FLORIDA TAX REVIEW
VOLUME 2 1994 NUMBER 2

Simplification and IRC § 415
Norman P. Steitz

I. INTRODUCTION

There has been much talk of late about simplifying Subchapter D, the

web of rules governing the affairs of tax-qualified pension plans.' Among the

targets that the simplification advocates have in their sights is section 415 of

the Code.2 Section 415 places limits on contributions to defined contribution

* Douglas Arant Professor of Law, University of Alabama School of Law. The

author gratefully acknowledges the helpful comments of Don Grubbs, Dan Halperin. Mary
Oppenheimer, Mary Radford, Bruce Wolk, and members of the ABA Subcommittee on Section
415, despite, in many cases, their disagreement with the author's conclusions. The University
of Alabama Law School Foundation generously provided funding for the article. Finally, this
article is dedicated to Don Grubbs, who will retire later this year. and whose career and
devotion to public service have provided an exemplary model for me and other members of
the employee benefits bar.

1. See, e.g., H.R. 2742, 102d Cong., 1st Sess. (1991); Pension Access and Simplifi-
cation Act of 1991, H.R. 2730, 102d Cong., 1st Sess. (1991); H.R. 2390, 102d Cong., 1st Sess.
(1991); H.R. 1735, 102d Cong., 1st Sess. (1991); Employee Benefits Simplification Act.
S. 2901, 101st Cong., 2d Sess. (1990); The Association of Private Pension & Welfare Plans,
Gridlock: Pension Law in Crisis and the Road to Simplification 32-34 (1989) [hereinafter
Gridlock].

2. Simplification of the rules applicable to pension plans may have a range of
purposes. These include making plans easier and less costly to administer, and easier for both
the plan sponsors and plan participants to understand; easing the IRS's burden of monitoring
compliance; reducing the opportunities for plan sponsors to evade legislative purpose through
plan design; and improving the ability of professionals to predict accurately the consequences
of particular rules to particular situations. The meaning of simplification in the tax law has
been subject to extensive scholarly reflection and debate. See, e.g.. Boris I. Bittker, Tax
Reform and Tax Simplification, 29 U. Miami L. Rev. 1 (1974); Walter J. Blum, Simplification
of the Federal Income Tax Law, 10 Tax L. Rev. 239 (1954); Robert B. Eichholz, Should the
Federal Income Tax Be Simplified?, 48 Yale LJ. 1200 (1939); James S. Eustice, Tax
Complexity and the Tax Practitioner, 45 Tax L. Rev. 7 (1989): Randolph E. Paul. Simplifica-
tion of Federal Tax Laws, 29 Cornell L.Q. 285 (1944); Stanley S. Surrey & Gerard M.
Brannon, Simplification and Equity as Goals of Tax Policy, 9 Win. & Mary L Rev. 915
(1968); Laurence N. Woodworth, Tax Simplification and the Tax Reform Act of 1969, 34 Law
& Contemp. Probs. 711 (1969).



Florida Tax Review

plans and on benefits payable from defined benefit plans.' The basic idea
justifying section 415 is that an employer should not be able to use the
Code's qualified plan provisions to bestow tax deferral on deferred compensa-
tion in excess of the reasonable retirement needs of its employees.4

The simplification advocates have proposed repeal of section 415 or
at least of its most supremely complex part, section 415(e), which sets
combined limits for individuals who participate in both defined contribution
and defined benefit plans. They argue that section 4980A, which was enacted
in 1986 and which imposes a nondeductible excise tax on excessive distribu-
tions from pension plans, has rendered section 415 limitations, or at least the
section 415(e) limitation, superfluous.5 They also argue that subsection (e)
is impervious to any sort of simplification efforts short of outright repeal.6

3. The limit on benefits payable from a defined benefit plan affects the amount of
contributions paid to the plan, since the employer's annual contribution is limited to the
appropriate annual actuarial cost of the maximum benefit permitted by § 415(b).

For an excellent treatment of the technical operation of the § 415 rules, see Richard
B. Stanger et al., Tax-Qualified Retirement Plans After TEFRA: Limitations on Benefits and
Contributions and Top-Heavy Plan Rules, 41 Inst. on Fed. Tax'n § 37 (1983) [hereinafter
Tax-Qualified Retirement Plans After TEFRA]. Although Congress has since modified § 415,
this article remains the most comprehensive treatment of the rules.

4. See infra text accompanying notes 48-54; see also H.R. Rep. No. 807, 93d Cong.,
2d Sess. 35 (1974); 2 Dep't of the Treasury, Tax Reform for Fairness, Simplicity, and
Economic Growth: General Explanation of the Treasury Dep't Proposals 346, 350 (1984)
[hereinafter Tax Reform].

5. See Memorandum from Lee Irish to Elaine Church & Roger Siske 8 (Oct. 25,
1990) (on file with author) [hereinafter Irish Memo]; see also Dianne Bennett, Plan Distribu-
tions: A Call for Some Order out of the Chaos, in ALI-ABA Fifth Pension Invitational
Conference 33, 39-40 (Oct. 11-12, 1987) (on file with author). Bennett's paper provides an
extraordinarily thoughtful approach to the web of rules governing distributions from qualified
plans. Bennett, in suggesting that a bolstered version of § 4980A replace § 415, noted that the
suggestion, even if rejected, might give rise to "consideration... of simplifications to section
415." Id. at 40. As is noted later, the proposals to eliminate § 415 are not nearly so serious
as the proposals to eliminate subsection (e).

The Association of Private Pension & Welfare Plans ("APPWP") has argued that
§ 415(e) should be eliminated if Congress retains the § 4980A tax. Gridlock, supra note 1, at
32-34. However, APPWP would prefer repeal of § 4980A to repeal of § 415(e).

The concept for the § 4980A excise tax came from the Department of the Treasury.
Tax Reform, supra note 4, at 349-53. The influential proposals led to the Tax Reform Act of
1986. The Department had proposed an excise tax as a substitute for § 415(e), which it stated
"may be the primary source of complexity in the retirement plan area." Id. at 350. Congress,
although adding the excise tax, retained the § 415(e) limits.

6. The case for elimination of § 415(e) is made articulately in a memorandum
prepared by an attorney participating in the American Tax Policy Institute Pension Roundtable.
See Irish Memo, supra note 5, at 8. The memorandum also suggests that § 415 itself might be
eliminated. Id.

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Simplification and IRC § 415

Because I agree with the basic idea undergirding section 415 and
reject the argument that section 4980A serves adequately as a replacement,
I disagree that section 415 is an attractive candidate for repeal. Moreover, in
my view even a repeal limited to subsection 415(e) would be an error
because of the subsection's importance in maintaining section 415's overall
integrity. This article explains the basis for these views and also suggests
ways of simplifying section 415(e) short of repealing it.

The article is divided into three parts. The first part describes the
pertinent provisions of section 415. The second part responds to the argument
that section 415 should be eliminated rather than simplified; this part explores
the policy goals served by section 415 and considers whether section 415 has
anything to add to other Code sections-primarily section 4980A-that serve
similar policy objectives. The third part suggests two approaches that
Congress might take toward simplification of section 415.

I. DESCRIPTION OF SECTION 415

Section 415 includes three limits. One limit (from section 415(b),
hereinafter referred to as the "(b) limit" or the "defined benefit limit")
restricts the maximum annual retirement benefit an employee can accrue
under all defined benefit plans maintained at any time by an employer. The
limitation is an annual straight single-life annuity equal to the lesser of
$90,000 or 100% of the employee's average compensation over the highest
three-year period.7 The dollar figure, however, is indexed to the cost of

The American Bar Association Section of Taxation has prepared a report advocating
several changes to simplify § 415, including repeal of § 415(e). American Bar Association.
Section of Taxation, Possible Simplification Proposals Relating to Limitations on Benefits and
Contributions Under Qualified Plans (Sept. 23, 1993) (on file at the University of Alabama
School of Law Library) [hereinafter ABA Report]. The author of this article, who was a
member of the subcommittee that drafted the report, dissented from the report's recommenda-
tion that § 415(e) be deleted. Id. at I.

7. IRC § 415(b)(1). ERISA originally set the dollar limi" at S75,000. but
cost-of-living adjustments pushed it up to S136,425 by 1982. I.R.S. Information Rcl. IR-8"2-18
(1982). Congress reduced the limitation to S90,000 in the Tax Equity and Fiscal Responsibility
Act of 1982 ("TEFRA"), Pub. L. No. 97-248, § 235(g)(2). 96 Stat. 324, 508 (1982) but
generally preserved already-accrued benefits in excess of the reduced limits. § 235(g)(4), 96
Stat. at 508-09. See generally Tax-Qualified Retirement Plans After TEFRA. supra note 3,
§ 37.03[6].

Congressional lore, as retold by former tax-writing committee staff members, has it
that there had been intense lobbying in 1982 from business interests to leave the dollar limits
intact, since the limits were an integral part of ERISA, a statute that was then only eight years
old. Reducing the limits, they argued, would have an adverse effect on plan formation and also
would be unfair to the businesses that had continued plan sponsorship since ERISA's passage
in reliance on the limits being indexed. The lobbying efforts appeared to be successful and a
majority of members of the House Ways and Means Committee was ready to vote against

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living and in 1994 is $118,881.8
The dollar limit is adjusted if the benefit begins earlier or later than

social security retirement age, or is paid in a form other than a straight-life
annuity.9 In addition, the dollar limit is phased in ratably over ten years of
actual plan participation."° The compensation limit is phased in over ten
years of service with the employer rather than plan participation.

