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415(m) Plans

“What is a 415(m) plan?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry involving plan types. 

Highlights of Discussion

A 415(m) plan is a type of nonqualified deferred compensation plan offered by public employers (e.g., state and local governments and their agencies, including public schools, colleges and universities). The technical title for these plans is “qualified governmental excess benefit arrangement” under Internal Revenue Code Section [IRC § 415(m)].

415(m) excess benefit plans are generally used to allow eligible public employees to set aside contributions over and above the contribution/benefit limits of IRC §415 that apply to qualified plans. The sponsoring institution owns the assets but the employees have a vested interest in the benefits. In the event of employer bankruptcy, assets are subject to the claims of the employer’s creditors.

Although, a 415(m) plan is a type of nonqualified deferred compensation plan, it is not subject to the IRC §409A rules for income inclusion for such plans. It is treated as if it were a nonqualified plan of a for-profit corporation.

For participant taxation purposes, pre-IRC §409A rules apply, specifically, those found under IRC Sec. 83 (related to the value of transferred property for the performance of services); IRC Sec. 451 (pertaining to the constructive receipt of income; and the Economic Benefit Doctrine (where taxation occurs in the year that assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee’s sole benefit).

Conclusion

In addition to having a type of qualified plan available to them, employees in the public sector may also have access to 415(m) excess benefit plans, which allow them to set aside amounts over the usual plan limits.

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