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401(a)(17) limit for retiring employee


Ken Davis
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We have a money purchase pension plan that began January 1, 2004. The plan year is the calendar year. For purposes of determing the employer contribution under the plan, an employee's annual compensation is multiplied by 25%.

The first employee covered by the plan to retire will retire at the end of this month. The employee's salary from January 1, 2013 through June 30, 2013 will be approximately $280K. The 401(a)(17) limit for the 2013 plan year is $255K. I've attached a copy of a page from the plan and a copy of part of the section 401(a)(17) regs. My reading of the sentence in the plan I've drawn a line around and the sentence in the regs that I underlined is that the $255K 401(a)(17) limit does not have to be prorated to half for the part of the year worked by the retiring employee. So, the employer contribution as limited by 401(a)(17) would be $63,750. However, the actual employer contribution will be limited to $51,000 by the section 415©(1) limit for defined contribution plans. Is this correct?

Thanks,

Ken Davis

facopier@usouthal.edu_20130612_113432.pdf

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That's good that you limited the amount to $51,000. I have seen more than one owner-only prospect bring an out-of-date MP plan to us (not restated for EGTRRA, GUST, etc.) where a buddy of theirs had been only applying the compensation limit and having them contribute 25% of the 401(a)(17) limit into the plan each year.

In one case the owner was about to put in $62,500 for 2012 but they had just been selected for an IRS audit. Since they had not done anything to their plan document since GUST or maybe before that, they got scared and started calling around. Since we would not help them backdate any old documents (isn't that something like tax fraud?), they found an "ERISA Counsel" somewhere who "found" up-to-date documents and, by golly, the execution dates on the document were no problem. We assume they still had to deal with and somehow use up the accumulated excess unallocated amounts (because of the excess contributions).

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