A second limit (under section 415(c), hereinafter referred to as the
"(c) limit" or the "defined contribution limit") applies to defined contribution
plans. The defined contribution limit provides that the annual additions to an
employee's accounts in all defined contribution plans maintained by an
employer may not exceed the lesser of $30,000 a year or 25% of the

reductions to the dollar limits. Before the vote, however, the roll call bell rang and the
committee members filed out to the floor of the House, where they participated in a vote to
reduce food stamps. The irony of voting to cut food stamps while preserving a $136,425 dollar
limit for benefits of the nation's most affluent citizens was apparently too much for a majority
of the committee members, who returned to their committee seats and voted to reduce the
§ 415 limits.

8. I.R.S. Information Rel. IR-94-3 (Jan. 13, 1994). TEFRA delayed indexation until
1986, with indexation reflecting cost-of-living increases occurring after 1984. TEFRA, supra
note 7, § 235(g)(1), (2), 96 Stat. at 508.

9. IRC § 415(b)(2)(A)-(D). See Tax-Qualified Retirement Plans After TEFRA, supra
note 3, § 37.03 for details on the rules and their operation.

10. IRC § 415(b)(5). The § 415(b)(5) phase-in period for the dollar limit formerly
was based on years of service with the employer rather than years of participation in the plan.
The Department of the Treasury believed that phasing in the dollar limits based on service
permitted a small employer to establish a defined benefit plan close to the time its key
employee would retire. Because the benefit could be based on past service with the employer,
the key employee generally would have service sufficient for "a fully funded benefit [but the
plan could] ... avoid providing benefits to non-key employees," who generally would have
less past service credit. Tax Reform, supra note 4, at 351. Thus, the Department proposed, and
Congress accepted, a phase-in period for the dollar limit on the basis of years of plan
participation rather than service. Section 415(b)(5)(D) provides that to the extent provided in
regulations, the phase-in period applies to changes in benefit structure.

The Service initially took the position that the phase-in of the dollar limits would
apply to a plan amendment improving benefits. Thus, an amendment to a plan could improve
benefits by no more than 10% of the dollar limit per year of participation after the plan
amendment. I.R.S. Notice 89-45, 1989-1 C.B. 684. The Service later reconsidered its position
in light of the regulations it promulgated under § 401(a)(4), which prohibit discrimination in
favor of highly compensated employees. See Regs. § 1.401(a)(4)-l(b). In Revenue Procedure
92-42, the Service noted that the legislative history of § 415(b)(5) indicated that Congress was
not concerned with phasing in benefit improvements that were not primarily for the benefit of
highly compensated employees. The Service therefore concluded that the § 401(a)(4)
nondiscrimination regulations eliminated the need for the phase-in period to apply to "changes
in benefit structure," since those regulations prohibit amendments that discriminate in favor
of highly compensated employees. Rev. Proc. 92-42, 1992-1 C.B. 872.

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Simplification and IRC § 415

employee's compensation." For these purposes, additions include employer
contributions, employee contributions, 2 and forfeitures allocated to the
employee's account.' 3 The $30,000 limit is indexed to inflation, but the
indexing will not commence until the inflation-adjusted defined benefit limit
reaches $120,000, which will likely occur in 1995.4

There is an important conceptual distinction between the (b) and (c)
limits. The (b) limit restricts the total career benefit an employee can accrue
in defined benefit plans maintained by an employer; the (c) limit restricts the
annual additions to a defined contribution plan.

A third limit (from section 415(e), hereinafter referred to as the "(e)
limit" or the "combined limit") applies when employers maintain both a
defined contribution plan and a defined benefit plan, whether simultaneously
or seriatim. The limit, which is quite complex, is designed to permit an
employer who sponsors or has sponsored both types of plans to provide
greater benefits to its employees than can be provided by an employer who
sponsors only one type of plan. The increased benefits under the combined
limit are, however, less than those determined by combining the full limits
applicable to each type of plan. The combined limit's complexity reflects the
difficulty of combining a career defined benefit limit with an annual defined
contribution limit.

The combined limit requires the preparation of both a "defined
contribution fraction" and a "defined benefit fraction" indicating the percent-

11. IRC § 415(c)(1). ERISA originally set the limit at S25,000, with indexation to
the cost of living. By 1982, the limit reached $45,475, but Congress cut back the limit to
$30,000 in 1982. TEFRA, supra note 7. § 235(a)(2), (g)(1), 96 Stat. at 505, 508. The defined
contribution limit permits the funding of a larger benefit over an employee's career than does
the defined benefit limit. See infra note 52 and accompanying text. The two limits, although
far from mathematically equivalent, apparently were regarded in Congress as political
equivalents.

12. IRC § 415(c)(2)(A), (B). One of the minor complexities in § 415 is that the Tax
Reform Act of 1986 expanded the definition of included employee contributions. Before the
Act, employee contributions for § 415(c) purposes were limited to the lesser of the amount of
the contributions in excess of 6% of compensation or one-half of the contributions. IRC
§ 415(c)(2)(B) (1985). The current version of § 415 includes all employee contributions. Thus.
in determining employee contributions, a plan administrator has to cope with different sets of
rules depending on the year in question.

13. IRC § 415(c)(2)(C).
14. The statutory mechanism for indexing the defined contribution limit is

§ 415(c)(1)(A), which provides that the dollar limit is "S30,000 (or. if greater. 1/4 of the dollar
limitation in effect under subsection (b)(l)(A))." The defined benefit dollar limit, in turn. is
indexed to the cost of living. IRC § 415(d)(1). The original dollar limit for defined benefit
plans was set at $90,000. IRC § 415(b)(l)(A). The indexation of the defined contribution limit
is deferred, however, until the defined benefit limit is adjusted under § 415(d) to S120,000.

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Florida Tax Review

age of utilization of each type of limit.'" The sum of the two fractions must
not exceed one.' 6 This description suggests that there would be no advantage
to sponsoring two types of plans. The manner in which the fractions are
calculated and the effect of the time value of money on the funding of
defined benefit plans, however, permit employers who sponsor two types of
plans (either simultaneously or seriatim) to provide greater total benefits than
can be provided by employers who sponsor only one type of plan. Both the
calculation of the combined limit and the implications of the time value of
money are discussed below.

The numerator of the defined benefit fraction is the amount of the
projected annual benefit the employee has accrued under the plan. 7 The
denominator of the fraction is the lesser of 1.25 times the dollar limit in
effect for the year or 1.4 times the compensation limit applicable to the
employee for the year.'8 This means that for an employee who has accrued
the maximum defined benefit under the (b) limit, i.e., $118,881 in 1984, the
defined benefit fraction is $118,881/(1.25 x 118,881), or 1/1.25, or 0.8. Thus,
even though the employee has accrued the maximum defined benefit under
section 415(b), he or she also may have contributions made to a defined
contribution plan so long as the defined contribution fraction does not exceed
0.2.

The defined contribution fraction is more complex because rather than
reflect a defined benefit as currently calculated, it reflects the cumulative use
of the (c) limit over the employee's service for the employer. The numerator
is the sum of all applicable additions to the employee's accounts in all
defined contribution plans ever maintained by the employer.' 9 The denomi-
nator of the fraction is the sum of variables calculated for each year of ser-
vice.2" The variable for each year is the lesser of 1.25 times the dollar (c)
limit or 1.4 times the compensation (c) limit for defined contribution plans
in effect for the applicable year.2'

15. IRC § 415(e)(l)-(3).
16. IRC § 415(e)(1).
17. IRC § 415(e)(2)(A).
18. IRC § 415(e)(2)(B).
19. IRC § 415(e)(3)(A).
20. IRC § 415(e)(3)(B).
21. Id. A source of needless complexity with respect to § 415(e) is that the

definition of compensation under § 415(c)(3) often differs from the definition of compensation
actually used by the employer to determine contributions under the plan. Some employers find
that a quite burdensome part of § 415(e) computations is determining § 415(c)(3) compensa-
tion over the employee's career, which might span 40 or more years. Records of such
compensation may not be in plan records, and W-2 information, when it can be unearthed, is
not useful if the plan year is other than the calendar year.

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Simplification and IRC § 415

To illustrate, consider an employee with two years of service. In the
first year, the employee's compensation was $64,285.72, and no additions
were made to a defined contribution plan for the employee; in the second
year, compensation was $125,000, and $30,000 in additions were allocated
to the employee's account. In the first year, the compensation limit-25% of
compensation ($16,071.43)-is applicable; in the second year, the dollar limit
is applicable.

Thus, the denominator is ($16,071.43 x 1.4) + (30,000 x 1.25). The
numerator of the fraction is 0 + $30,000. The fraction, then, is as follows:

0 + 30.000
(16,071.43 x 1.4) + (30,000 x 1.25)

This reduces to 30,000/60,000), or 0.5.
If an employee subject to the dollar limits in each year received the

maximum additions under the (c) limitation for each year of service, the
defined contribution fraction, like the defined benefit fraction for an employee
who has accrued the maximum benefit permitted under the (b) limitation,
would be 1/1.25, or 0.8.

The result of the above calculations is that an employee can com-
pletely utilize either the (b) or (c) limit and still have a benefit under plans
subject to the other limit.

There is one important exception to the above rules: certain plans
must substitute a 1 for the 1.25 factor applied to the dollar limit.2- The
effect of this is that participants subject to the dollar limit may use only a
single maximum limit. Thus, for example, an employee whose defined benefit
equaled the dollar limit could not receive any contributions under a defined
contribution plan.

