 457(e)(17)(A) applies without regard to whether the transfer is made between plans maintained by the same employer:

i. The limitations of (j)5 above shall not apply in determining whether the transfer is for the purchase of permissive service credit; and

ii. The distribution rules applicable under Federal law to the system shall apply to such amounts and any benefits attributable to such amounts.

8. For an eligible member, the limitation of 26 U.S.C. § 415(c)(1) 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 under the terms of a retirement system as in effect on August 5, 1997. For purposes of this paragraph an eligible member is an individual who first became a member in the system before January 1, 1998.

(k) Modification of contributions for 26 U.S.C. §§ 415(c) and 415(n) purposes. Notwithstanding any other provision of law to the contrary, the system may modify a request by a member to make a contribution to the system if the amount of the contribution would exceed the limits provided 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 system may establish a periodic payment plan for the member to avoid a contribution in excess of the limits under 26 U.S.C. §§ 415(c) or 415(n).

2. If payment pursuant to (k)1 above shall not avoid a contribution in excess of the limits imposed by 26 U.S.C. §§ 415(c) or 415(n), the system may either reduce the member's contribution to an amount within the limits of those sections or refuse the member's contribution.

(l) Repayments of cash outs. Any repayment of contributions, including interest thereon, to the plan with respect to an amount previously refunded upon a forfeiture of service credit under the plan or another governmental plan maintained by the retirement system shall not be taken into account for purposes of 26 U.S.C. § 415, in accordance with 26 CFR 1.415(b)- 1(b)(3)(iii).

(m) For participation in other qualified plans, the aggregation of qualified plan limits shall be as follows:

1. The 415(b) limit with respect to any member who at any time has been a member in more than one defined benefit system as defined in 26 U.S.C. § 414(j) maintained by the member's employer shall apply as if the total benefits payable under all such defined benefit systems in which the member has been a member were payable from one plan.

2. The 415(c) limit with respect to any member who at any time has been a member in more than one defined contribution plan as defined in 26 U.S.C. § 414(i) maintained by the member's employer shall apply as if the total annual additions under all such defined contribution plans in which the member has been a member were payable from one plan.

(n) Reduction of benefits priority. For defined benefit systems, reduction of benefits to all systems, where required, shall be accomplished by first reducing the member's benefit with respect to the system in which the member most recently accrued benefits and thereafter in such priority as shall be determined by the system and the plan administrator of such other systems. For defined contribution plans, reduction of contributions to all plans shall be accomplished first with respect to the plan in which the member most recently accrued benefits and thereafter in such priority as shall be established by the plan and the plan administrator for such other plans.

(o)26 U.S.C. § 415(c) limitations on contributions and other additions. After-tax member contributions or other annual additions with respect to a member may 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. Annual additions, as used in this subsection, are defined to mean the sum for any year of employer contributions to a defined contribution plan, all member contributions to a defined contribution plan, post-tax member contributions to a defined benefit plan, and forfeitures credited to a member's individual account. Member contributions are 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 26 U.S.C. § 415(c) and for no other purpose, the definition of compensation where applicable shall be compensation actually paid or made available during a limitation year, and as permitted by 26 CFR 1.415(c)-2, or successor regulation; provided, however, that member contributions picked up under 26 U.S.C. § 414(h) is not be treated as compensation.

3. "Compensation," as used in this subsection, shall be defined 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 under 26 U.S.C. §§ 6041(d), 6051(a)(3), and 6052 and shall be determined without regard to any regulations under 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. The following limitation years apply:

i. For limitation years beginning after December 31, 1997, compensation shall also include amounts that would otherwise be included in compensation but for an election under 26 U.S.C. §§ 125(a), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). For limitation years beginning after December 31, 2000, compensation shall also include any elective amounts that are not includible in the gross income of the member by reason of 26 U.S.C. § 132(f)(4).

ii. For limitation years beginning on and after January 1, 2010, compensation for the limitation year shall also include compensation paid by the later of two-and-a-half months after a member's severance from employment or the end of the limitation year that includes the date of the member's severance from employment if:

(1) The payment is regular compensation for services during the member's regular working hours, or compensation for services outside the member's regular working hours (such as overtime or shift differential), commissions, bonuses, or other similar payments, and, absent a severance from employment, the payments would have been paid to the member while the member continued in employment with the employer;

(2) The payment is for unused accrued bona fide sick, vacation, or other leave that the member would have been able to use if employment had continued; or

(3) Payments pursuant to a nonqualified unfunded deferred compensation plan, but only if the payments would have been paid to the member at the same time if the member had continued employment with the employer and only to the extent that the payment is includible in the member's gross income.

(A) Any payments not described in this subparagraph are not considered compensation if paid after severance from employment, even if they are paid within two-and-a-half months following severance from employment, except for payments to the individual who does not currently perform services for the employer by reason of qualified military service within the meaning of 26 U.S.C. § 414(u)(1) to the extent these payments do not exceed the amounts the individual would have received if the individual had continued to perform services for the employer rather than entering qualified military service.

(B) An employee who is in qualified military service within the meaning of 26 U.S.C. § 414(u)(1) shall be treated as receiving compensation from the employer during such period of qualified military service equal to:

(I) The compensation the employee would have received during such period if the employee were not in qualified military service, determined based on the rate of pay the employee would have received from the employer but for the absence during the period of qualified military service.

(II) If the compensation the employee would have received during such period was not reasonably certain, the employee's average compensation from the employer during the 12-month period immediately preceding the qualified military service or, if shorter, the period of employment immediately preceding the qualified military service.

(III) Back pay, within the meaning of 26 CFR 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 under this definition.

(4) If the annual additions for any member for a plan year exceed the limitation under 26 U.S.C. § 415(c), the excess annual addition shall be corrected as permitted under the Employee Plans Compliance Resolution System or similar IRS correction program.

(5) For limitation years beginning on or after January 1, 2010, a member's compensation for purposes of this subsection shall not exceed the annual limit under 26 U.S.C. § 401(a)(17).

N.J. Admin. Code § 17:1-17.7