HOUSTON POLICE OFFICERS PENSION SYSTEM. Section 415 Limitations Policy. Section 3400

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1 Section 415 Limitations Policy Section 3400 Approved date: 07/13/2017 Page 1of 5 Effective Date: 07/01/2017

2 SECTION PAGE 3400 Introduction The Law The Plan Purpose Procedure... 4 Page 2 of 5

3 3400 Introduction HOUSTON POLICE OFFICERS PENSION SYSTEM Section 415 of the Internal Revenue Code (the Code ) limits the amount that may be paid to a retired member from a tax-qualified plan. Pursuant to Section 3 of Article 6243g-4 of the Revised Civil Statutes of Texas ( Article 6243g- 4 ), the Board of Trustees ( Board ) is charged with the general administration, management and operation of the Houston Police Officers Pension System, a pension plan qualified under Section 401 of the Code. Pursuant to Section 26 of Article 6243g-4, the Board is also responsible for the administration of the Excess Benefit Plan, an unfunded plan established for the purpose of paying to members or their beneficiaries any amounts that may not be paid from the qualified plan solely because the payment would cause the benefits to exceed the limits imposed by Section 415 of the Code. Section 25(j) of Article 6243g-4 further authorizes the Board to make any changes to Article 6243g-4 to the extent necessary to assure compliance with the qualification requirements of Section 401 of the Code The Law The limits on benefits that apply to a tax-qualified defined benefit plan, such as the Plan, are set forth in Section 415(b) of the Code. The annual dollar limit is adjusted, generally, on a yearly basis by the Secretary of the Treasury to reflect cost of living increases. However, this dollar limit is applied to the City funded portion of the benefit only and does not apply to the portion of the benefits funded with a member s after-tax contributions (such as member contributions made before the City s adoption of the Pick Up Ordinance) or the value of any qualified joint and survivor annuity payable to a surviving spouse. Before being compared to the dollar limit, the value of the pension earned by the member must also be adjusted to the equivalent of a life annuity. This means the life annuity value of the member s DROP account must be determined. This determination must first be made as of the member s annuity starting date. The rules for making these adjustments are set out in Section 1.415(b)-1 of the Federal Income Tax Regulations (the Regulations ). The Regulations provide, at Section 1.415(b)- 1(b)(1)(iii), that a member s benefit must be retested under the multiple annuity starting date rules if the benefit is increased after it commences. For example, the benefits must be retested where a new distribution election is effective during the year with respect to a distribution that previously commenced. The rules also apply where benefits are increased due to a plan amendment or existing plan provision applying a cost of living increase unless an exception applies. Page 3 of 5

4 3402 The Plan The tax-qualified Plan contains provisions that restrict the maximum benefits that may be payable from the Plan to the amount allowed by Section 415 of the Code. The Plan also provides that the benefits will be increased, to the extent they have been reduced to comply with the limits under Section 415(b) changes in the limits allow from time to time. Benefits that may not be paid from the Plan because they would cause the benefits to exceed the dollar limit under Section 415(b) of the Code will be paid from the Excess Benefit Plan. Because the Excess Benefit Plan may never provide a member (directly or indirectly) with an election to defer compensation, any such excess benefit will be provided monthly, commencing on the annuity starting date, in the form of a life annuity. Before 2015 the Plan had not needed to be concerned with the limits imposed by Section 415 and compliance could be verified by occasionally verifying that a few retiring members with the highest benefit accruals satisfied the limits. In 2015 one retiree s expected benefits exceeded the dollar limit ($210,000 per year for 2015 and also for 2016). It is expected the other members benefits will exceed the limit in future years, necessitating a procedure to assure compliance with Section Purpose In light of the foreseeable trend growth regarding this issue, the Board now adopts this policy and procedure for administering distributions under the Excess Benefit Plan. This policy may change from time to time as case law, legislation, and Internal Revenue Service guidance develop Procedure A. Monitor Benefits. The Executive Director (or designee) will monitor earned benefit levels to identify those that appear to be near the Section 415 limit. When a benefit appears to be near the Section 415 limit, the System s actuary will be asked to confirm whether the member s entire benefit can be paid from the tax-qualified Plan commencing on the date the member wishes to receive his or her first distribution from the Plan. B. Payments From Excess Benefit Plan. If the actuary determines that the total benefits earned by the member will exceed the limits under Section 415(b) of the Code, the actuary will also determine the amount that may be paid from the taxqualified Plan and the monthly life annuity that must be paid from the Excess Benefit Plan. Payments from each Plan will commence in accordance with the System s Page 4 of 5

5 usual procedures. The member shall have no election with respect to how benefits will be made from the Excess Benefit Plan. C. New Annuity Starting Date. The benefits of a member in pay status shall be retested for compliance with Section 415(b) of the Code at any time there is an increase in the member s benefits if the member is already receiving benefits from the Excess Benefit Plan or it appears to the Executive Director (or designee) that the increase might result in total benefits exceeding the limit in Section 415(b) of the Code. If the actuary determines that some or all of the increase will exceed those limits, the excess will be paid in the form of an increase to the monthly payments from the Excess Benefit Plan. Benefits of a member in pay status will be increased from time to time to the extent that the Section 415 limit is raised and the payments under the Excess Benefit Plan will be reduced accordingly. Page 5 of 5