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Avg Salary used in pension calculation


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A person has the following pays:

1995 50,000

1996 60,000

1997 70,000

1998 55,000 (terminated on 10/1/98)

plan uses a 3 yr avg.

Is it legal to ignore the 1998 compensation in computing avg salary, eventhough it would produce a higher avg, because the plan says it only uses complete years worked? Or is it really just based on what the plan says? Interested in other opinions.

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Guest John Koresko

In any matter concerning a qualified plan, the plan language controls. Ignoring the language exposes the fiduciary to potential liability if the result is harm to the affected participant. In addition, interpretations of the plan become precedent which could be adverse to the plan in the future. Tread very carefully.

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Actually, interpretations to the Plan COULD become precedent. My preference and advice is to document (that is, in writing) the interpretation and the reason for it. That way the precendent (and the "problem" that the interpretation is trying to correct) is clear and can be followed correctly in the future.

My observation is that no plan definition of "compensation" is completely adequate. Interpretations should be expected. No disrespect to plan drafters intended.

[This message has been edited by pax (edited 10-16-1999).]

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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