The exception applies to two types of "top-heavy plans." A top-heavy
plan is essentially a plan in which more than 60% of the total benefits are for
key employees. 23 The types of top-heavy plans covered by the exception are
plans in which more than 90% of total benefits are for key employees and
other top-heavy plans that do not satisfy certain optional minimum benefit
requirements.24

22. IRC § 416(h).
23. IRC § 416(g)(1).
24. IRC § 416(h)(2). Employers must contribute at least 3% of compensation (or

if less, the percentage of compensation contributed for the key employee for whom the
percentage is greatest) annually for each non-key employee. IRC § 416(h)(2)(A). Top-heavy
defined benefit plans must provide a retirement annuity equal to at least 2% times years of
service (up to 10) times average compensation. IRC § 416(c). Section 415(e can remain at
1.25, however, only if 4% of compensation is contributed to a defined contribution plan, or

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The time value of money affects the amount an employer contributes
to a defined benefit plan: the longer the period between contribution and
benefit distribution, the smaller the contribution to the plan because the
contribution will have more time to produce investment return. To illustrate,
assume an employer will make a contribution to a pension plan sufficient to
pay the employee a $1,000 lump sum benefit when the employee attains age
sixty-five. Assuming an annual 8% rate of return on investment, the employer
would have to contribute a single payment of $46 to fund the benefit for a
twenty-five-year-old employee or $681 to fund the benefit for a sixty-year-old
employee.25 This simply reflects the fact that the contribution for the twenty-
five-year-old will produce investment return for forty years, while the
contribution for the sixty-year-old will produce a return for only five years.

This has important consequences to small employers who wish to
benefit a principal employee while sponsoring only one plan at a time.26

When the employee is young, the employer will sponsor a defined contribu-
tion plan, for the $30,000 maximum addition to such plan will exceed the
maximum contribution that can be made to fund the maximum defined
benefit for such employee. However, a switchover point will be reached,
where the defined benefit contribution for the employee will exceed the
$30,000 maximum defined contribution addition.2 7 Depending on circum-

a benefit of 3% times years of service times average compensation is provided by a defined
benefit plan. IRC § 416(h)(2)(A).

25. The contributions in the text do not reflect a discount for preretirement
mortality. Such a discount would somewhat reduce each of the contributions. The percentage
decrease of the contribution on behalf of the younger employee would be slightly greater
because actuarialy a 25 year-old is expected to die at an earlier age (82.0) than a 60 year-old
(84.2). See Regs. § 1.72-9, tbl. V.

26. The costs of defined benefit plans, plus the § 415(e) limits, especially as
applicable to certain top-heavy plans, constrain many small employers from adopting defined
benefit plans. If the § 415(e) limits were repealed, small employer sponsorship of defined
benefit plans almost certainly would increase.

27. See, e.g., Stanley N. Bergman & David L. Reynolds, Plan Selection-Pension
and Profit-Sharing Plans, 350 Tax Mgmt. (BNA) 10 (indicating that larger annual contributions
can be made to defined benefit plans than to defined contribution plans for employees near
retirement age); Robert E. Madden, Tax Planning for Highly Compensated Individuals

5.02[2] (1983) ("[Ain employer who is contemplating the implementation of a qualified plan
may favor a defined benefit pension plan over other options that are available if that employer
has older employees it particularly wishes to benefit."); American Bar Association, Senior
Lawyers Division, The Lawyers Guide to Retirement 140 (David A. Bridewell ed., 1991)
[hereinafter Lawyers Guide to Retirement].

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Simnplification and IRC § 415

stances, this point will generally occur sometime between an employee's early
forty's and early fifty's.'

For example, assume a fifty-year-old employee, with a defined
contribution fraction of 0.4. The defined benefit fraction for the employee is
0.6, which translates into a defined benefit limitation equal to 75% of the
defined benefit dollar limitation.29 Assume that the limit is $ 12 0 ,0 00O."
Thus, the plan could provide, and the employer could fund, a $90,000 defined
benefit, unless the plan were subject to the more restrictive top-heavy
limitations."1

The amount of the annual contribution required to fund this benefit
will depend on the actuarial cost method and assumptions employed by the
plan's actuary.32 The employer probably will contribute between $35,000

28. The literature does not indicate the age at which a contribution to a defined
benefit will exceed the maximum contribution to a defined contribution plan, and indeed, the
age will vary depending on a number of factors. See infra text accompanying notes 29-35. The
immediately following textual example involves an employee who is age 50.

In preparing this article, the author spoke with six pension attorneys, who suggested
that the age at which defined benefit plans permit larger contributions than defined contribu-
tion plans occurs somewhere between 41 and 51. Of course, the actual point at which contribu-
tions to a defined benefit plan, with respect to a particular participant may exceed contributions
to a defined contribution plan, will depend on the assumptions the plan's actuary makes con-
cerning interest, mortality, assumed retirement age, the history of previous additions to defined
contribution plans, and the actuarial method used by the plan to assign benefit costs to each
year in which the plan is being funded. See generally I Gary I. Boren. Qualified Deferred
Compensation Plans ch. 8 (1993) (discussing the elements of various actuarial methods).

29. A defined benefit fraction with a numerator of .75 and a denominator of 1.25
is .6.

30. The $120,000 dollar limit was selected because indexation of the defined
contribution begins when the (b) limit reaches S120,000. See supra note 14.

31. See supra text accompanying notes 23-24. In the example, if the plan were super
top-heavy, the defined contribution fraction would have been .5 rather than .4 (i.e., .5/1.25=.4).
and the defined benefit fraction also would have been .5. Thus, the maximum defined benefit
that could be funded would have been $60,000 if the plan had been super top-heavy.

32. See Jerome Mirza & Assocs. v. United States, 882 F.2d 229 (7th Cir. 1989). In
Jerome Mirza & Associates, the employer's contribution was based on an interest rate
assumption of 5% and an actuarial method that allocated costs related to past service entirely
to the year of plan adoption. The Service successfully argued that the 5% interest rate
assumption was unreasonable and that the costs attributable to past years should have been
allocated to those years and then amortized over a ten-year period. The court adopted the
Service's 8% interest rate assumption. The plan itself had invested in government securities
that yielded between 11.65% and 15.75%. The court reduced the taxpayer's original deduction
of $625,925 to $115,953. Id. at 230-31. However, more recently, the Service was unable to
persuade the Tax Court that a 5% interest rate or an assumed retirement age of 55 was
unreasonable. Citrus Valley Estates, Inc. v. Commissioner. 99 T.C. 379 (1992): Vinson &
Elkins v. Commissioner, 99 T.C. 9 (1992). aff'd. 7 F.3d 1235 (5th Cir. 1993); Wachtell.
Lipton, Rosen & Katz v. Commissioner, 64 T.C. Memo 1992-392 (CCHI) 1992.

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and $85,000, 33 depending on how aggressive it wishes to be (i.e., how much
risk of dispute with the Service it wishes to assume). 34 Moreover, the
amount of the permissible benefit for the employee will increase each year
because the employee's defined contribution fraction will decline to reflect
the fact that no further contributions are being made to the defined contribu-
tion plan.

An employer whose sole motive was to maximize tax deferral,
however, would sponsor defined contribution and defined benefit plans
simultaneously rather than seriatim. Simultaneous funding would permit full
utilization of the defined contribution fraction and permit earlier funding of

33. The low-end figure assumes retirement at age 65, an interest rate of 8%, and
a life expectancy of 85. Funding at a level-dollar amount over 15 years would yield a
contribution of $36,491.30. The high-end figure assumes a retirement age of 60, a 6% interest
rate, and a life expectancy of 90. These assumptions would yield a first year contribution of
$86,244.90. The latter assumptions are less conservative than the assumption challenged in
Jerome Mirza & Associates, or in the Tax Court cases cited supra note 32. It should be noted
that the size of the contribution depends not only on the plan's actuarial assumptions, but also
its actuarial method, which assigns portions of the cost of benefits to each year in which the
benefits are funded. See Boren, supra note 28, ch. 8.

34. The Service has engaged in an audit of small defined benefit pension plans. The
American Society of Pension Actuaries has opposed this program vigorously. See, e.g.,
American Society of Pension Actuaries, IRS Small Plan Actuarial Audit Program (1990); Ellin
Rosenthal & Herman Ayayo, PBGC Told to Wait in Line; Small Plan Actuarial Audit Program
Feud Continues, 47 Tax Notes 1157 (June 4, 1990); Ellin Rosenthal, IRS v. Actuaries: The
Feud Continues over Small Plan Audits, 47 Tax Notes 140 (Apr. 9, 1990). The Service
apparently routinely challenged interest rate assumptions lower than 8% and age-65 minimum
retirement ages. See Rosenthal, supra, at 140. The positions that the Service took in the audit
program were rejected by the Tax Court in a trio of 1992 decisions. See supra note 32.

A relatively recent disincentive to some small employers making aggressively large
contributions to a defined benefit plan is the excise tax that § 4980 imposes on surplus assets
reverting to the employer when an overfunded pension plan terminates. The excise tax is 50%,
unless the employer establishes a "qualified replacement plan" or shares the plan surplus with
the employees, in which case the tax is reduced to 20%. IRC § 4980(d). Assume a small
business will come to a close when a principal employee reaches retirement age and that the
business will then have an overfunded pension plan. When the plan terminates, the residual
assets will be taxed at punitive rates under § 4980(d) unless they are partially used to provide
additional benefits to employees. The principal employee, however, will not be able to share
in the additional benefits if already at the § 415 limits. Thus, the employer will either have
to pay the tax or give 20% of the surplus to employees other than the principal. This scenario
will discourage some small employers from funding their plans aggressively. There may,
however, be ways to plan around this problem to some extent; for example, a plan might
provide for a lump sum distribution option, with a relatively low interest rate assumption. See
IRC § 415(b)(2)(E)(i).

35. In effect, a zero is added to the numerator in each year, to reflect a zero
contribution, while 1.25 times the (c) dollar limit is added to the numerator. Forfeitures added
to the employee's account, however, are also treated as additions. IRC § 415(c)(2). Thus, any
forfeitures allocated to an employee's account would increase the numerator.

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Simplification and IRC § 415

a portion of the same defined benefit that can be funded at a later stage.36
Earlier plan funding is less costly than later plan funding because earlier
funding enjoys the benefits of the tax-deferred plan funding vehicle for a
longer period of time.

