Order Code RS20393
Updated October 12, 2001
CRS Report for Congress
Received through the CRS Web
Multiemployer Pension Plans:
The Section 415 Benefit Limits
Celinda Franco
Specialist in Social Legislation
Domestic Social Policy Division
Summary
Section 415(b) of the Internal Revenue Code sets limits on the maximum dollar
benefit that can be paid from a tax-qualified pension plan. It also sets a limit on the
percentage of a participant’s salary that can be replaced by pension benefits. In 2001,
the maximum annual pension benefit that can be paid from a defined benefit pension plan
is the lesser of $140,000 or 100% of the average annual compensation over a
participant’s highest 3 consecutive years. The dollar limit is actuarially reduced for early
retirement (before the Social Security normal retirement age). These limits are designed
to prevent tax abuse and to avoid overly generous pension benefits subsidized at taxpayer
expense. Multiemployer pension plans have been seeking relief from §415(b) limits,
arguing that benefit formulas in these collectively bargained plans are not related to
compensation, and the §415 limits unfairly reduce the pensions of low and middle income
workers.
In the 107th Congress, the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA), signed into law on June 7, 2001 (P.L. 107-16), included provisions
to exempt multiemployer plans from the §415(b) limit of 100% of the average
compensation of an individual’s highest consecutive 3 years beginning in 2002. In
addition, EGTRRA eliminates the requirement that defined benefit plans make actuarial
adjustments to annuities that start from ages 62 to 65. (This report will not be updated.)
Background
Most retirement income plans are employment-based. Only about half the workforce
is covered by employer pension plans. Federal law does not force employers to offer
retirement plans, but those that do must comply with the Employee Retirement Income
Security Act (ERISA) of 1974 (P.L. 93-406) and the Internal Revenue Code in order to
gain favorable tax treatment of the plan. ERISA sets standards for coverage, funding,
vesting of benefit rights, fiduciary responsibilities, and information disclosure. The tax
code replicates ERISA rules as standards a plan must meet to qualify for tax preferences,
and limits contributions and regulates benefit distributions. The purpose of these tax rules
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is to limit the federal revenue foregone through tax preferences and to assure that tax-
advantaged plans help workers broadly in a fair, nondiscriminatory way. Since revenue
foregone from deferral of taxes on plan contributions and investment earnings amounts to
the largest federal tax expenditure, modest changes in pension limits yield immediate
revenue gains or losses.
Section 415 of the Internal Revenue Code limits the annual benefit that may be paid
from tax-qualified pension plans. The particular limits on contributions and benefits that
apply to a qualified pension plan depend on whether it is a defined benefit plan or a defined
contribution plan.1 Paragraph (b) of Section 415 sets limits on benefits paid from defined
benefit plans. The public policy purposes for these limits are: (1) to guard against overly
generous pension benefits such as those top executives might get; and (2) to restrict the
total size of tax-qualified pension plans in order to limit the federal revenue foregone for
this purpose.
History of §415 Limitations
The §415(b) dollar limit was first established when the Employee Retirement Income
Security Act (ERISA) was enacted in 1974. Prior to that time, there was no specific dollar
limit on pension benefits, but an income tax provision limited pensions to no more than
100% of compensation. The dollar limit originally was set by ERISA at $75,000 but was
permitted to grow with inflation. By 1982, it had reached $136,425. The Tax Equity and
Fiscal Responsibility Act (TEFRA) of 1982 (P.L. 97-248) scaled it back to $90,000 to
reduce federal revenue loss and froze it at that level until 1988, when it again was
inflation-indexed. The limit grew to $118,800 in 1994 but became subject to new
rounding down rules in 1995 that were also designed to stem revenue loss. The dollar
limit is now increased for inflation in multiples of $5,000. An inflation adjustment
increased the §415(b) dollar limit to $120,000 in 1995. It rose to $125,000 in 1997,
$130,000 in 1998, $135,000 in 2000, and $140,000 in 2001.
The maximum annual benefit payable in 2001 for someone retiring at age 65 is the
lesser of $140,000 or 100% of the participant’s highest consecutive 3-year average
compensation. If retirement benefits begin before the Social Security normal retirement
age (currently age 65 but scheduled to increase gradually to age 67 beginning in 2000), the
$140,000 limit is reduced actuarially to reflect the longer payout period.2 Conversely, the
limit is increased for benefit payments commencing after the participant has reached Social
Security normal retirement age. Furthermore, the dollar limit and the 100% of
compensation limit are proportionately reduced for a participant with less than 10 years
of plan participation.
1 A defined benefit plan uses a formula that ties benefits to either a worker’s salary or a specific
dollar amount and is funded on a group basis. A defined contribution plan invests employer and
employee contributions in individual accounts from which benefits are paid when participants
retire.
2 In 1975, a 55-year-old could receive a $75,000 annual pension (no actuarial reduction required);
in 1999, despite 24 years of inflation, the most an employee of a private-sector business can receive
at that age is about $57,200 (after §415 limits and actuarial reduction for early retirement).

