Board Resolution 2020-02-10(b)

Topic:	Plan Administration
Subtopic:	Benefit/Contributions Limitations, Required Distributions, Eligible Rollovers
Date:	2/28/2020
Status:	Inactive

WHEREAS, section 7-198 of the Illinois Pension Code authorizes the Board of Trustees of the Illinois Municipal Retirement Fund to establish rules necessary or desirable for the efficient administration of the Fund; and

WHEREAS, section 1-106 of the Pension Code provides for rollovers of eligible distributions from the Fund, as required under federal law; and

WHEREAS, section 1-116.1 of the Pension Code authorizes the Board of Trustees to make distributions as required by Internal Revenue Code section 401(a)(9); and

WHEREAS, sections 1-116 and 7-224 of the Pension Code limit benefit amounts payable from the Fund to those allowed under Internal Revenue Code section 415; and

WHEREAS, it is necessary to adopt rules for the efficient administration of sections 1-106, 1-116, 1-116.1, and 7-224.

THEREFORE BE IT RESOLVED that the following administrative rules be and are hereby adopted by the Board of Trustees:

Rule on Rollovers

1. General Rule

Beginning January 1, 1993, pursuant to 40 ILCS 5/1-106(b), IMRF may, and to the extent required by federal law shall, at the request of any person entitled to receive an eligible rollover distribution from the pension fund or retirement system, pay any portion of that eligible rollover distribution directly to an eligible retirement plan designated in writing by the person.

2. Eligible rollover distribution

An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or the life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Section 401(a)(9) of the Internal Revenue Code; the portion of any distribution that is not includible in gross income; any other distribution which the Internal Revenue Service does not consider eligible for rollover treatment, such as certain corrective distributions necessary to comply with the provisions of section 415 of the Internal Revenue Code; and any other distribution that is reasonably expected to total less than $200 during the year. Effective January 1, 2002, a portion of a distribution will not fail to be an eligible rollover distribution merely because the portion consists of after-tax employee contributions that are not includible in gross income. However, such portion may be transferred only (i) to an individual retirement account or annuity described in Section 408(a) or (b) of the Internal Revenue Code, or to a qualified defined contribution plan described in Section 401(a) Internal Revenue Code or to a qualified plan described in Section 403(a) of the Internal Revenue Code, that agrees to separately account for amounts so transferred (and earnings thereon), including separately accounting for the portion of the distribution that is includible in gross income and the portion of the distribution that is not so includible, or (ii) on or after January 1, 2007, to a qualified defined benefit plan described in Section 401(a) of the Internal Revenue Code or to an annuity contract described in Section 403(b) of the Internal Revenue Code, that agrees to separately account for amounts so transferred (and earnings thereon), including separately accounting for the portion of the distribution that is includible in gross income and the portion of the distribution that is not so includible; or (iii) on or after January 1, 2008, to a Roth IRA described in section 408A of the Internal Revenue Code. Effective January 1, 2002, the definition of eligible rollover distribution also includes a distribution to a surviving spouse.

3. Eligible retirement plan

An eligible retirement plan is any of the following that accepts the distributee's eligible rollover distribution:

• a. an individual retirement account described in Section 408(a) of the Internal Revenue Code,
• b. an individual retirement annuity described in Section 408(b) of the Internal Revenue Code,
• c. an annuity plan described in Section 403(a) of the Internal Revenue Code,
• d. a qualified trust described in Section 401(a) of the Internal Revenue Code,
• e. effective January 1, 2002, an annuity contract described in Section 403(b) of the Internal Revenue Code,
• f. effective January 1, 2002, a plan eligible under Section 457(b) of the Internal Revenue Code that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or a political subdivision of a state that agrees to separately account for amounts transferred into that plan from a plan under this title,
• g. effective January 1, 2008, to the extent required by federal law and permitted under a retirement or pension system subject to this title, a Roth IRA described in Section 408A of the Internal Revenue Code, or
• h. effective December 18, 2015, a SIMPLE IRA described in Code Section 408(p)(1) provided that the rollover contribution is made after the two (2) year period described in Section 72(t)(6) of the Internal Revenue Code.