However, there are reasons why small employers might prefer not
sponsoring defined benefit plans while the favored employee is young. The
most evident reason is that defined benefit plans are relatively expensive to
administer and may not be justified until the sponsor can make substantial
contributions on behalf of the favored employee.3 ' Additionally, given the
relative illiquidity of pension wealth prior to the time an employee retires, not
all younger employees wish to maximize contributions to qualified plans."

Thus, many small employers will sponsor only a defined contribution
plan when the favored principal is young and later will switch to only a
defined benefit plan. This strategy has an additional benefit to small employ-
ers that wish to minimize the cost of providing benefits for employees other
than the principal-provided such other employees are younger than the
principal during the defined benefit sponsorship. There are three reasons why
defined benefit plans can minimize costs attributable to young employees.

The first reason is the time value of money's effect on contributions.
Section 401(a)(4) of the Code, which proscribes discrimination in favor of
highly compensated employees, generally permits an employer to fund a

36. Section 404j), however, does not permit a deduction for a contribution to a
defined benefit plan to the extent that the benefit being funded exceeds the benefit permissible
under § 415. IRC § 4040). This prevents an employer from anticipating inflation-adjusted
increases in the § 415 limits for purposes of plan funding. Thus, maintaining two plans would
permit early funding of only a portion of the complete benefit that ultimately can be funded
under a defined benefit plan.

37. Defined benefit plans must utilize actuarial services, which can add costs. In
addition, many defined benefit plans must pay premiums to Pension Benefit Guarantee
Corporation ("PBGC") for each participant. There are important exceptions to PBGC coverage.
including an exception for professional service employer plans which never have had more
than 25 active participants. ERISA § 4021(b)(13) (codified at 29 U.S.C. § 1321(b)(13)).
Finally, because defined benefit plans are considerably more complex than defined contribution
plans, associated legal and accounting costs also may be higher. See, e.g., Madden. supra note
27, 5.02[2].

38. Section 72(t) imposes a 10% excise tax on most distributions from a qualified
plan to a participant younger than age 59.5. IRC § 72(t). In addition, the Service has long
taken the position that a pension plan (as opposed to a profit-sharing plan) may not make
distributions to an employee prior to the employee's separation from service, death, or
disability. Rev. Rul. 56-693, 1956-2 C.B. 282. To some extent, this can be mitigated by an
employee's access to plan loans, but plan loans are subject to many restrictions and are not
available to owner-employees who sponsor Keogh plans or to shareholder-employees in
Subchapter S plans. See generally Boren, supra note 28, § 11:18. In addition, loan programs
do not work well in defined benefit plans because plan assets are not allocated to individual
participants.

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defined retirement benefit for each employee equal to a uniform percentage
of the employee's compensation. 39 The cost of funding this benefit is lower
for younger employees than for older employees because the period between
contribution and benefit payment is longer. What this means is that the
employer will contribute a smaller percentage of pay to fund the benefits of
younger employees than for older employees.4" In a garden variety defined
contribution plan, however, this will not be the case, for the employer
generally will contribute the same percentage of each employee's compensa-
tion to the plan.

The second reason defined benefit plans are more attractive than
defined contribution plans when the goal is to favor older employees is the
ability to combine a flat benefit formula with the fractional rule of accrual.42

The fractional rule permits a plan to define a benefit for all employees and
have the benefit accrue over the remaining period of an employee's service
with the employer. Thus, for example, a plan might promise a benefit of 30%
of compensation for all employees, to accrue over each employee's period of
projected future service. A fifty-five-year-old doctor would (but for
antidiscrimination regulations noted below) thus accrue 1/10 of the benefit in
a plan with normal retirement age of sixty-five, or a benefit accrual of 3% of
compensation, each year, while the twenty-five-year-old nurse would accrue
1/40 of the benefit, or .75% of compensation, each year. When the doctor

39. A defined benefit plan can be integrated with social security, such that the
benefit for lower-compensated employees will be a smaller percentage of their compensation
than for higher-compensated employees. IRC § 401(1). See generally Nancy J. Altman,
Rethinking Retirement Income Policies: Nondiscrimination, Integration, and the Quest for
Worker Security, 42 Tax L. Rev. 433 (1987).

40. This does not, however, mean that the ultimate benefit being paid to the younger
employee will be a smaller percentage of pay, but only that the cost to the employer of
funding the benefit is less. See supra note 25 and accompanying text for an illustration.
Assume further that each employee in the example eams $10,000; thus, each of them accrues
a benefit equal to 10% of pay. However, the employer would contribute .46% of the younger
employee's compensation, compared to 6.81% of the older employee's compensation. See
generally Lawyers Guide to Retirement, supra note 27, at 140 (noting that "[blecause the
contribution formula considers the number of years remaining to retirement for all participants,
a defined benefit plan works best when your employees are somewhat younger than you").

41. The defined contribution plan, like a defined benefit plan, can be integrated with
social security, resulting in larger contributions for employees whose compensation exceeds
the plan's integration level. IRC § 401(l)(2)(a); see supra note 39. Also, an employer, at the
cost of added complexity, can sponsor a defined contribution plan that permits contributions
that are larger as a percentage of pay for older employees. See Regs. § 1.401(a)(4)-8(b)(3)
(describing safe harbor nondiscrimination rules for target benefit plans); Regs. § 1.401(a)(4)-
8(b)(1)-(2) (providing rules to cross-test defined contribution plans on the basis of benefits).
However, contributions to such plans may run up against the defined contribution limitation
of $30,000. IRC § 415(c).

42. IRC § 411(b)(1)(C).

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Siniplification and IRC § 415

retires in ten years, the doctor will have accrued a benefit equal to 30% of
compensation while the nurse during this same period of time will have
accrued a benefit equal to 71/2% of compensation.13 Relatively recent regula-
tions under section 401(a)(4) put limits on this technique but do not eliminate
it.

44

The third reason is that a defined benefit can be based in part on
past-service credit.45 In many cases, the favored principal will have substan-
tially more past service than other employees. Thus, the benefit being funded
for the principal can be larger (as a percentage of compensation) than the
benefits for employees without equivalent past service credit. Newly finalized
regulations under section 401(a)(4) limit but do not eliminate an employer's
ability to exploit the grant of past-service credits to favor a principal.6

This conflicts with a purpose of the tax subsidy for qualified plans,
which is to encourage employers to establish plans that provide benefits to
rank-and-file employees that are proportionate (as a percentage of compensa-
tion) to the benefits provided to highly compensated employees. 7

43. It is probable that the plan will terminate when the doctor retires. Thus, the
nurse will not have the opportunity to increase her benefit accruals to 30% of pay.

44. Regs. § 1.401(a)(4)-3(b)(2)(iv), (4). The regulations create a safe harbor in
which a plan's fractional rule formula will be considered nondiscriminatory, and thus
nonviolative of § 401(a)(4), if the denominator of the fraction is at least 25 for each employee.
Regs. § 1.401(a)(4)-3(b)(4).

45. For example, an employer might adopt a plan on January 1. 1994, providing a
benefit equal to 1% of final pay multiplied by years of service. The years of service might
include all years that an employee worked for the employer, even those before 1994. Section
415(b)(5), however, does place some limit on this, since the defined benefit dollar is phased
in over 10 years of plan participation. IRC § 415(b)(5).

46. The regulations create a safe harbor generally permitting a plan to award five
years of past-service credit. Prop. Regs. § 1.401(a)(4)-5(a)(3).

47. The subsidy has been justified as an inducement to employers to set up plans
by providing substantial tax benefits to upper-income employees who participate. The
antidiscrimination rules of § 40 1(a)(4) and coverage rules of § 410 then require that benefits
be provided to a substantial percentage of the non-highly compensated portion of the
employer's workforce, and § 401(a)(4) requires that the benefits provided to rank-and-file
employees be comparable to those provided to highly compensated employees. See generally
Michael J. Graetz, The Troubled Marriage of Retirement Security and Tax Policies, 135 U.
Pa. L. Rev. 851 (1987); Bruce Wolk, Discrimination Rules for Qualified Retirement Plans:
Good Intentions Confront Economic Reality. 70 Va. L. Rev. 419 (1984). Both Professors
Graetz and Wolk question the effectiveness of the qualified plan rules in directing benefits to
rank-and-file employees. Taking a more extreme view, Professor Joseph Bankman argues that
the nondiscrimination mechanism may harm the welfare of rank-and-file employees. Joseph
Bankman, Tax Policy and Retirement Income: Are Pension Plan Anti-Discrimination
Provisions Desirable?, 55 U. Chi. L. Rev. 790, 805-14 (1988).

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III. THE PURPOSE OF SECTION 415
AND THE ARGUMENTS FOR ITS ELIMINATION

A. Purpose of Section 415

Prior to the enactment of ERISA, the Code placed no direct limita-
tions on contributions or benefits for individual employees. 48 It was thus
possible for an employer to make exceedingly large contributions or to fund
exceedingly large benefits for an employee. Congress, in enacting ERISA,
believed that the law's failure to place limits on contributions and benefits
represented a shortcoming.49 Senator Long expressed this view in comments
before the Senate:

[Section 415] makes the tax laws regarding pension
plans fairer by limiting the amount of the contributions or
benefits that can be provided to any individual under such a
plan. The fact that present law does not provide such specific
limitations has made it possible for extremely large contribu-
tions and benefits to be made under qualified plans for some
highly paid individuals. While there is, of course, no objec-
tion to large retirement benefits in themselves, it is not
appropriate to finance extremely large benefits in part at
public expense through the use of special tax treatment.50

The purpose of Section 415 can be understood as limiting contribu-
tions and benefits under qualified plans to levels that are proportionate "to the
reasonable needs of individuals for a dignified level of retirement income."'
Benefits and contributions in excess of these levels are not eligible for the tax
deferral available under a qualified plan.

