401(a)(17) and anti-EGTRRA amendment

[Guest kbs]

We have a defined benefit plan that continuously credits benefits to participants (there is no 1000 hours of service requirement for benefit accrual). Benefits are credited monthly. We originally adopted the amendment increasing the annual compensation limit to $200,000 for the 2002 plan year. Now we'd like to reduce the annual compensation for the 2002 plan year back down to $170,000. I realize that there is a 204(h) notice that needs to go out a reasonable period of time before the effective date of the amendment.

However, what, if anything will we have to do with respect to benefits credited from January 1, 2002 to the effective date of the amendment? Can we treat the annual compensation limit as $170,000 for the entire year? Would we have to prorate the $200,000 limit for the short period of time during which that limit was in effect for the 2002 plan year to avoid violating the anti-cutback rule? Would any of this matter if we are certain that no one has exceeded the $170,000 compensation limit for this short period of time?

[david rigby]

The "anit-cutback" rule covers benefits earned as of the effective date of the change, not what could be earned if the rule had not changed.

If I understand your facts correctly, then the plan could be amended to revise the definition of compensation, retaining a minimum of the accrued benefit. (Alternatively, you could revise other aspects of the rate of benefit accrual.)

[Guest kbs]

Thanks for the reply. So I won't have to be concerned with whether or not the participant has accrued a greater benefit from January until the effective date of the amendment if I have a participant who may earn more than $14,166 a month during that time? (170,000/12) I just have to look at whether someone has earned more than $170,000 during that short period of time to make sure that I'm not taking away an accrued benefit by limiting compensation to $170,000?

[david rigby]

To the best of my knowledge, that's correct.

Caution: I'm an actuary, not an attorney.