Comp limit under EGTRRA-retroactive?

[AndyH]

What is a person's average comp as of 1/1/2002 in a calendar plan, when the person has always earned $200,000? Does the new limit apply to past years? I've read a couple of arguments that it should be applied retroactively, but IRS' guidance is needed.

Any recent developments, or indication of whether or when guidance will be issued?

[Guest sdolce]

Past compensation limits were always applied year-by-year with no retroactive effect. I haven't seen anything in EGTRRA to change that .Could you go back and make additional contributions? Supose a plan failed the general test based on the $170,000 limit and a corrective amendment was done increasing benefits to the NHCEs,but the test passes base on $200,000.Can you now undo the amendmant and rescind the correction?Ion't think so. At least I hope not.

[Guest Harry O]

I think the point is this --

When the 401(a)(17) limit was first imposed by law in 1989 at $200,000, the IRS said it applied retroactively to all prior years (subject to 411(d)(6) grandfathering).

Then when the 401(a)(17) limit was reduced by law to $150,000 in 1993, the IRS again said it applied retroactively to all prior years (subject to 411(d)(6) grandfathering).

So . . . when the limit is increased by law to $200,000 in 2002, why doesn't the same rationale apply -- that is, it applies retroactively to all prior years?

Any other result is really a "heads I win, tails you lose" approach by the IRS.

[AndyH]

[This was in response to sdolce's comments, before I saw Harry's-which is on point]

But, remember that the change to $150,000 was retroactive; we were allowed to grandfather accrued benefits, but not average comp. That's part of the argument I've seen for making $200 k retroactive.

I would think it would apply only to people working one or more hours on or after pyb in 2002, and not to past plan years with respect to 401(a)(4), 404, etc. Also, it might need an EGTRRA amendment to become effective.

This possible retroactive application isn't my imagination. I've read a couple of detailed analyses suggesting that is the probable or possible outcome. One of them is from Milliman. Maybe MGB can help here.

[Guest sdolce]

Unlike the apparent retroactive relief for "bad" loans, there is nothing in the Committe Report that says anything about retroactivity on the increased comp limit. MGB's point is well taken,but the change to $150,000 was a cutback,not an increase,and cutbacks are much easier to deal with administratively than increases.The comp limit went down but you got 411(d)(6) protection on the prior accrued benefit. The nearest thing we've seen to the EGTRRA comp increase is the repeal of family aggregation.You could have recognized the repeal retroactively,but you would have needed an amendment (no big deal), and then you had to demonstrate that the increased benefits were non-discriminatory (probably a very big deal).I don't know of anyone who availed themselves of the retroactivity.

There are so many goodies in EGTRRA that the comp increase may very well be retroactive.On the other hand(or the other side of the aisle) this might be " ENOUGH ALREADY!" In either case I have pretty strong administrative reservations.

[AndyH]

No question it would cause a lot of complications, one of which would be the instant underfunding of many small plans, but on the other hand, I have a number of mid-sized clients who have key people at or near retirement age who would be significantly affected favorably.

[Guest sdolce]

If you have a db plan that was already underfunded,or one that previously was funded adequately and is now short, your HCE clients won't be able to get the increased benefit anyway.This is one goodie that looks better on paperthan in reality,at least given current market conditions.Wait until the next bull market. How does 2010 sound?

[Guest Harry O]

You could deal with the underfunding problem by simply amending your plan to NOT take advantage of any retroactive increase. Depending on the exact plan language, there are some interesting 411(d)(6) issues raised by such an amendment but it should be do-able in most cases. A plan can always use a lower compensation limit than that allowed under 401(a)(17). [Don't forget to give advance notice of such an amendment since it will reduce benefit accruals.]

[MGB]

In an initial meeting with Bill Sweetnam at Treasury, he indicated they would treat it the same as a CPI increase, i.e., no retroactivity. We, of course, made the arguments about the earlier change to $150,000 and he seemed to take it to heart. In a later meeting he was leaning towards retroactivity but gave no official answer.

About a month ago, Paul Schultz from the IRS stated in a presentation (Western Pension and Benefits Conference in Denver) that they expect it to be applied retroactively. That is the last word I've heard.

Originally, it was hoped that these various guidance issues would be released by the end of August. However, Sweetnam said in a speech on an ABA webcast in July (I don't know how these guys ever get anything done - they are always at meetings or giving speeches) that they expect guidance "by the end of the year." So much for getting your systems and clients prepared in time.

On the issue of not accepting the increase: Historically, you could not have 401(a)(17) referenced in the plan (only 415 is allowed to be incorporated by reference) beyond the reference to the CPI changes, meaning that $150,000 is in the plan and would need an amendment to increase it by the end of the remedial amendment period. In this case, there is no issue of cutback or providing a 204(h) notice if you just don't change anything (left it at $150,000). However, it has been brought to my attention that the IRS review of determination letters has been lax in recent years and now a lot of plans do incorporate 401(a)(17) by reference. In these cases, an amendment prior to 1/1 stating that the old structure is maintained instead of the $200,000 should be no problem, but a 204(h) notice would be required.