One can argue about how well section 415 actually effects this
purpose. First, the limits under section 415 are generous, perhaps to a fault.
Take the case of a twenty-year-old who receives the maximum contributions
to a defined contribution plan for forty-five years. If we assume no inflation

48. See Tax-Qualified Retirement Plans After TEFRA, supra note 3, § 37.02. The
pre-ERISA Internal Revenue Code, however, did include rules prohibiting discrimination in
favor of shareholders, officers, and other highly compensated employees. See IRC § 401 (a)(4)
(1973). In addition, § 162(a) requires that compensation be reasonable. IRC § 162(a)(1). This
placed an indirect limit on deferred compensation.

49. See Tax-Qualified Retirement Plans After TEFRA, supra note 3, § 37.01.
50. 120 Cong. Rec. S. 29,946 (1974) (statement of Sen. Long).
51. H.R. Rep. No. 807, 93d Cong., 2d Sess. 112 (1974), reprinted in 1974

U.S.C.C.A.N. 4670, 4777.

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Simplification and IRC § 415

and that the plan realizes an annual rate of return of 4% the employee would
accumulate a defined contribution account balance of approximately
$3,630,000 by the time the employee reaches age sixty-five. 2 In addition,
the employer could fund 25% of the maximum defined benefit permitted
under section 415(b).13 It is difficult to regard this level of benefit as no
more than reasonable. A second problem with the limits is that they apply on
a per-employer basis. Thus, an employee who works for more than one
employer theoretically can accumulate greater benefits than those just
described.-4

Notwithstanding these criticisms, section 415 does at least put an
outer limit on benefits and contributions. Moreover, there probably are not
very many young people who are credited with $30,000 in annual additions
to defined contribution plans or employees whose changes of employer
significantly increase their total benefits because of section 415's separate
applicability to each employer." Thus, even though section 415 does not
work perfectly, it does serve the purpose of placing at least some limits on
the amount of tax deferral available to participants in qualified plans. In so
doing, section 415 controls the tax expenditures for qualified plans.

B. The Argument for Eliminating Section 415

Those who argue that we should repeal section 415 generally do not
take issue with its basic policy goals.5 6 Rather, their argument is that section
415's contribution to these goals does not justify the costs imposed by its
intractable complexity.' In the next part of this article, however, it will be
shown that section 415 is less impervious to simplification efforts than
generally has been acknowledged. The argument that section 415 should be

52. As noted in the text, this benefit figure assumes no inflation and a true rate of
return of 4%. Assuming an annual inflation rate of 4% (which would increase the (c) limits)
and a rate of return on investments of 8%, the employee will accumulate an account balance
in excess of $19,500,000 by the time the employee attains age 65. By way of contrast, the
present value of a $120,000 retirement annuity at age 65 is approximately $1.6 million.
assuming a 4% interest rate and a 20-year-life expectancy.

53. Sponsors of certain top-heavy plans, however, would not be able to provide the
defined benefit. See supra notes 22-24 and accompanying text.

54. See Bruce Wolk, The New Excise and Estate Taxes on Excess Retirement Plan
Distributions and Accumulations, 39 U. Fla. L. Rev. 987, 989 (1987).

55. Moreover, an employee who works for two related employers within the
meaning of §§ 414(b), (c), (m), (n), or (o), is subject to a single, aggregate § 415 limit. See
IRC § 415(g).

56. None of the sources cited supra note 5 argue against the basic policy goal of
placing limits on the use of tax deferral provided by qualified plans.

57. See sources cited supra note 5.

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Florida Tax Review

repealed is weakened considerably if it is correct that the section can be
simplified in a manner that substantially reduces its administrative costs.

This still leaves the question of whether section 415 has anything to
add to other sections of the Code that also serve the purpose of limiting tax
deferral. If section 415 serves little or no purpose, there is no reason to retain
even a simplified version of it. Proponents of eliminating section 415 argue
that the policy goals effected by section 415 can be served adequately by the
section 4980A excise tax on excess distributions, which is less complex than
the section 415 rules. 8

Section 4980A imposes a 15% excise tax on "excess distributions"
from qualified plans.59 An excess distribution is the amount of distributions
from all qualified plans, individual retirement accounts, and section 403(b)
annuities in a given year to the extent that such distributions exceed a
threshold amount.6° The threshold amount is currently $150,000, except for
taxpayers who elected a grandfather provision.6'

Example: A is an individual who in a single year receives a
$90,000 annual annuity payment from the defined benefit
plan of Employer X and a $40,000 payment from a defined
contribution plan of the same employer. In addition, A
receives another $50,000 annuity payment from a defined
benefit plan of Employer Y and also withdraws $30,000 from
an individual retirement account. In all, A receives $210,000
in distributions in plans whose distributions are subject to
section 4980A in the year in question. The distributions
exceed the threshold amount by $60,000. Thus, A would pay
$9,000 in tax (15% x $60,000) under section 4980A.62

58. See generally sources cited supra note 5. Note that even those who argue that
§ 415 should be repealed do not seem to regard repeal as likely. Dianne Bennett, who makes
the case against § 415 articulately, notes that consideration of her argument might lead to
simplification of § 415 even if it does not lead to repeal. Bennett, supra note 5, at 40.

59. IRC § 4980A(a). For a discussion of the operation of the excise tax and
opportunities to plan around it, see Dianne Bennett et al., Taxation of Distributions from
Qualified Plans ch. 13 (1991).

60. IRC § 4980A(c)(1), (e).
61. IRC § 4980A(c)(1), (f). The grandfather provisions are found in § 4980A(f).

Dianne Bennett proposed deleting the grandfather provisions from the Code. See Bennett,
supra note 5, at 39.

62. Section 4980A includes special rules reducing the tax in a year in which the
employee receives a lump sum distribution. IRC § 4980A(c)(4). The provision is elective and
may be made only once. IRC §§ 4980A(c)(4), 402(d)(4)(B).

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An analogous tax provision increases the estate tax of decedents who die with
excessive accumulations in plans whose distributions are subject to section
4980A. 63

In a nutshell, then, section 4980A is an additional tax on unreason-
ably large benefit distributions from qualified plans.' In theory, the section
recoups a portion of the tax deferral attributable to the excessive portion of
the benefits. The effect of the section should be limiting benefit size, which
is, of course, also the effect of section 415. But where section 415 operates
directly by limiting what goes into a plan,6 5 section 4980A operates indirect-
ly by imposing a tax on what comes out of the plan. Section 415 works as
a prophylactic, section 4980A as a corrective.

Section 4980A, however, would not be an adequate substitute for
section 415.66 The primary problem with section 4980A is that it is a flat tax
that does not take into account many of the variables that contribute to the
extent of the tax deferral an employee will realize from participation in a
qualified plan. 67 A 15% tax, for example, will do more than recover the tax
savings embedded in assets that have been in the plan for a short time but
recover only a small percentage of the tax savings reflected in assets that
have been accumulating over an extended time period.

Example: Assume a taxpayer with a 39.6% marginal tax rate
and assume that both the taxpayer and the qualified plan will
earn a 6%, pre-tax, annual rate of return on investments.

The taxpayer is paid $1,000 in taxable compensation in 1991,
yielding $604 after tax. The $604 will grow to $1,757 with
a pre-tax 6% rate of return after thirty years.

Assume now that instead of being paid $1,000 in taxable
compensation, the taxpayer's employer contributed $1,000 to
a qualified plan, which earns a 6% rate of return. The $1,000
will grow to $5,743 in thirty years. If this amount is then
distributed to the taxpayer in a lump sum, the taxpayer will
retain $2,608 after paying a 39.6% income tax and a 15%
section 4980A tax on the distribution. This is approximately
148% of the amount that the taxpayer could have accumulat-
ed outside the plan.

63. IRC § 4980A(d).
64. Tax Reform, supra note 4, at 350-53.
65. The (c) limit directly limits what goes into a defined contribution plan; the (b)

limit, by providing a maximum benefit, indirectly limits the contributions that are made to a
defined benefit plan.

66. See Wolk, supra note 54, for an excellent critique of the § 4980A excise tax.
67. Id. at 1022-24.

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Florida Tax Review

The differential between the value of after-tax savings and the qualified plan
increases as tax or interest rates increase.68 Assuming the applicability of the
section 4980A tax, the point at which a contribution to a qualified plan
becomes more valuable than immediately taxable compensation is approxi-
mately twelve years, given the assumptions about interest and tax rates in the
example.69 In other words, given these assumptions and all other things
being equal, a taxpayer whose retirement distributions will be subject to the
section 4980A excise tax should choose deferred compensation if the deferral
period is greater than twelve years.7" Thus, section 4980A is not a very
effective tax to limit accumulations in qualified plans during much of a
taxpayer's career. Despite the existence of section 4980A, eliminating section
415 would give some taxpayers a reasonably free hand to decide how much
compensation to defer on a tax-advantaged basis."

One could argue that section 4980A could be restructured to target
more precisely the embedded tax advantage in a qualified plan distribution,
or that the section 4980A tax rate could be increased.72 A more precise
section 4980A, however, would make section 415 appear a model of
simplicity. An excise tax that perfectly compensates for previous tax deferral
attributable to "excess distributions" would have to be based on the difference
between (1) the plan's pre-tax return on all contributions multiplied by the
taxpayer's marginal tax rate at the time of distribution, and (2) a theoretical
after-tax rate of return that the taxpayer would have realized had she paid
immediate tax on each contribution and invested it in a taxable investment
format. Such calculations would require that the taxpayer identify the amount

68. Id. at 1020-21. The benefit of the qualified plan is enhanced in states with an
income tax.

69. The figures were derived on a spreadsheet, which compared the after-tax
accumulation of an after-tax payment to the employee in the hypothetical with the after-tax
distribution of a contribution to a plan. The figures assume that the entire plan distribution was
subject to a 39.6% marginal tax rate, plus the 15% excise tax.

An earlier version of this article assumed a 31% marginal tax rate and an 8% return.
These assumptions yielded an approximately 10-year break-even point.

