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Annual benefit limit


Ken Davis
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Regarding a governmental DB plan, I have a question about the 415(B)(1)(A) annual benefit limit of $160,000.

I'm not an actuary, so I'm only trying to get a basic understanding of what this limit means to an employee who has been in a DB plan for many years and has a relatively high income. For example, a public university faculty physician where the university does not have a separate faculty practice plan, i.e., both teaching and clinical practice income are paid by the university on one check.

For example, assume one has worked for the university for 30 years, and the state teachers' retirement system general retirement benefit formula is 2% for each year of service. Assume a $300,000 average annual salary over the last 3 years (assume pre-'96 employment so not subject to the $200,000 annual compensation limit). The general benefit formula would result in a $180,000 annual retirement benefit. This is clearly in excess of the current limit of $160,000, so would the plan have language limiting the benefit to $160,000?

And what of the requirement that each employee contribute 5% of his/her salary to the plan? Would the employee still be required to contribute 5%, even though the retirement benefit being "purchased" by this contribution, as a percentage of average salary, is less than one whose retirement benefit is under the 415(B)(1)(A) limit?

Thanks,

Ken Davis

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The $160,000 only applies to the employer-derived benefit (the total benefit under the formula minus the employee-derived benefit). Employee contributions will produce a certain amount of benefit by themselves (the "employee-derived benefit"). To calculate this amount you need to use the IRS rules under Section 411 (this use of the calculation rules under 411 for this applies to governmental plans, even though Section 411 doesn't apply to them).

So, the actual limit in a contributory plan is greater than $160,000, because you add on top of that the employee-derived benefit.

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Guest PA consultant

Also, I believe that the limitation would need to be further adjusted if the benefit is paid in a form other than a life annuity, or if payments were to commence before age 62 or after age 65.

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