JJRetirement

401(a)(17) Governmental Grandfather rule

4 posts in this topic

This is related to a question I posted recently under Defined Benefit plans.

Client recently discovered a few participants who appeared to have exceeded compensation limit.

Each of these participants was participating prior to 1/1/96, and the plan had no compensation limit in effect on 7/1/93. The plan was amended back in 1995 (the TRA 86 restatement) to incorporate the limit effective 1/1/96 for all participants.

Did the grandfather rule for eligible participants need to be set forth in the plan document for the plan to be able to use it?

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The grandfather rule would not countenance the continued use of earnings above the 401(a)(17) limit after the effective date for benefit accrual purposes. The grandfather rule would provide that any benefits already accrued when 401(a)(17) became applicable would be protected.

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Sorry - I should have been more specific.

I am referring to the special transition rule for eligible participants in governmental plans as set forth in regulation 1.401(a)(17)-1(d)(4)(ii) [rather than the more generally applicable grandfathering accrued benefits based on the pre-OBRA '93 limit].

Under this rule, "if the plan as in effect on July 1, 1993, determined benefits without any reference to a limit on compensation, then the annual compensation limit in effect under this section will not apply to any eligible participant in any future year."

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I don't know that there is a clear rule on this. The statute provides that the limit will not apply to eligible participants (those hired before 7/1/93) if the plan had no limit on 7/1/93, and was amended after that date to incorporate the limit with respect to noneligible participants for plan years beginning after 12/31/95 (or earlier, if the plan amendment so provides). However, in this case, the same amendment applied the limit to eligible and noneligible participants alike. I'm not sure whether you could now go back and amend that amendment, and still retain the grandfather.

One thing you might want to look into, depending on the state, is whether there was any Constitutional bar to decreasing the rate of benefit accruals for existing participants. Courts in about two-thirds of the states have held that state or federal Constitutional provisions stating that “[n]o state shall enter into any…Law impairing the Obligation of Contracts” preclude cutbacks of future benefit accruals, not just existing accrued benefits, for existing employees. (The special grandfather rule for governmental plans actually exists for this reason--because many governmental plans could not constitutionally impose 401(a)(17) on their existing employees.) If your state has such a provision, you might be able to argue that the part of the amendment relating to eligible employees was void from its inception, because it violated the state or federal Constitution.

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