70. Different assumptions would either lengthen or shorten the period. In addition,
there are planning opportunities to reduce the effect of the excise tax. For example,
§ 4980A(c)(4) provides for special treatment of a lump sum distribution qualifying under
§ 402(d)(4)(B) and § 4980A(d)(5) for an effective marital deduction for an electing spouse
who elects to treat post-mortem payments as a retirement distribution to the spouse. IRC
§ 4980A(c)(4), (d)(5). See Bennett, supra note 59, 13.4, .6[7][c][ii]; see also Wolk, supra
note 54, at 996-97, 1006-10. Professor Wolk also suggests planning possibilities in community
property states. Id. at 999-1002.

71. It is possible that some employers ignore the § 415 limits because of their
complexity. Part of the issue, then, might be which is preferable: § 4980A with compliance
or § 415 without?

72. See Bennett, supra note 5, at 38-39; Irish Memo, supra note 5, at 7-8.

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Simplification and IRC § 415

contributed to the plan in each year, the plan's rate of return for each year,
the taxpayer's marginal tax rate for each year, and the taxpayer's theoretical
rate of return on nonqualified plan investments for each year.'" No one
could seriously suggest that such an approach is workable. The record-
keeping requirements would be staggering and determining alternate rates of
return virtually impossible without resort to across-the-board, rough-justice
assumptions. What's worse still, the complexity would be visited at the
individual taxpayer level. At least with section 415, the complexity occurs at
the plan level, where it is likely to be less bedeviling.74

Increasing the section 4980A tax also is an unappealing idea. If the
increase is high enough to discourage excessive early accumulations of assets,
it will impose a substantial tax penalty on individuals whose pension wealth
is attributable either to strong investment performance or late plan contribu-
tions." Moreover, assuming annual returns on investment of 6% and an
employee with a constant 39.6% marginal tax rate, the excise tax would have
to be approximately 27.2% to prevent tax deferral advantages for benefits
resulting from level contributions over a forty-year career.76 Finally, changes
in income tax rates would virtually mandate complicated adjustments of the
excise tax.77

73. See Wolk, supra note 54, at 1020-21.
74. Interestingly, the Department of the Treasury, when it proposed the excise tax

as a replacement for § 415(e), argued that complexity at the participant level was preferable
to complexity at the plan level because it did not impose an administrative burden on the plan.
Tax Reform, supra note 4, at 352-53.

75. See Gridlock, supra note 1, at 33 (noting that the tax "acts as a penalty on
investment success"); Bennett, supra note 5, at 39 (noting that "the excise tax penalizes good
investment experience rather than simply addressing overaccumulation from contributions,"
but also that even "good investment experience [has] the advantage of tax-free build-up in a
plan"). Professor Wolk, however, notes that the tax acts particularly unfairly in cases of
unrealized appreciation. Wolk, supra note 54, at 1022. In such cases, the qualified plan offers
no tax benefit since unrealized gain is not taxed outside the plan until disposition. Id.
Subjecting what would be unrealized appreciation outside the plan to an excise tax when the
appreciated assets are distributed is difficult to defend.

76. The 27.2% tax rate reflects a further assumption: that plan benefits were paid
out in a lump sum at retirement age. For benefits paid out as annuities, the tax would have to
be still higher to reflect the fact that tax deferral continues while assets are held by the plan.

In an earlier draft of this article, which assumed an 8% rate of return and a 31%
marginal income tax rate, the excise tax would have needed to increase to 33.3%. If the
marginal tax rate were 31% and the rate of return were 6%, the excise tax would need to be
26%.

77. This is so because a change in tax rates would change the size of the tax
subsidy, sometimes reducing it, sometimes increasing it. Moreover, changes in tax rates could
affect people differently. Assume a taxpayer accumulated pension wealth while her marginal
tax rate was 40%. When the taxpayer retires, Congress increases the tax rates such that the
taxpayer's marginal tax rate is now 50%. One could argue that the excise tax should be

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Florida Tax Review

Even if section 4980A were substantially increased or amended to
precisely, or at least more precisely, target the tax deferral of "excess
distributions," elimination of section 415 might still be a source of potential
havoc for revenue collection over a transition period, because the revenue loss
would occur annually as contributions were made to qualified plans while
revenue gains would be delayed until benefits are distributed. (This assumes
that current distributions subject to section 4980A are relatively small
compared to the contributions that will ultimately result in excess distribu-
tions in the future.)

Moreover, it is possible that the day of revenue payback will never
arrive for some taxpayers. Change in the tax law is as much a certainty as
death and taxes themselves. Congress may in the future respond to pressures
about the complexity and unfairness of the section 4980A tax by repealing
section 4980A. Of course, it is also plausible that Congress may respond to
pressures to raise more revenue by increasing the tax or lowering the
taxability threshold.

Thus, an argument for repeal of section 415 based on the similar
policy goals of section 4980A is not persuasive.7" Despite this, a repeal of
section 415 probably would not result in employees of large employers
receiving significantly larger benefits from qualified plans than they receive
today. The rules prohibiting discrimination against non-highly compensated
employees would be a substantial economic disincentive to providing
excessively large benefits for the highly paid because similar levels of
benefits would have to be provided for all employees.79 Large employers

lowered to reflect the fact that the distributions will be taxed at a 50% rate. However, an
active employee whose marginal rate jumped from 40% to 50% would now realize greater
deferral from qualified plan savings. One could thus also argue that the excise tax should be
increased. Increasing the rate for some taxpayers, while reducing it for others, would breed
complexity.

78. Without § 415, the only direct limit on contributions to a defined contribution
plan would be the § 404 rule limiting contributions to a profit sharing or stock bonus plan to
15% of compensation and contributions to two or more plans to the greater of 25% of
compensation or the minimum contribution to a defined benefit plan required under § 412. See
infra note 81 for further discussion of the § 404 limits on deductions.

Whether § 4980A should be retained as an adjunct to § 415 is a difficult question.
Professor Wolk views the tax as fundamentally flawed. Wolk, supra note 54, at 1020-26. The
APPWP has argued that the tax should be repealed. Gridlock, supra note 1, at 32-34. But see
Bennett, supra note 5 (expressing the view that § 4980A does not present difficult issues).
Given the fact that § 415 permits wealthy taxpayers to accumulate rather large tax-favored
pools of money, one could argue that § 4980A, despite its problems, should be left in the
Code.

79. See supra note 39 and accompanying text.

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Simplification and IRC § 415

normally have too many non-highly compensated employees to make such
strategies appealing.'0

Repeal of section 415 would, however, provide tax planning opportu-
nities for small businesses seeking to benefit principal employees. A vivid
illustration of this is provided by a consideration of a successful self-em-
ployed professional with no employees. Assume the professional earns
$500,000 annually, which will be allocated between current compensation and
qualified deferred compensation. Under current law, the professional could
contribute $30,000 each year to a defined contribution plan. Were section 415
repealed, the taxpayer could contribute perhaps $100,000 or more to the plan
in 1994, and perhaps could contribute as much compensation as the taxpayer
desired, depending on how limitations on deductions are interpreted.8 1
Moreover, section 404 places no direct limit on the size of a defined benefit
that can be funded with deductible contributions; without section 415, the
only limit on such contributions would be the general restriction under section
162 limiting compensation to reasonable amounts.

It might be argued that allowing a class of affluent taxpayers to defer
large amounts of income is a small price to pay for banishing section 415
from the Code. But the revenue costs of effectively unfettering many profes-
sionals and small business owners from the limits of section 415 are likely
to be high, particularly if income tax rates continue to rise. Moreover, to
allow even a small group of taxpayers to decide how much tax they should

80. Employers currently may provide for benefits in excess of § 415 limitations
through nonqualified "excess benefit" plans.

The floor debates on ERISA indicated an awareness of the difficulty that large
employers would have in providing extraordinary benefits through qualified plans. See
Subcomm. on Labor of the Senate Comm. on Labor and Pub. Welfare. 94th Cong.. 2d Sess.,
Legislative History of the Employee Retirement Income Security Act of 1974 1740 (Comm.
Print 1976) (statement of Sen. Long noting that discrimination rules and threat of shareholder
litigation would prevent loading up benefits for executives from qualified pension plans).

81. The sole constraint on this would be the limitations on deductions under § 404.
While deductions are limited to 15% of compensation for contributions to a stock bonus or
profit-sharing plan, and to the greater of 25% of compensation or the minimum contribution
to a defined benefit plan under § 412 if the employer maintains a defined contribution and
defined benefit plan, § 44(a)(7), there is no limit on deductions for an employer who
maintains only a money-purchase pension plan. Of course, one could argue that were § 415
repealed, the 25% limitation should apply (or be legislatively amended to apply) to employers
who maintain only money-purchase plans. In addition, § 401(a)(17) would limit the compensa-
tion to $150,000 in 1994. If the 25% limit on deductions applied, the taxpayer's contribution
would be limited to $37,500 which would be 25% of the S 150.000 of § 401(a)(17) compensa-
tion. However, the argument that the 25% limit should apply is difficult to make. for two plans
are not involved. Moreover, § 404(j), which reduces deductions by the amount that annual
additions exceed the § 415 limits, suggests that the § 404 25% limit need not apply to
single-plan situations. Thus, textual statements seem correct under the current version of § 404.

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Florida Tax Review

pay in a particular year sends a symbolically appalling message to other
taxpayers, which may be unwise for a system dependent on voluntary compli-
ance.

