What Is a 415(m) Governmental Excess Benefit Plan?

The Internal Revenue Code’s Section 415 establishes limitations on the annual benefits an individual can receive from a tax-qualified retirement plan, setting a maximum dollar amount for both private and public sector plans. For public employees whose calculated pension benefit exceeds this federal limit, Congress created a provision under Internal Revenue Code (IRC) Section 415(m). This allows state and local governments to pay the portion of a benefit that surpasses the cap, ensuring retirees receive their full promised pension.

Core Function and Eligibility

A plan established under IRC Section 415(m) is formally known as a Qualified Governmental Excess Benefit Arrangement (QGEBA). These arrangements are not separate, voluntary retirement plans; rather, they are extensions of the primary government pension plan designed to restore benefits lost due to federal tax law restrictions. The main pension plan pays the retirement benefit up to the federally allowed maximum, and the QGEBA pays the difference.

For example, if a retiring police chief’s pension formula calculates an annual benefit of $290,000, but the applicable Section 415 limit for the year is $280,000, the primary pension plan would pay the $280,000. The QGEBA would then be responsible for paying the remaining $10,000, ensuring the retiree receives the full amount calculated under their employment terms. This structure allows the main pension plan to maintain its tax-qualified status by adhering to the federal limits, while still fulfilling the benefit promise to the employee.

Eligibility for these arrangements is limited to participants in a governmental defined benefit plan, as defined in IRC Section 414(d). Participation is not elective for the employee, as an individual cannot choose to defer compensation into this type of plan. Instead, a retiree automatically becomes a participant if their calculated pension from the main plan exceeds the Section 415 dollar limit for that year.

Funding and Trust Requirements

A requirement under Section 415(m) is that the funds designated to pay the excess benefits must be held in a separate arrangement. This is often accomplished by creating a distinct trust maintained solely for paying benefits under the QGEBA. The assets of the excess benefit trust cannot be commingled with the assets of the main qualified pension plan.

This separation ensures the tax-qualified status of the main pension fund is not jeopardized. The funds for the QGEBA must be provided entirely by the governmental employer, as employee contributions are not permitted. The employer makes contributions to the excess benefit trust as needed to cover obligations for affected retirees.

The income that accrues within this separate trust from investments is generally exempt from federal income tax. This is because the income is considered to be derived from the exercise of an essential governmental function, a protection granted under IRC Section 115. This tax-exempt status helps the arrangement meet its future payment obligations.

Taxation and Reporting of Benefits

The tax treatment of payments from a QGEBA differs significantly from distributions made by a qualified pension plan. Because a QGEBA is a non-qualified deferred compensation plan, the benefits it pays are not eligible for tax-favored treatment, such as a tax-free rollover to an IRA. Any amount a retiree receives from the excess benefit arrangement is fully taxable as ordinary income in the year it is received.

Unlike distributions from the main pension plan, which are reported on Form 1099-R, payments from a QGEBA are reported as wages. This means the income is included on the retiree’s Form W-2 for the year, alongside any other wages they may have.

Consequently, these benefit payments are subject to federal income tax withholding, just like regular salary. Depending on the jurisdiction, they may also be subject to Social Security and Medicare (FICA) taxes, although specific rules can vary.