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Grandfathered Code Section 401(a)(17) Compensation Limits


Guest Benefits1234
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Guest Benefits1234

Good morning! Code Section 401(a)(17) places a limit on the amount of compensation that can be used to determine the amount of a defined benefit plan participant's benefit. There is a special transition rule for governmental plans. That special transition rule for governmental plans provides that the Code Section 401(a)(17) limits will not apply if such limits will reduce the amount of compensation that was taken into account (for purposes of determining a participant's benefit) under a governmental defined benefit plan on July 1, 1993. The governmental plan however, must be "amended so that the plan incorporates by reference the annual compensation limit under section 401(a)(17), effective with respect to noneligible participants for plan years beginning after December 31, 1995 (or earlier, if the plan amendment so provides)."

It's unclear to me whether the foregoing language means that a governmental plan (i) only has to be amended to incorporate the Code Section 401(a)(17) limits; or (ii) has to be amended to incorporate the limits effective with respect to noneligible participants. Can a governmental defined benefit plan apply "special" Code Section 401(a)(17) limits to eligible participants if that governmental plan (i) was amended to incorporate the Code Section 401(a)(17) limits by reference, but (ii) did not indicate that such limits applied only with regard to noneligible participants?

There seem to be varying opinions on this issue. I appreciate any thoughts.

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You would need to incorporate the limits applicable to that plan with respect to all participants. However, in the case of eligible participants, the limit would be the lesser of a) the normal limit under 401(a)(17), or b) the amount of compensation that was taken into account (for purposes of determining a participant's benefit) under the plan on July 1, 1993.

The reason you can't limit 401(a)(17) to noneligible employees is that if the plan is amended after July 1, 1993 to increase the compensation taken into account, even the benefits of eligible employees will potentially be limited.

Employee benefits legal resource site

The opinions of my postings are my own and do not necessarily represent my law firm's position, strategies, or opinions. The contents of my postings are offered for informational purposes only and should not be construed as legal advice. A visit to this board or an exchange of information through this board does not create an attorney-client relationship. You should consult directly with an attorney for individual advice regarding your particular situation. I am not your lawyer under any circumstances.

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