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Until about a month ago I was certain I knew how this worked, but I am getting push back from a plan sponsor and their legal counsel. I am hoping someone here may be able to point me to guidance (even if informal) on how this should work. Traditional average pay DB plan. Pension plan formula is based on the highest consecutive 12 months of earnings. Plan year is 7/1 - 6/30. Earnings are as follows: Plan Year beginning 7/1/2019= 400,000; 2019 comp limit = 280,000 Plan Year beginning 7/1/2020= 300,000; 2020 comp limit = 285,000 Plan Year beginning 7/1/2021= 325,000; 2021 comp limit= 290,000 Approach 1: apply the comp limit to each 12 months of earnings, then look for the highest, and divide by 12 to get the FAE. In this case, that would mean using 7/1/2021-6/30/2022 earnings capped at $290,000/12 = $24,167. Approach 2: find the highest 12 months of earnings, then apply the cap, and divide by 12 to get the FAE. In this case, that would mean the highest 12 months of earnings is $400,000 in 7/1/2019, capped at $280,000 /12 = $23,333.

I just joined a great company as a 401(k) administrator and immediately saw that their annual 401(k) match calculation formula of 25% of first 6% had two failures (1) failed to cap wages at the the 401(a)17 compensation limit and (2) failed to cap the match computation based on the first 6% of wages. They essentially took 25% of deferrals across the board as the company match. $750K overpaid match in 2018 by my calc. Match was correct for those whose effective deferral rate was 6% or less (400 EEs). The match on 600 EEs with higher deferrals than 6% were all overpaid. It is an audited Plan; been around for many years making this mistake. I can see that a VCP filing will be needed. I took a look at Rev Proc 2018-52, 2.07(1)(b), Example 25 and I don't see how a retroactive amendment will work when it's not just a 401(a)(17) failure but compounding computational errors. The company is successful and expensed and shelled out way more than it should have. The company I'm sure they would be more willing to fix going forward than pull funds out of accounts. I'm sure we'd offer to pull out money from executives at a certain level and above if that's what it takes. Has anyone seen such a longstanding mistake and what would be a typical IRS response to the company be with such a huge overpayment? How far back would they make the correction go? What negotiation can be done? Haven't informed ERISA counsel (I'd fire the auditor if it were my decision) yet only working my way up the chain of command at this point. I am a new hire afterall. I just want to have some idea of what the company is facing here before I push harder. Thank you!! https://www.irs.gov/retirement-plans/fixing-common-plan-mistakes-using-a-plan-amendment-for-correction-in-the-self-correction-program

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?

I have a client that believes she should limit the Per Payroll Deferral Calculations to the Annual Compensation Limit divided by the number of Payrolls in the year for employees that have a base salary that is greater than the Annual Compensation Limit. The Plan allows employees to continue to defer on money after they've reached the Annual Comp Limit. I'm looking specifically for documentation to prove that she's incorrect in her interpretation of how the Annual Comp Limit works but I'm having difficulty finding anything and she's refusing to budge. Example: Employee Earns $360,000 Annually and has elected 5% Pre-Tax. EE is paid $13,846.15 on a Bi-Weekly basis. Payroll calculates a Pre-Tax Deferral of $692.31. Plan Sponsor says this is incorrect. States that since the EE earns > than $265,000 the Bi-Weekly Pre-Tax Deferral should be $509.62 = ($265,000 / 26) * .05. Thank you,

Is the increase in the 401(a)(17) compensation limit considered to be a plan amendment increasing benefits as restricted by 436 for an underfunded DB plan and therefore cannot be used to calculate benefits, or is it only considered as such an amendment as applied to the 415 limit?

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.