There is another potential disadvantage to repeal of section 415: a
probable increase in the use of defined benefit plans, which will make it more
likely that benefits for non-highly compensated employees will be reduced.
We have already seen that defined benefit plans favor older employees, and
that as a result some small employers wishing to benefit a particular older
employee will switch from a defined contribution plan to a defined benefit
plan. This not only maximizes contributions under section 415, but also
minimizes the cost of providing benefits for their younger employees.
Notwithstanding these facts, some such employers do not swap plan types
because the size of the permissible benefit for the favored employee under
section 415 may not be great enough to warrant the costs and bother of
administering a defined benefit plan. Such costs, however, might be seen as
trivial if section 415 ceased to limit benefits under defined benefit plans.
Employers currently shunning such plans because of a cost/benefit analysis
might well begin adopting such plans. As just noted, adoption of such plans
sometimes will result in disproportionately low benefits for non-highly
compensated employees, an outcome that is at odds with one of the purposes
of the qualified-plan tax subsidy: providing approximately proportional
benefits (as a percentage of compensation) for all participants.

C. Consideration of the Arguments for Eliminating Section 415(e)

Most of the complexity of section 415 is attributable to section
415(e), which provides the limitation for combinations of defined benefit and
defined contribution plans. A case can thus be made that section 415 should
be retained but that subsection (e) should be repealed.82

Repeal of section 415(e), however, might substantially reduce
revenues. An employer would be free both to fund a maximum defined
benefit and to make maximum contributions to a defined contribution plan.
In all, this would permit some employees to accumulate by retirement age a
defined benefit and defined contribution account with an aggregate value of
approximately five million dollars, given current tax rates and relatively low
interest assumptions.83 The value could be still higher depending on the

82. The Department of the Treasury initiated the idea of substituting an excise tax
on distributions for § 415(e). See Tax Reform, supra note 4, at 352-53.

83. This assumes a 4% investment return and no inflation (after the dollar limit is
adjusted to $120,000). The accumulation in the defined contribution plan would be approxi-
mately $3,600,000, and the value of a $120,000 annuity would be approximately $1,600,000,
assuming a life expectancy of 20 years at retirement. See supra note 52 and accompanying

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Simplification and IRC § 415

investment return in the defined contribution plan and on the actuarial
assumptions used to value the defined benefit. A substantial portion of the
benefit's value would reflect the value of the tax deferral extended to
qualified plans.84

One possible means of reducing the revenue loss that would result
from repealing section 415(e) would be a lowering of the (b) and (c) limits
for employees of employers who maintain both types of plans. However, this
approach, if it were to work, would reintroduce the very complexity it seeks
to eliminate, for the lowered limits would have to apply not only to employ-
ers who simultaneously sponsor defined benefit and defined contribution
plans, but also to employers who sponsor only one type of plan for a number
of years and then either switch to, or add, the other type of plan in later
years. Rules to apply the reduced limits for employers who adopt plans
seriatim would look very much like the current section 415(e) limitation.

Another approach to reducing the revenue loss would be to lower the
(b) and (c) limits for all plans, regardless of whether the employer sponsors
more than one type of plan. There are serious policy problems with this
approach. The reduction in the (b) and (c) limits might have to be substantial
in order to control the tax benefits of sponsoring both plan types. But if the
reduction were substantial, it would reduce the size of benefits that an
employer who sponsored only one type of plan could provide for its employ-
ees. Employers who wished to provide reasonably high levels of benefits thus
would be forced to sponsor both types of plans, saddling some employers
who would prefer sponsoring only a defined contribution plan with the added
expense and complexity of defined benefit plan sponsorship."s

There is a third possible approach for recovering the revenue loss,
which merits consideration: reduce the defined contribution limits for younger
employees. This might be done with respect only to the dollar limits, or with
respect to both the dollar and compensation limits. For example, the dollar
limit might be cut in half for employees under the age of thirty, and then
gradually rise until the limit reaches its maximum level when an employee

text. The amount of the benefit would be considerably higher if we assumed even moderate
rates of inflation. However, as banks in advertising individual retirement accounts have
learned, stating the benefit in terms of future nominal dollars tends to inflate the value of the
tax deferral.

The repeal would be valuable especially to participants in those top-heavy plans
whose denominator for the dollar limit is I rather than 1.25. See supra text accompanying
notes 22-24.

84. The number of employers who might adopt defined benefit plans because of the
repeal of § 415(e) is of course a matter of conjecture. The complexity and cost of defined
benefit plans would continue to deter at least some employers from sponsoring such plans.

85. Under current law, employers who want to maximize benefits must sponsor both
types of plans, but high levels of benefits can be provided through either plan format alone.

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Florida Tax Review

reaches age fifty-five. Such an approach might constructively contribute to
tax and retirement policy. As already noted, if an employer annually contrib-
utes $30,000 to an employee's account in a defined contribution plan
beginning at age twenty-one, the total accumulation will be approximately
$3,600,000 at age sixty-five, assuming an annual rate of return of 4%. This
is an unusually large accumulation, worth approximately twice the present
value of the maximum defined benefit at age sixty-five. A large portion of
the accumulation is attributable to the tax deferral associated with the earliest
contributions. By reducing the early contributions and the concomitant tax-
deferred investment growth, the value of career-long participation in the
defined contribution plan, would be brought more in line with the value of
a maximum defined benefit. Arguably this is a desirable result in a world
with or without section 415(e). Under this approach, the cost of repealing
section 415(e) would be born by affluent employees who participate in
defined contribution plans while they are young.

There are some reasonable objections one might make to this
approach. First, the approach goes beyond simplification: it creates a class of
people that will pay for repeal of section 415(e) that is broader than the class
that would benefit from the repeal.8 6 Second, it is by no means clear that the
tax savings under this approach would equal the tax costs of repealing section
415(e). Third, some employers may stop sponsorship of defined contribution
plans if the benefit they can provide to favored young employees is substan-
tially reduced. 7

Section 415(e)'s repeal would create problems in addition to revenue
loss. A repeal of section 415(e) might encourage more employers to adopt
defined benefit plans when the employees it wishes to favor have reached
mid-to-late middle age, resulting in diminished contributions on behalf of
younger non-highly paid employees. Moreover, as we have seen, Congress
has substantially tightened the section 415(e) limits for certain top-heavy

86. While this is true, note that under current law, a 30-year-old employee who
receives an annual $30,000 contribution to a defined contribution plan and obtains a 4% rate
of return, will accumulate a defined contribution account in excess of $3 million dollars by
age 65. This large benefit also may be supplemented by a benefit from a defined benefit plan.
Cutting the limits along the lines hypothesized still would produce a very large benefit.

87. This certainly would be true to some extent, but a considerable amount of
conjecture would be required to determine to what extent plan sponsorship actually would be
affected. Many small employers-who are the ones most likely to stop plan sponsorship-have
already substituted § 401(k) plans for employer-funded defined contribution plans, despite the
maximum employee contributions permissible under such plans.

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Simplification and IRC § 415

plans.8 Repeal of section 415(e) would also repeal the stricter limits on the
benefits for key employees in such plans."

IV. APPROACHES TO SIMPLIFICATION OF SECTION 415(e)

The case for repeal of section 415 loses appeal if the section can be
simplified- We have already seen that much of the complexity derives from
subsection (e). In this part, I will suggest two approaches toward simplifica-
tion of subsection (e). The approaches stand alone, although they also could
be combined. 90

A. Lengthening the Dollar Linit Phase-hI Under Section 415(b)(5), with
Annual Allocation of a Section 415(e) Percentage

The major cause of complexity in section 415(e) is that the (c) limits
on additions to defined contribution plans are annual, while the (b) limits on
a defined benefit are aimed at limiting a benefit accrued over a participant's
career with an employer. Section 415(e) attempts to cope with this dissimilar-
ity of limits by forcing the defined contribution fraction into a career mold,
reflecting defined contribution utilization for all of an employee's years of
service with the employer. It is this fraction that is at the root of the complex-
ity in section 415(e), for it is this fraction that requires a backward look at all
previous additions to a participant's account in light of both the dollar and
compensation limits; results in annually changing fractions; and results in
different fractions for each employee.

Because there does not appear to be any simple means of equating
the (c) limit to a career benefit, simplification of the defined contribution
fraction, and thus subsection 415(e), has not seemed possible. A change in
focus, however, yields a possibility for simplification. Instead of attempting
to force the defined contribution fraction to mimic a career benefit, it would
be possible to do the reverse, (i.e., equate defined benefit accruals to annual
additions). This could be accomplished by extending the current ten-year

88. See supra text accompanying notes 22-24.
89. Any proposals to repeal § 415(e) thus should be inapplicable to top-heavy plans,

although it should be noted that repeal of the rules applicable to such plans is another target
of simplification-minded reformers. See Gridlock, supra note 1. at 34. It should be noted that
the proposal of the ABA Tax Section to eliminate § 415(e) would apply to all plans, including
super top-heavy plans. See ABA Report, supra note 6. at 12.

90. There are a number of relatively small, and relatively noncontroversial, changes
that would simplify § 415. See supra notes 12 & 21.

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Florida Tax Review

phase-in for the dollar limits, perhaps to thirty-five or so years.9' If this
were done, employers could simply allocate a section 415(e) percentage
between the defined benefit and defined contribution plans for each year in
which an employer maintains two plans.

This approach dispenses with the need to recompute annually the
defined contribution limitation, the primary source of section 415(e)'s
complexity. If the employer does not alter the allocations of the section
415(e) percentage from year to year, the plan would be able to determine an
employee's defined benefit limit by multiplying a participant's years of
participation by the portion of the overall percentage allocated to the defined
benefit limit. Even if the employer did choose to vary the allocations, the
section would not present a high degree of complexity or significantly
increase the amount of recordkeeping for the plan. 92

To illustrate, assume that Congress amended subsection (e) to permit
a 120% combined limit of the sort suggested. Each employer that sponsors
both types of plans would allocate the 120% between the separate limits for
each plan type. Assume an employer allocates 100% of the combined limit
to the defined benefit plan and 20% to the defined contribution plan. An
employee could receive 20% of the maximum annual additions to the defined
contribution plan in a particular year and would also be credited with 1/35 of
the defined benefit limitation for that year.93 When the employee retired, his
defined benefit limit would be the sum of the annual phase-in credits,
multiplied by the adjusted defined benefit dollar limit at the time of benefit
payment. Thus, an employee with twenty years of credit under such an
allocation, could receive a maximum benefit of 20/35, or 57% multiplied by
whatever the indexed dollar limit is at retirement.