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Certain pension plans are exempt from some §415(b) limits. Specifically, plans
maintained by governments and tax-exempt organizations and qualified merchant marine
plans are not subject to the early retirement adjustments required for retirements before
the Social Security normal retirement age. Instead, these plans determine early retirement
actuarial reductions in benefits from age 62 and are covered by a provision that prevents
an early retirement pension benefit from being reduced below $75,000. Governmental
plans are also exempt from the 100% of high-3 pay limit, as well as from survivor and
disability pension dollar limitations that otherwise apply to early retirements and to
employees with less than 10 years of plan participation. Qualified police and firefighter
pension plans are exempt from any early retirement actuarial reduction of benefits.
Multiemployer Pension Plans
A multiemployer pension plan is a collectively bargained arrangement between a labor
union and a group of employers in a particular trade or industry. These plans cover groups
of workers in the unionized sector of such industries as trucking, building and
construction, clothing and textiles, food and commercial workers, among others. The
coverage continues when they change jobs if the new employment is with a participating
employer. These plans offer a means for workers in industries where job change is
frequent to build up pension rights over a career. Over 10 million workers are covered by
multiemployer plans, as are millions more of their family members.
Unlike plans covering salaried employees which base pension benefits on
compensation (e.g., 2% of final average pay for each year of service), multiemployer
pension plans usually determine pension amounts by multiplying the number of years of
covered service by a flat dollar amount. Although the dollar amount in these formulas
sometimes varies with an employee’s earnings or service, the predominant method used,
according to the U.S. Bureau of Labor Statistics, is to multiply a uniform (single) dollar
amount by years of service. Employer contributions to multiemployer plans are set
through collective bargaining and are usually based on the number of hours worked by
union employees. In many collective bargaining negotiations, the employer offers a per-
hour total compensation amount, and it is left to the union to decide how to allocate this
compensation among cash wages, pension, health and other benefits.
Multiemployer plans typically provide the same annual retirement benefit to all
participants with the same amount of service, regardless of pay level. As a result,
multiemployer pension plans tend to be more advantageous to lower paid workers with
long service. However, the §415(b) limits can lower significantly the pension benefits of
workers who: (1) retire early; (2) have unstable employment and fluctuating wages; or (3)
earn low wages over long periods of covered employment.
Problems Beneficiaries Have With §415 Limits
Participants of multiemployer pension plans face different problems with the §415(b)
limits. Benefits in multiemployer plans are not linked to wages. Thus benefits often are
more generous to low-wage workers than to higher-wage workers in the same plan.
However, under the 100% of high-3 compensation limit, many low-wage workers could
see their pension benefits lowered by the §415(b) limit. In addition, the physically
demanding nature of the work of industries covered by multiemployer plans can result in

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workers retiring at age 50 or 55 after 30 years of heavy physical labor. In such cases, a
worker’s pension benefit would be actuarially reduced, significantly lowering the worker’s
benefit as the result of a provision in §415(b). The following examples illustrate the types
of problems facing multiemployer plan participants.
The problem multiemployer plan beneficiaries face from the §415(b) 100% of high-3
pay limit can be illustrated by the following example. In the case of a multiemployer plan
in the construction-industry that has negotiated a pension benefit equal to $80 a month for
every year of service, a worker with 35 years of covered service could be eligible to
receive a monthly pension of $2,800 (35 x $80), or $33,600 annually. The regular hourly
wage rate for workers participating in the plan is $16, or $32,000 a year if work is
available for 2,000 hours per year. However, in this industry workers rarely work a full
2,000 hours in a year due to seasonal unemployment and downturns in the industry. In
recent years, plan participants have only been working an average of 1,450 hours a year,
therefore, earning an average of about $23,200 a year. If the average consecutive high-3
wage of such a worker who reached the 35-year maximum pension contribution was only
$23,200, under the collectively bargained agreement the worker would be entitled to the
maximum pension benefit of $33,600. However, the §415(b) 100% of high-3 pay limit
would prohibit the worker from receiving a pension benefit of more than $23,200. Thus,
in this example the worker’s annual pension benefit would be reduced $10,400, or about
$867 a month, a 31% reduction.
Similarly a low-wage worker’s pension benefits also could be lowered significantly
by §415(b) below what was provided in a collectively bargained agreement. High benefits
and relatively low pay may have become a more acute problem in some plans, where
unions have granted benefit increases while available work in the industry — and the
higher pay that comes with it — has declined. Special problems can also arise in
multiemployer plans that allow more than 1 year of service to be earned in a calendar year,
so that if an individual worked heavy overtime and regularly accumulated a large total
number of hours worked per year, even at relatively low wages, the accrued pension could
exceed the average high-3 compensation limit. In addition, the inclusion of a low earnings
year in the 100% of consecutive high-3 annual average compensation limit can lower a
worker’s pension benefit.
In addition to the problems with the 100% of high-3 pay limit, participants of
multiemployer plans face significant actuarial reductions of their pension benefits for early
retirement under §415(b). As noted above, many of the workers employed by industries
participating in multiemployer plans, such as the building and construction trades, find that
the physical demands of these jobs often require them to retire at younger ages than the
Social Security normal retirement age (currently age 65). For early retirements, §415(b)
requires the dollar limit of the pension benefit to be reduced actuarially for each year under
the Social Security normal retirement age. Assuming an actuarial reduction of 5%, a
worker retiring at age 55 could see pension benefits reduced by almost 50% (5% x 10
years) by the §415 limit.

