401(a)(17) grandfather limit

[Guest hapa123]

Has the IRS issued the year 2002 compensation limit (401(a)(17)) for pre-96 grandfathered participants? Thanks is advance for any responses.

[MGB]

Not yet.

They issue all of the CPI'd numbers in one release. There are technical problems with a handful of others (e.g., minimum compensation for a SEP) that don't have correct references to a base period. They have decided to go forward with the release even though these issues remain, but it may take a couple more weeks.

[Carol V. Calhoun]

Thanks for the update, MGB! Has your firm (or anyone else you know of) calculated the amounts unofficially, even though IRS has not yet issued them officially?

[MGB]

I apologize for the mistaken post (I almost got through the year without a mistake!), this number is not released with the others (they usually come out in late October after the September CPI release).

This number is based off of Oct-Nov-Dec CPI, so the number is not calculable until late January (the December CPI is released about January 18).

If Nov and Dec CPI remain unchanged from the Oct CPI, the number would be $295,340, up from $289,260 in 2001. I would expect it to be slightly higher.

[Carol V. Calhoun]

Hmm, last year the numbers (including the number for grandfathered governmental plans) all came out in News Release IR-2000-82 (November 20, 2000). The year 2000 limits (including that for grandfathered governmental plans) came out as News Release IR 99-80 (October 20, 1999). The year before that, all the limits were in News Release IR 98-63 (October 26, 1998). Is there a reason to believe the limits will come out separately this year?

[MGB]

Well, I'll sort of vascillate one more time. The IRS publishes a number with the other numbers, that is true. But, we feel it is wrong and I know of at least one large state that uses our "correct" number.

The pre-OBRA'93 number was an unrounded number based on 4th quarter CPIs. The change in OBRA'93 to $150,000 also changed the adjustment period to 3rd quarter AND created a $10,000 rounding. There is also the statement that governmental plans can continue to use what they were using before if it was in the plan on July 1, 1993 (some states had no limit and are still operating that way). However, there is no reference that anyone using this grandfather should make use of any change in the indexing or rounding.

In the releases from the IRS, they use 3rd quarter indexing (retaining the original 4th quarter base period, though). The reason I know this is I have a 5-page memo from Jim Holland from 1998 that shows the unrounded number for 1999. That is exactly what a 3rd quarter calculation produces. Then, the releases round it to $5,000. If it were rounded to $10,000, I could see where they are coming from...they are applying the post-OBRA'93 adjustment and rounding rules, even though OBRA-'93 did not say to do that.

With the use of a $5,000 rounding convention, it makes no sense what they are doing. Without there being any guidance from them on why they are doing this, we have chosen to ignore it and continue to produce a 4th quarter unrounded amount for clients that are using it.

Using the IRS's methodology on 3rd quarter, the unrounded amount is $295,460, which they will round to $295,000. Although that is what they will release, we will not use it.

(Note the $295,460 here is greater than the $295,340 in my earlier post because the CPI went down from September to October.)

In our view, technically, if a governmental plan makes use of the rounded 3rd quarter numbers that the IRS produces, they are not following the terms of the plan as of July 1, 1993 and therefore are no longer eligible for the grandfather.

[Carol V. Calhoun]

Thanks for the clarification! I'm also dealing with a statewide plan that is in the same situation, and that has specifically flagged this issue in its determination letter request. As far as I am concerned, this should be a question of interpreting what state law requires, and the IRS is not in a position to change that. But the issuance of this figure does leave governmental plans with some tough choices to make.