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Definition of "average annual compensation" under 29 USC 105


Guest Peter Henner

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Guest Peter Henner

A union pension plan provides benefits based upon years of service multiplied by salary received. However, the formula does not include overtime worked; if overtime was included, the salary, and hence, the retirement benefit, would be significantly higher.

29 USC 1054 (B) (1) (A) seems to say that "a normal retirement benefit" is based on "average rate of compensation" during the consecutive years where an employee's salary was highest. However, these terms are not defined in the statute.

Does "average rate of compensation" include overtime, and is the failure of the plan to provide credit for such overtime actionable under ERISA?

Thanks in advance to all who respond.

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No, and I don't think so.

A qualified plan is permitted to define "compensation". Many plans use W-2, and many others add in deferred items such as 401(k) contributions, but the choice of definition is up to the plan sponsor. For example, we have a plan in our office that defines compensation as W-2, but not to exceed $40,000.

However, if the plan is negotiated, the definition is (at least theoretically) part of that negotiation.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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I agree with pax' answer which assumes (as most of us would) your question concerns a plan which has been negotiated between union and management.

If, on the other hand, the "union" plan is the plan for employees of the union, then the definition of compensation may have to be tested for discrimination purposes. It is possible the exclusion of overtime in a single employer plan could lead to improper discriminaton.

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Larry is correct.

I believe the IRS regs. Sec. 1.414 discuss the various alternative definitions of comp that do not require testing. For example, using W-2 comp is deemed to be a non-discriminatory definition.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest Danavjack

check plan definition. overtime is also part of w2 wages. in fact, in a non union plan, if overtime is excluded, then the plan would have to demonstrate that the definition of comp. used does not discriminate in favor of HCEs. Please check the Plan to see how compensation is defined.

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