4. Distributee

A distributee includes an employee or former employee. It also includes the employee's or former employee's surviving spouse or an alternate payee. Effective January 1, 2008, to the extent permitted under a retirement or pension system subject to this title, a distributee further includes a nonspouse beneficiary who is a designated beneficiary as defined by Section 401(a)(9)(E) of the Internal Revenue Code. However, a nonspouse beneficiary may rollover the distribution only to an individual retirement account or individual retirement annuity established for the purpose of receiving the distribution, and the account or annuity will be treated as an "inherited" individual retirement account or annuity.

5. Direct Rollover

A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee.

Rule on Required Distributions

1. General Rule

Notwithstanding any other provision to the contrary, and pursuant to 40 ILCS 5/1-116.1, distributions from IMRF shall conform with a good faith interpretation of Code Section 401(a)(9) and the regulations under that section as applicable to a governmental plan within the meaning of Code Section 414(d).

2. Minimum Required Distributions

Effective on and after January 1, 2020, IMRF shall be subject to the following provisions:

• a. Benefits must begin by the required beginning date, which is the later of April 1 of the calendar year following the calendar year in which the plan member reaches 70½ years of age (age 72 for distributions required to be made after December 31, 2019, with respect to plan members who obtain age 70½ after December 31, 2019) or April 1 of the calendar year following the calendar year in which the plan member terminates employment. If a plan member fails to apply for retirement benefits by April 1 of the calendar year following the calendar year in which he or she reaches 70½ years of age (age 72 for distributions required to be made after December 31, 2019, with respect to plan members who obtain age 70½ after December 31, 2019) or April 1 of the calendar year following the calendar year in which he or she terminates employment, whichever is later, the plan will begin distributing the benefit as required by this section.
• b. The plan member's entire interest must be distributed over the plan member’s life or the lives of the plan member and a designated beneficiary, or over a period not extending beyond the life expectancy of the plan member or of the plan member and a designated beneficiary. Death benefits must be distributed in accordance with Section 401(a)(9) of the Internal Revenue Code, including the incidental death benefit requirement in Section 401(a)(9)(G) of the Internal Revenue Code, and the regulations implementing that section.
• c. If a plan member dies after the required distribution of benefits has begun, the remaining portion of the plan member's interest must be distributed at least as rapidly as under the method of distribution before the plan member's death and no longer than the remaining period over which distributions commenced.
• d. If a plan member dies before required distribution of the plan member's benefits has begun, the plan member’s entire interest must be distributed in accordance with the following rules:
• i. If the member's surviving spouse is the sole designated beneficiary, the member's remaining interest in the plan is distributed or begins to be distributed by December 31 of the calendar year immediately following the calendar year in which the member died or by December 31 of the calendar year in which the participant would have attained age 70 1/2, if later, (or age 72 for distributions required to be made after December 31, 2019, with respect to participants who would have attained age 70½ after December 31, 2019) and if the surviving spouse dies before the distribution to the surviving spouse begins, this section shall be applies as if the surviving spouse were the plan member; or
• ii. If the member’s surviving spouse is not the sole designated beneficiary, the member’s remaining interest must either be distributed (in accordance with federal regulations) over the life or life expectancy of the designated beneficiary, with the distributions beginning no later than December 31 of the calendar year immediately following the calendar year of the plan member's death, or distributed by December 31 of the calendar year containing the fifth anniversary of the plan member's death.

3. Incidental Benefit Rule

• a. The amount of an annuity paid to a plan member's beneficiary may not exceed the maximum determined under the incidental death benefit requirement of the Internal Revenue Code.
• b. The death and disability benefits provided by a plan are limited by the incidental benefit rule set forth in Section 401(a)(9)(G) of the Internal Revenue Code and Treasury Regulation Section 1.401-1(b)(1)(i) or any successor regulation thereto.