Or assume that the employer allocates 40% of a year's allocation to
a defined contribution plan and 80% to a defined benefit plan. In such a year,
the employer could contribute 40% of the (c) dollar limit to the defined
contribution plan. In addition, the employee's dollar limit for the defined
benefit would be 80% of 1/35 of the indexed dollar limit at retirement. An
employee who had twenty years of service under a plan that maintained such

91. This article suggests the phase-in for the dollar limit only. The alternative limit
restricting benefits to 100% of compensation could continue to apply but would not require
a phase-in period based on participation.

92. The plan would have to keep track of the employer's allocation of the § 415(e)
percentage for each plan year, but the same allocation would apply to all employees. In
addition, transition rules would require that one-time transition data be created and retained.

93. APPWP has suggested that Congress repeal the compensation limit on additions
to defined contribution plans because this limitation is unnecessary to control benefits of the
highly compensated because of the applicability of the dollar and deduction limitations and can
harm lower-paid employees. See Gridlock, supra note 1, at 34.

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Simplification and IRC § 415

an allocation of the section 415(e) percentage would earn 80% of 20/35, or
46% of the dollar limit as indexed through the date of retirement.

One policy objection to this approach toward simplification is the
limitations it would place on an employer who has not in the past sponsored
any retirement plans and now wishes to sponsor a defined benefit plan that
will provide a generous benefit for all employees, even those within ten years
of retirement. Under current law, the employer could provide a benefit equal
to 100% of the (b) dollar limit; under the approach suggested here, however,
the benefit could not exceed 10/35 of the dollar limit.

This does not seem a particularly troubling problem. The employer
can still fund a very large benefit for the employee over ten years, just not
as large as is permissible under current law. This may not be too steep a price
to pay for simplicity. In any event, it would be possible to base the phase-in
on years of service rather than participation with respect to any prior year in
which the employer had not maintained a qualified plan, which would permit
a more accelerated phase-in of the (b) dollar limits.9' A formula could also
be devised to award prorated years of past service in cases in which less than
the maximum annual additions were made to an employee's defined contribu-
tion account. This would add a measure of complexity to things, but at least
the complexity would be a one-time occasion and affect only a relatively
small number of employers.

The restructuring of the defined benefit limitation into annual
increments suggested here would bring with it an advantage in addition to
simplicity. Under current law, the limitations are applied separately for each
employer. Thus, an employee who changes employment may accumulate

94. Section 415(b)(5) currently requires that the dollar limit be phased in over 10
years of participation in the plan. IRC § 415(b)(5)(A). The compensation limit, on the other
hand, may be phased in over 10 years of service, which means that the phase-in has no effect
on most participants in a plan whose benefits are based on past service. The 10-year phase-in
of the dollar limit was intended to prevent a small employer from timing the establishment of
a defined benefit plan to shortly before retirement of a key employee, who would have enough
service to receive a fully funded benefit while other employees might lack sufficient service.
After the key employee retires, the employer may decide to terminate the plan. depriving other
employees of the opportunity to earn a full benefit. Thus, if this article's proposal permitted
past-service credit for purposes of the extended phase-in period for the dollar limits, an
additional 10-year participation phase-in still would be necessary to prevent employers from
timing establishment of defined benefit plans in the manner described.

The current phase-in period for the dollar limits applies not only to establishment of
a defined benefit plan, but, to the extent provided in regulations, to benefit improvements in
existing plans as well. IRC § 415(b)(5)(D). The Service. however, has decided not to
implement this provision because the nondiscrimination regulations substantially eliminated
the need for the requirement. Rev. Proc. 92-42, 1992-1 C.B. 872, §§ 2.02, 3. In any event.
there is no reason why an extended 35-year phase-in period should apply to benefit improve-
ments if the proposal suggested here were adopted.

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Florida Tax Review

substantially larger retirement savings than an employee who remains with
one employer for his or her career. Because the approach suggested here
would be applied separately for each year, the benefits for employees who
work for multiple employers would be reduced.95

B. Restricting Section 415(e) Calculations to Small Employers

We have earlier seen that a repeal of section 415(e) would not have
a significant effect on the benefits provided by large employers." The
reason for this is that the nondiscrimination rules of section 401(a)(4) will
generally require that whatever benefits are provided to highly compensated
employees (as a percentage of their compensation, with a $150,000 limit on
compensation taken into account) 97 are also provided to other employees. As
a result, the costs of providing high benefits to non-highly compensated
employees would constrain most large employers from providing too high a
level of benefits for highly compensated employees. And if these costs did
not constrain employers, there would be a measurable gain in the extent to
which the tax subsidy is benefiting all employees, a desirable policy goal.

If this analysis is correct, one approach to simplification of section
415(e) would be to define a class of employers for whom its application does
not generally serve any purpose and then exempt that class from its require-
ments.98 One possible definition of plans that could be exempted from

95. This article does not propose transition rules to the suggested simplification of
the (e) limits. There are many directions transition rules could take, however, depending on
how one resolves various policy choices. An outline of one approach would be for the defined
benefit dollar limit under prior law to be frozen as of the effective date and to assign a
fresh-start dollar limit to each employee. Each employee's fresh-start limit would grow
annually under the new § 415(e) approach (i.e., a percentage would be added to it each year;
the percentage in each year would be the same for each employee) and would be applicable
when it exceeded the frozen limit under prior law. The defined contribution fraction could be
dispensed with immediately.

One possibility for the initial fresh-start limit would be the lesser of (i) the frozen
limit and (ii) years of defined benefit plan participation as of the effective date multiplied by
1/35, with reduced amounts for years in which the employee participated in both a defined
contribution and a defined benefit plan. Another possibility for the fresh-start limit might be
(i) years of service multiplied by (ii) the § 415(e) percentage (which as suggested in the text,
would be 120%) less the defined contribution fraction as of the effective date (but in no event
to be greater than 100%).

96. See supra text accompanying note 79.
97. IRC § 401(a)(17). Prior to the Omnibus Budget Reconciliation Act of 1993, P.L.

No. 103-66, the compensation limit was $200,000.
98. Indeed, the legislative debate over ERISA included early proposals to apply

limitations only to "proprietary employees" in relatively small corporations. See S. 1179, 93d
Cong., 1st Sess. § 702 (1973) (bill reported out of Senate Finance Committee applied limits

[Vol 2:2



Simplification and IRC § 415

section 415(e) is "top-heavy plans," as defined in section 416(g).9 While
determining whether a plan is top-heavy is itself a complex undertaking,
plans already are required to make the determination. To further limit
complexity, the section 415(e) limitation might be applied only to "key
employees" under section 416(i)(1) or "highly compensated employees" under
section 414(q).'O

While this approach to simplification may be sensible, it does go
against the grain of an apparent policy in subchapter D that distinctions
between large and small employers generally are inappropriate.'"' Neverthe-
less, the argument that section 415(e) should be eliminated for the class of
employers who would not in any event be in a position to load up contribu-
tions in excess of what the (e) limits already provided is a strong one; if the
contours of such a class can be outlined, administration of such plans would
be simplified.

V. CONCLUSION

Section 415, as it currently exists, serves a purpose but its complexity
extracts a cost. Is the cost too steep a price to pay for the section's contribu-
tions? The answer is debatable, but is also beside the point if the section can
be simplified. If simplification is possible it should occur, regardless of one's
feelings about whether the section in its current form is worth its current
costs.

In this article I have shown that it is possible to reduce substantially
the section's complexity by altering the structure of subsection (e). I have

only to plans of "proprietary employees," which were defined as plans in which at least 25%
of the benefits were for employees with 2% or more of the corporation's stock and to plans
of self-employed persons); see also Subcomm. on Labor of the Senate Comm. on Labor and
Pub. Welfare, supra note 80, at 1653 (statement of Sen. Curtis): id. at 1656. 1658-59
(statement of Sen. Nelson).

99. See IRC § 416(a). See also supra notes 23-24 and accompanying text.
100. There is at least one problem with applying § 415(e) to top-heavy plans: how

to treat plans that are top-heavy in some years, but not others. For example, assume a defined
benefit plan that is not top-heavy and in which all participants have accrued the maximum
benefits permissible under § 415(b). Assume further that the employer also has made
maximum contributions to a defined contribution plan. In a subsequent year, the plan becomes
top-heavy. If the § 415(e) limit now applies, the plan will have to reduce accrued benefits.
This scenario is certainly not desirable. But neither is it inevitable: § 415(e) could apply only
to benefit accruals that take place in years when the plan is top-heavy.

101. It apparently was this concern that caused Congress to create limits for all
plans rather than only for smaller plans with proprietary employees. Subcomm. on Labor of
the Senate Comm. on Labor and Pub. Welfare, supra note 80, at 1704 (statement of Sen.
Buckley); id. at 1706-07 (statement of Sen. Gravel); id. at 1755 (statement by Sen. Bellmon);
id. at 1777-1780 (statement of Sen. Thurmond). see also supra note 94.

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98 Florida Tax Review [VoL 2:2

also suggested that it might be possible to limit the effects of the section's
complexity by targeting the section more precisely at employers in a position
to exploit the tax planning possibilities its repeal would make possible. Either,
or both of these suggestions, would simplify the administration of qualified
plans.

It is true, of course, that outfight repeal of section 415, or section
415(e), would simplify administration of qualified plans even more, but it is
also true that outright repeal would result in a loss of revenue at a time when
we can ill afford it. Moreover, repeal might indirectly reduce the benefits of
younger non-highly compensated employees by creating fresh incentives for
some small employers to substitute defined benefit plans for defined contribu-
tion plans. Repeal, then, should be regarded as the remedy of last resort, not
the remedy of choice.