EGTRRA Compensation Limit

[Scott]

Prior to being amended for EGTRRA, a defined benefit plan limits compensation to "the amount prescribed by Code Section 401(a)(17)." The plan sponsor does not want to recognize the EGTRRA increase and wants to keep the limit at $170,000. Can the sponsor amend the plan now (February 2002) to provide that, effective 1/1/02, compensation is limited to $170,000, or is it too late? My concern is that, by incorporating 401(a)(17) by reference, the limit under the plan automatically became $200,000 on 1/1/02, so that a retroactive amendment now would be a prohibited cutback. Thoughts, anyone?

[david rigby]

Sounds to me like that provision does incorporate 401(a)(17) by reference. Yes, the plan can be amended to use a $170K limit, but IRC411(d)(6) will require that any resulting benefit not be less than the accrued benefit immediately prior to the change. Has any participant already exceeded $170K? If not, such amendment should accomplish your goal.

[Scott]

Thanks for the reply. Here's another question, totally unrelated to the first:

A defined benefit plan's formula provides that a participant's benefit is a certain percentage of his compensation for the highest 36-month period, multiplied by his years of service. If a participant retires in 2002 and his highest 36-month period is the last 36 months that he worked (therefore including periods both during and prior to 2002), Notice 2001-56 indicates that the plan could elect to apply the $200,000 limit to the entire 36-month period.

What if the participant's highest 36-month period occurred entirely prior to 2002 (i.e., 1999, 2000 and 2001)? Could the plan apply the $200,000 limit to those years in determining his benefit when he retires in 2002?