Rule on 415 Limitations

1. Basic 415 Limitations

Notwithstanding any other provisions to the contrary, and pursuant to 40 ILCS 5/1-116, the Member contributions made to, and retirement benefits paid from, IMRF shall be limited to such extent as may be necessary to conform to the requirements of Section 415 of the Internal Revenue Code of 1986, as now or hereafter amended ("Code"), for a qualified pension plan.

2. Limitation Year

For purposes of Code Section 415, the limitation year is the calendar year.

3. Participation in Other Qualified Plans: Aggregation of Limits

• a. The 415(b) limit with respect to any Member who at any time has been a member in any other defined benefit plan as defined in Code Section 414(j) maintained by the Member's employer in this plan shall apply as if the total benefits payable under all such defined benefit plans in which the Member has been a member were payable from one (1) plan.
• b. The 415(c) limit with respect to any Member who at any time has been a member in any other defined contribution plan as defined in Code Section 414(i) maintained by the Member's employer in this plan shall apply as if the total annual additions under all such defined contribution plans in which the Member has been a member were payable from one (1) plan.

4. Basic 415(b) Limitation

Before January 1, 1995, a Member may not receive an annual benefit that exceeds the limits specified in Code Section 415(b), subject to the applicable adjustments in that section. On and after January 1, 1995, a Member may not receive an annual benefit that exceeds the dollar amount specified in Code Section 415(b)(1)(A), subject to the applicable adjustments in Code Section 415(b) and subject to any additional limits that may be specified in this section. In no event shall a Member's annual benefit payable in any limitation year from IMRF be greater than the limit applicable at the annuity starting date, as increased in subsequent years pursuant to Code Section 415(d) and the regulations thereunder.

5. Definition of Annual Benefit

For purposes of Code Section 415(b), the "annual benefit" means a benefit payable annually in the form of a straight life annuity (with no ancillary benefits) without regard to the benefit attributable to after-tax employee contributions (except pursuant to Code Section 415(n)) and to rollover contributions (as defined in Code Section 415(b)(2)(A)). The "benefit attributable" shall be determined in accordance with Treasury Regulations.

6. Adjustments to Basic 415(b) Limitation for Form of Benefit

If the benefit under the plan is other than the form specified in 5, then the benefit shall be adjusted so that it is the equivalent of the annual benefit, using factors prescribed in Treasury Regulations.

a. If the form of benefit without regard to the automatic benefit increase feature is not a straight life annuity or a qualified joint and survivor annuity, then the preceding sentence is applied by either reducing the Code Section 415(b) limit applicable at the annuity starting date or adjusting the form of benefit to an actuarially equivalent amount [determined using the assumptions specified in Treasury Regulation § 1.415(b)-1(c)(2)(ii)] that takes into account the additional benefits under the form of benefit as follows:

b. For a benefit paid in a form to which Code Section 417(e)(3) does not apply [a monthly benefit], the actuarially equivalent straight life annuity benefit that is the greater of (or the reduced 415(b) limit applicable at the annuity starting date which is the "lesser of" when adjusted in accordance with the following assumptions):

• i. The annual amount of the straight life annuity (if any) payable to the Member under the plan commencing at the same annuity starting date as the form of benefit to the Member, or
• ii. The annual amount of the straight life annuity commencing at the same annuity starting date that has the same actuarial present value as the form of benefit payable to the Member, computed using a 5% interest assumption (or the applicable statutory interest assumption) and the applicable mortality tables described in Treasury Regulation § 1.417(e)-1(d)(2) (Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Rulings 2001-62); or

c. For a benefit paid in a form to which Code Section 417(e)(3) applies [a lump sum benefit], the actuarially equivalent straight life annuity benefit that is the greatest of (or the reduced 415(b) limit applicable at the annuity starting date which is the "least of" when adjusted in accordance with the following assumptions:

• i. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial experience;
• ii. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable, computed using a 5.5 percent interest assumption (or the applicable statutory interest assumption) and the applicable mortality table for the distribution under Treasury Regulation § 1.417(e)-1(d)(2) (the mortality table specified in Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Ruling 2001-62); or
• iii. The annual amount of the straight life annuity commencing at the annuity starting date that has the same actuarial present value as the particular form of benefit payable (computed using the applicable interest rate for the distribution under Treasury Regulation § 1.417(e)-1(d)(3) (the 30-year Treasury rate (prior to January 1 2007, using the rate in effect for the month prior to retirement, and on and after January 1, 2007, using the rate the in effect for the first day of the plan year with a one-year stabilization period)) and the applicable mortality rate for the distribution under Treasury Regulation § 1.417(e)-1(d)(2) (the morality table specified in Revenue Ruling 2001-62 or any subsequent Revenue Ruling modifying the applicable provisions of Revenue Ruling 2001-62), divided by 1.05.

7. Benefits Not Taken into Account for 415(b) Limit

For purposes of this section, the following benefits shall not be taken into account in applying these limits:

• a. Any ancillary benefit which is not directly related to retirement income benefits;
• b. That portion of any joint and survivor annuity that constitutes a qualified joint and survivor annuity;
• c. Any other benefit not required under Code Section 415(b)(2) and Treasury Regulations thereunder to be taken into account for purposes of the limitation of Code Section 415(b)(1).

8. Other Adjustments in 415(b) Limitation

• a. In the event the Member's retirement benefits become payable before age sixty-two (62), the limit prescribed by this section shall be reduced in accordance with regulations issued by the Secretary of the Treasury pursuant to the provisions of Code Section 415(b), so that such limit (as so reduced) equals an annual straight life benefit (when such retirement income benefit begins) which is equivalent to a one hundred sixty thousand dollar ($160,000) (as adjusted) annual benefit beginning at age sixty-two (62).
• b. In the event the Member's benefit is based on at least fifteen (15) years of service as a full-time employee of any police or fire department or on fifteen (15) years of military service, the adjustments provided for in (a) above shall not apply.
• c. The reductions provided for in (a) above shall not be applicable to pre-retirement disability benefits or pre-retirement death benefits.

9. Less than Ten (10) Years of Service Adjustment for 415(b) Limitations The maximum retirement benefits payable to any Member who has completed less than ten (10) years of service shall be the amount determined under subsection 1 multiplied by a fraction, the numerator of which is the number of the Member's years of service and the denominator of which is ten (10). The reduction provided by this subsection cannot reduce the maximum benefit below 10%. The reduction provided by this subsection shall not be applicable to pre-retirement disability benefits or pre-retirement death benefits.

10. Ten Thousand Dollar ($10,000) Limit

Notwithstanding the foregoing, the retirement benefit payable with respect to a Member shall be deemed not to exceed the 415 limit if the benefits payable, with respect to such Member under the plan and under all other qualified defined benefit pension plans to which the Member's employer contributes, do not exceed ten thousand dollars ($10,000) for the applicable limitation year and for any prior limitation year and the employer has not any time maintained a qualified defined contribution plan in which the Member participated.

11. Effect of COLA without a Lump Sum Component on 415(b) Testing

Effective on and after January 1, 2003, for purposes of applying the 415(b) limit to a Member with no lump sum benefit, the following will apply:

• a. a Member's applicable 415(b) limit will be applied to the Member's annual benefit in the Member's first limitation year without regard to any automatic cost of living adjustments;
• b. to the extent that the Member's annual benefit equals or exceeds the Limit, the Member will no longer be eligible for cost of living increases until such time as the benefit plus the accumulated increases are less than the 415(b) limit;
• c. thereafter, in any subsequent limitation year, a Member’s annual benefit, including any automatic cost of living increases, shall be tested under the then applicable 415(b) limit including any adjustment to the Code Section 415(b)(1)(A) dollar limit under Code Section 415(d), and the Treasury Regulations thereunder.

