Last week, the IRS published final regulations under Section 415 of the Internal Revenue Code, which provides for limits on annual additions to participant accounts under defined contribution plans (such as 401(k) plans) and on annual benefits payable by defined benefit plans.  The final regulations generally apply to plan years beginning on and after July 1, 2007, or to plan years beginning on January 1, 2008 for calendar year plans.  For the most part, the regulations update prior regulations issued in 1981 to take into account extensive statutory changes in the provisions of Section 415 made since then, including changes made by the Pension Protection Act.  With respect to defined benefit plans, the regulations incorporate numerous technical changes. 

The regulations also clarify what compensation may be considered by all plans, including 403(b) annuities and eligible 457 plans maintained by governmental employers, following an employee’s termination of employment.  Payments made after termination may be included as long as, absent termination, those amounts would have been paid to the employee while he or she continued in employment.  For example, these payments include overtime, as well as accrued sick, vacation or other leave that the employee could have taken had employment continued.  This post-termination compensation must be paid by the later of 2½ months after the employee’s termination date or the end of the plan year in which the termination date occurs.  The plan document must specifically include post-termination payments in the definition of compensation used for plan purposes in order for them to be counted. 

Employers should begin planning for how to handle circumstances newly addressed by the regulations.  Although the regulations are effective on and after July 1, 2007, plan amendments generally are not required until the last day of the 2008 plan year.