Compensation limit is retroactive

[MGB]

Notice 2001-56 was released this afternoon.

The $200,000 compensation limit may be applied retroactively when computing average compensation for an accrued benefit calculation in 2002.

[Guest terbes]

This is big news for companies with non-qualified plans.

Does this mean companies would be allowed to change the nature of current benefit payments from non-qualified to qualified?

[MGB]

No, not for current benefit payments if they are retired (yes, for current active participants).

The retroactivity applies to the compensation used in the calculation of a benefit "accrual" in 2002. I don't think you can use this if the person does not have any new service. Although, I could certainly see arguments to the contrary.

[Guest terbes]

How do you think this would apply to a cash balance plan?

Could we go back and "reconstruct" the participants hypothetical account with the new comp limit for prior years' accruals?

Based on my reading of the notice, I dont think there is any reason not to restate (other than administrative burden).

Your comments are appreciated.

Cheers

[AndyH]

MGB, just a note to say thanks for offering your time, insights and considerable knowledge into helping us understand these rather incredible developments.

P.S. I don't have the Notice in front of me, but noted in reading it earlier that the introduction seemed to indicate that plans using measuring periods other than plan years (i.e. calendar measuring periods) could use the new limits even prior to the pyb in 2002.

I have a 7/1-6/30 plan which uses calendar pay. I have an exec going part time and starting his pension 1/1/92 who has always been over $200k. Does this language say that I can use the 200K for average comp 1/1/2002, even before the pyb in 2002, i.e. 7/1/2002?

In other words is this person's average comp 200,000 1/1/2002 (assuming he completes one hour of service) even though the first plan year beginning in 2002 starts 7/1/2002?

To me this was always a gray area anyway, but not the Notice seems to be tackling this question head on, in a favorable manner. I wonder why.

[MGB]

Terbes,

Yesterday morning I had already sent a message to all consultants in our firm that the cash balance change is a great opportunity. You probably couldn't do it given the way plans are currently written, but changing to an accrued benefit formula instead of a sum of accruals would do it (same thing in a career average plan). Note you could go back and increase frozen benefits, too, with an amendment.

AndyH,

I don't read it the same as you did.

I read it as meaning you can use $200,000 for 2002 (and all prior years), but not until you are doing benefit determinations in the plan year beginning in 2002.

[AndyH]

Yes, I see your point. Reading it again I can interpret it differently.