February 4, 1993

(Response from IRS to Vince Amoroso)

This letter is in response to your letter dated January 15, 1993, concerning the calculation of 
the annual cost-of-living adjustments applicable to dollar limitations on contributions and 
benefits under qualified pension plans and to other provisions affecting such plans. Specifically, 
you requested an explanation of the methodology used to calculate the increase in these dollar 
limitations.

Section 415 of the Internal Revenue Code provides for certain limitations on contributions and 
benefits under qualified pension plans. Section 415(b) limits the annual benefit to which a 
participant may be entitled under a defined benefit pension plan during any limitation year. 
Section 415(c) limits the annual additions that may be credited to a participant's account in a 
defined contribution plan during any limitation year. Section 415(d) requires that the Commissioner 
of the Internal Revenue Service adjust these limits annually for cost-of-living increases 
commencing in 1988.

A number of Code sections have similar adjustments and are adjusted in the same manner as section 
415(d). These Code sections are as follows: the exclusion for elective deferrals under section 
402(g)(1); the dollar amounts under section 409(o)(1) for tax credit employee stock ownership plans; 
the amount under section 4980A (as changed from 4981A in the Technical and Miscellaneous Revenue Act 
of 1988) regarding excess distributions; the limitation used in the definition of highly compensated 
employees under section 414(q); and the compensation amount under section 408(k) regarding SEP's.

Section 415(d) provides that the adjustment procedures are to be similar to the procedures used to 
adjust benefit amounts under the Social Security Act. The base period to be used is the last three 
months of 1986. However, because 1990 was the first year that the $200,000 limit under sections 
401(a)(17), 404(l), and 408(k)(3)(C) was adjusted, the base period for that adjustment is the last 
three months of 1988.

To actually calculate the cost-of-living increases for any particular year, the Consumer Price Index 
for All Urban Consumers (CPI-U) must be obtained from the Department of Labor for the last three 
months (i.e., October, November, and December) of the previous year. The sum of the three indices is 
then compared to the sum of the indices for the last three months of the base year (i.e., either 1986 
or 1988, depending on the Code section). The quotient of these sums is truncated to five decimal 
places. This result is then rounded to four decimal places. Finally, this result is multiplied by the 
given dollar limitation, which is rounded to the nearest dollar to obtain the new dollar limitation 
for a particular year.

For example, to calculate the dollar limitation under section 415(b)(1)(A) applicable for 1993, you 
divide the sum of the CPI-U's for the last three months of 1992 (i.e., 425.7) by the sum of the CPI-U's 
for the last three months of 1986 (i.e., 331.3). The result is 1.28493. This result is rounded to 
1.2849. Finally, the dollar limitation under section 415(b)(1)(A) (i.e., $90,000) is multiplied by 
1.2849. The result is $115,641, the dollar limitation under section 415(b)(1)(A) applicable for 1993.

To calculate the adjustment in the $200,000 limit under sections 401(a)(17), 404(l), and 408(k)(3)(C) 
applicable for 1993, you would use the same method, except that you would divide the sum of the CPI-U's 
for the last three months of 1992 by the sum of the CPI-U's for the last three months of 1988 (i.e., 
361.0). The result is 1.17922. This result is rounded to 1.1792 and multiplied by $200,000, resulting 
in a dollar limitation of $235,840 applicable for 1993.

We hope our response has been helpful. If we can be of further assistance in this matter, please 
contact Mr. Heil at 202-622-7383.

Sincerely yours,

James E. Holland, Jr.

Chief, Actuarial Branch