12. Effect of COLA with a Lump Sum Component on 415(b) Testing

On and after January 1, 2009, with respect to a Member who receives a portion of the Member's annual benefit in a lump sum, a Member's applicable Limit will be applied taking into consideration cost of living increases as required by Code Section 415(b) and applicable Treasury Regulations.

13. 415(c) Limit

After-tax member contributions or other annual additions with respect to a Member may not exceed the lesser of $40,000 (as adjusted pursuant to Code Section 415(d)) or 100% of the Member's compensation.

• a. Annual additions are defined to mean the sum (for any year) of employer contributions to a defined contribution plan, member contributions, and forfeitures credited to a Member's individual account. Member contributions are determined without regard to rollover contributions and to picked-up employee contributions that are paid to a defined benefit plan.
• b. For purposes of applying the 415(c) limits only and for no other purpose, the definition of compensation where applicable will be compensation actually paid or made available during a limitation year, except as noted below and as permitted by Treasury Regulation § 1.415(c)-2, or successor regulation; provided, however, that member contributions picked up under Code Section 414(h) shall not be treated as compensation.

c. Unless another definition of compensation that is permitted by Treasury Regulation § 1.415(c)-2, or successor regulation, is specified by the plan, compensation will be defined as wages within the meaning of Code Section 3401(a) and all other payments of compensation to an employee by an employer for which the employer is required to furnish the employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052 and will be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2).

• i. However, for limitation years beginning on and after January 1, 1998, compensation will also include amounts that would otherwise be included in compensation but for an election under Code Section 125(a), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b). For limitation years beginning on and after January 1, 2001, compensation will also include any elective amounts that are not includible in the gross income of the employee by reason of Code Section 132(f)(4).
• ii. For limitation years beginning on and after January 1, 2009, compensation for the limitation year will also include compensation paid by the later of 21⁄2 months after an employee's severance from employment or the end of the limitation year that includes the date of the employee's severance from employment if:
• A. the payment is regular compensation for services during the employee's regular working hours, or compensation for services outside the employee's regular working hours (such as overtime or shift differential), commissions, bonuses or other similar payments, and, absent a severance from employment, the payments would have been paid to the employee while the employee continued in employment with the employer; or
• B. the payment is for unused accrued bona fide sick, vacation or other leave that the employee would have been able to use if employment had continued.

iii. Back pay, within the meaning of Treasury Regulation § 1.415(c)-2(g)(8), shall be treated as compensation for the limitation year to which the back pay relates to the extent the back pay represents wages and compensation that would otherwise be included under this definition.

14. Service Purchases under Section 415(n)

Effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, if a Member makes one or more contributions to purchase permissive service credit under the plan, then the requirements of Code Section 415(n) will be treated as met only if:

• a. the requirements of Code Section 415(b) are met, determined by treating the accrued benefit derived from all such contributions as an annual benefit for purposes of Code Section 415(b), or
• b. the requirements of Code Section 415(b) are met, determined by treating all such contributions as annual additions for purposes of Code Section 415(c).
• c. For purposes of applying this section, the plan will not fail to meet the reduced limit under Code Section 415(b)(2)(C) solely by reason of this subparagraph and will not fail to meet the percentage limitation under Code Section 415(c)(1)(B) solely by reason of this section.

d. For purposes of this section the term "permissive service credit" means service credit—

• i. recognized by the plan for purposes of calculating a Member's benefit under the plan,
• ii. which such Member has not received under the plan, and
• iii. which such Member may receive only by making a voluntary additional contribution, in an amount determined under the plan, which does not exceed the amount necessary to fund the benefit attributable to such service credit.
• iv. Effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, such term may include service credit for periods for which there is no performance of service, and, notwithstanding clause (B), may include service credited in order to provide an increased benefit for service credit which a Member is receiving under the plan.

