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PPA Benefit Limit Interpretation


Guest Patrick Foley
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Guest Patrick Foley

I get to be one of the first to draft church plan language making the 415(b)(1)(B) compensation limitation inapplicable except with respect to "highly compensated benefits." My joy is compromised by the lack of clarity in the second and third sentences of the new 415(b)(11) language. The second sentence restricts "highly compensated benefits" to accruals during or after the first year of HCE status. But the third sentence states that all benefits are taken into account in applying the limit to the highly compensated benefits.

As I get over thinking that it's nonsense, this language seems necessary to avoid giving the HCE the whole (b)(1)(B) limit just for benefits accrued after attaining HCE status--the intention being to stack the highly compensated benefits on top of previous accruals to apply the (b)(1)(B) limit, but not to cut anything but the highly compensated benefits.

For example:

Assume that X's high 3 years compensation at retirement is $80,000. At the beginning of year 1, when his accrued benefit is $70,000, he becomes bishop and thus a 5% owner of the corporation sole that sponsors the plan. By the end of year 5, when he retires, his accrued benefit is $100,000. Under 415(b)(11), his benefit is limited to his high 3 years compensation of $80,000.

However, if the facts were the same except that H had accrued a benefit of $90,000 at the beginning of year 1, then (b)(11) would only reduce his $100,000 accrued benefit to $90,000 by eliminating the $10,000 in highly compensated benefits.

Are there other interpretations for these two sentences? Or other thoughjts or comments?

Thanks!

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