High-Earning Employees & the ASRS: 415 Limits and Excess Benefits

Did you know there are contribution and pension benefit limits for employees making over a certain amount? Referred to as “415 Limits” based on the Internal Revenue Code (IRC) Section 415, this can be a set of not-well-known, not-often-used rules for employers and their high-earning employees. But for those they apply to, 415 limits have a big impact. Below is an explanation of what 415 limits are, how the excess benefit is administered.

The IRC serves a multitude of functions as they pertain to 401(a) plans, like the ASRS, but they specifically impact our employers and your employees in a few specific ways. In short, the IRC limits both the amount the ASRS receives in contributions each fiscal year from a member, as well as the amount that the ASRS may pay as a pension benefit to those members upon retirement. These limits apply to any members who joined the ASRS on or after January 1, 1990, and they are set by the IRS each year. 

The limit on contributions: For fiscal year 2022, the ASRS cannot continue to receive contributions above $430,000 for members who joined before 07/01/1996, and $290,000 for members who joined on or after 07/01/1996. These limits are determined by the IRS, but they do not impact their service credit with the ASRS. Once an employee has reached the compensation limit for the fiscal year, even though you as their employer stop remitted contributions, we are notified that the 415 limit has been reached and we adjust the employee’s ASRS service credit during our fiscal year-end processing. (Note that only the benefit based on pre-taxed dollars and their earnings is subject to the limit defined by the IRC Section 415.)

When a member retires, the ASRS will calculate the member’s salary used for the ASRS retirement calculation based on the annual maximums, not the actual salary the member received above the annual limits. It’s important to make members aware that the salary used in their pension calculation is capped by these annual limits.

The limit on their pension benefit: Once an employee impacted by the 415 limits retires through the ASRS, the federal government determines the maximum pension benefit payable based on the member’s age at retirement and their date of retirement. These accounts are considered complex, and it is important that the member understand when retiring that their benefit estimate will be a rough approximation of their retirement benefit and it is not an income commitment.  The ASRS must manually calculate the salary based on data confirmed by the employer. This process is completed through retirement processing. However, to complete a benefit estimate prior to retirement, the ASRS is only able to provide an estimation of the salary. 

What is Excess Benefit, and how is it paid?

If the pension benefit calculated at retirement exceeds the IRC Section 415 limit that the ASRS can pay out in a year, any portion of the pension owed to the member that the ASRS cannot pay because its above the limits, will be paid to the member from the ASRS’s Excess Benefit Account (EBA) distributed through the member’s former ASRS employer. The member will end up receiving two monthly payments: their regular pension from the ASRS, plus the amount of any excess benefit exceeding the IRC Section 415 limit from their employer. The first excess benefit check will be retroactive and subsequent monthly payments will equal the difference between their full monthly pension and the maximum monthly payment set by the IRC Section 415.

Who is administering the Excess Benefit Program?

You, their former ASRS Employer, administer the EBA, but the funds come from the ASRS’s Excess Benefit Arrangement Account. If they are entitled to receive an excess benefit, you should send them a W-4P form (for federal withholding), and, if they request, a direct deposit form.

You are responsible for distributing the excess benefit payments to eligible retirees, replacing lost or stolen checks, and sending them the appropriate tax information at the end of the year. On or before January 31 each year, they should receive a 1099-R for their ASRS-qualified plan and a W-2 form from you, their former ASRS Employer, for payments from the Excess Benefit Arrangement Account for the prior calendar year.

If I have questions, who do I contact?

Your employer liaison! Submit a secure message through your secure employer myASRS account or email [email protected]

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