e. The plan will fail to meet the requirements of this section if—

• i. more than five years of nonqualified service credit are taken into account for purposes of this subparagraph or
• ii. any nonqualified service credit is taken into account under this paragraph before the Member has at least five years of participation under the plan.

f. For purposes of paragraph (e), effective for permissive service credit contributions made in limitation years beginning after December 31, 1997, the term "nonqualified service credit" means permissive service credit other than that allowed with respect to

• i. service (including parental, medical, sabbatical, and similar leave) as an employee of the Government of the United States, any State or political subdivision thereof, or any agency or instrumentality of any of the foregoing (other than military service or service for credit which was obtained as a result of a repayment described in Code Section 415(k)(3)),
• ii. service (including parental, medical, sabbatical, and similar leave) as an employee (other than as an employee described in clause (A)) of an education organization described in Code Section 170(b)(1)(A)(ii) which is a public, private, or sectarian school which provides elementary or secondary education (through grade 12), or a comparable level of education, as determined under the applicable law of the jurisdiction in which the service was performed,
• iii. service as an employee of an association of employees who are described in clause (i), or
• iv. military service (other than qualified military service under section 414(u)) recognized by the plan.

g. In the case of service described in clause (i), (ii), or (iii), such service will be nonqualified service if recognition of such service would cause a Member to receive a retirement benefit for the same service under more than one plan.

h. In the case of a trustee-to-trustee transfer after December 31, 2001, to which Code Section 403(b)(13)(A) or Code Section 457(e)(17)(A) applies (without regard to whether the transfer is made between plans maintained by the same employer)—

• i. the limitations of paragraph (e) will not apply in determining whether the transfer is for the purchase of permissive service credit, and
• ii. the distribution rules applicable under federal law to the plan will apply to such amounts and any benefits attributable to such amounts.

i. For an eligible participant, the limitation of Code Section 415(c)(1) shall not be applied to reduce the amount of permissive service credit which may be purchased to an amount less than the amount which was allowed to be purchased under the terms of the plan as in effect on August 5, 1997. For purposes of this paragraph, an eligible participant is an individual who first became a participant in the plan before January 1, 1998.

15. Modification of Contributions for 415(c) and 415(n) Purposes

Notwithstanding any other provision of law to the contrary, the plan may modify a request by a Member to make a contribution under this rule if the amount of the contribution would exceed the limits provided in Code Section 415 by using the following methods:

• >a. If the law requires a lump sum payment for the purchase of service credit, the plan may establish a periodic payment plan for the Member to avoid a contribution in excess of the limits under Code Section 415(c) or 415(n).
• b. If payment pursuant to subparagraph (a) will not avoid a contribution in excess of the limits imposed by Code Section 415(c) or 415(n), the plan may either reduce the Member's contribution to an amount within the limits of those sections or refuse the Member's contribution.

16. Repayments of Cashouts

Any repayment of contributions (including interest thereon) to the plan with respect to an amount previously refunded upon a forfeiture of service credit under the plan shall not be taken into account for purposes of Code Section 415, in accordance with applicable Treasury Regulations.

17. Reduction of Benefits Priority

Reduction of benefits and/or contributions to all plans, where required, shall be accomplished by first reducing the Member's defined benefit component under any defined benefit plans in which the Member participated, such reduction to be made first with respect to the plan in which the Member most recently accrued benefits and thereafter in such priority as shall be determined by the plan and the plan administrator of such other plans; and next, by reducing the Member's defined contribution component benefit under any defined benefit plans; and next by reducing or allocating excess forfeitures for defined contribution plans in which the Member participated, such reduction to be made first with respect to the plan in which the Member most recently accrued benefits and thereafter in such priority as shall be established by the plan and the plan administrator for such other plans provided, however, that necessary reductions may be made in a different manner and priority pursuant to the agreement of the plan and the plan administrator of all other plans covering such Member.