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Policy Issues
While §415(b) limits have been around since passage of ERISA, they have become
a concern to multiemployer pension plans in recent years. As a result, multiemployer
pension plans continue to seek relief from §415(b) limits, particularly the 100% of average
high-3 compensation limit. They argue that their benefit formulas are not related to an
individual’s compensation but are set uniformly for all employees. They also argue that
multiemployer pension plans are not easily manipulable for tax avoidance. Since employer
contributions to finance these plans are set through collective bargaining, it is argued that
these plans cannot be used by individuals or firms as tax dodges or tax shelters. If a plan
is found to be in violation of these limits, it can be disqualified by the Internal Revenue
Service.
An exemption of multiemployer plans from §415 limits could be questioned on the
grounds that unions have chosen to structure their pension plans without regard for the
limits established for all other pension plans by the Internal Revenue Code. It could be
argued that exempting multiemployer plans from §415 limits might lead to an unraveling
of limits that were enacted to limit tax preferences for highly compensated workers. Of
course, the design of these plans preceded enactment of the §415 limits, so unions may
find it difficult to make drastic changes in plan design, given their member’s expectations.
Over the years, there have been legislative efforts to waive the §415(b) limits for
multiemployer pension plans. The Senate-passed version of the vetoed Balanced Budget
Act of 1995 (H.R. 2491) would have exempted both public pension plans and
multiemployer pension plans from both the 100% of compensation limit and the early
retirement reduction. The House did not have a comparable provision, and the conference
agreement did not include the Senate amendment. An exemption from both the 100%
compensation limit and the early retirement reduction was later included in the Small
Business Job Protection Act (H.R. 3448) signed into law in 1996 (P.L. 104-188), but the
exemption was granted only to governmental pension plans.
In obtaining this relief, public plans successfully argued that they were not designed
as tax shelters for the highly paid. If their employees have pension benefits exceeding their
highest consecutive 3-year salary, they argued that it is because of long careers and
relatively generous pension benefit formulas that were designed to compensate for a lack
of Social Security coverage. Also, cost-of-living adjustments often increase public pension
benefits after retirement. Though relief from the 100% of high-3 pay limit was provided
to governmental plans in 1996, no policy reason was given for excluding multiemployer
plans from this relief. Perhaps one indication of why the Congress did not enact an
exemption for multiemployer plans may have been the estimated cost of such a provision.
The Joint Committee on Taxation in March 1996 estimated that exempting governmental
plans from the 100% of high-3 pay limit would have a negligible revenue effect, but that
the same exemption for multiemployer plans would reduce revenue by $14 million for
FY1997-FY2001, and by $36 million for FY1997-FY2006.
The problems faced by participants of multiemployer plans raise some interesting
public policy issues. It is important to consider whether federal law should protect
multiemployer plan pension benefits, giving them special exemptions from provisions that
apply to all other private pension plans. Should the Congress be concerned with providing
further favorable treatment for multiemployer plans when such plans already receive the

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favorable tax treatment provided all qualified pension plans? Some might argue that it
does not serve the public interest to provide such pension plans with additional exceptions
to limits that are designed to encourage individuals to continue working until the Social
Security normal retirement age. Should participants of multiemployer pension plans be
exempt from pension limits that apply to all other pension beneficiaries? Most
multiemployer plan participants are eligible to receive Social Security benefits that will
supplement their pension benefits. When millions of workers receive no employer-
provided pension benefits at retirement age, is it in the public interest to provide
participants of multiemployer plans with additional favorable treatment under the tax code
that will have the effect of lowering federal revenue?
Legislative Developments
In the 107th Congress, the Economic Growth and Tax Relief Reconciliation Act of
2001 (EGTRRA), signed into law on June 7, 2001 (P.L. 107-16), included provisions
affecting multiemployer plans beginning in 2002. EGTRRA exempts multiemployer plans
from the §415(b) limit of 100% of the average compensation of an individual’s highest
consecutive 3 years. The dollar limit will increase to $160,000 in 2002, and will continue
to apply to multiemployer plans. If an employer contributes to both a multiemployer plan
and a single employer plan covering the same participant, the benefits accrued under the
multiemployer plan will not be required to be aggregated with the benefits accrued under
the single employer plan when applying the 100% of compensation limit to the single
employer plan. However, aggregation will still be required for applying the dollar
limitation to the participant’s benefits. In addition, EGTRRA eliminates the requirement
that defined benefit plans make actuarial adjustments to annuities that start from ages 62
to 65.

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