FAP Calc stumper...

[Guest tomaney]

I'd be interested in any thoughts on following Q for calculating final average pay (FAP)...

Qualified DB plan provisions:

Immediate entry; 100% immediate vesting; CS = one year for each year beginning on employee anniversary date with 1000+ hrs. AB = 5% of 36 month average times CS.

401(a)(17) Limits:

1999: 160000

2000: 170000

Employee A (straightforward):

Hired 7/1/1999, termed 6/30/2000, salary $20K/mo (i.e. in excess of 401(a)(17))

Based on Example 3 of 401(1)(17) regs, it is clear that the monthly average for EmpA is 160000/12 = 13333. (i.e uses 1999 salary limit) This results in an AB of .05*1*13333 = $666.

Employee B (the grey one!):

Hired 1/1/2000, termed 6/30/2000, salary $20K/mo

Option1:

Observe that all pay is recieved in 2000. Therefore, the monthly average for EmpB is ((6/12)*170000)/6 = 14167. This results in an AB of .05*1*14167 = $708.

This gives EmpB a larger benefit than EmpA, even though he worked 6 months less and had the same salary and term date.

Option2:

"Attempt" to apply Ex3 of regs by saying that you need to use (a)(17) limit effected at the beginning of the 12 mo period ending at term date (i.e. 1999 salary limit) Therefore, the monthly average for EmpB is ((6/12)*160000)/6 = 13333. That results in an AB of .05*1*13333 = $666.

This option makes the two employees equal but seems wrong since all employement and pay was 2000.

Comments:

What muddles this for me is that I've never really understood how Example 3 clarifies the text of the (a)(17) regs...rather, the example seems to sort of make it's own rule for plans with monthly averages.

If you're still reading and have any thoughts, I'd really appreciate it!!

Thanks.

[mwyatt]

What is the plan year of your example? Calendar or non-calendar? Assuming from your question that it is non-calendar (7/1/99-6/30/00 maybe) but need confirmation before responding.

[Guest tomaney]

Calendar...

But as I said, service is granted based 1000+ hours for year beginning on Ee anniversary.

If I knew what code or regs Example 3 of (a)(17) regs was based on, I'd have some guidance to help answer this, but that Example 3 seems to sort of stand on its own.

I suspect that either interpretation would be fine. I'm leaning toward using the 170000 from 2000. Thanks for you thoughts.

[mwyatt]

Actually, given that you have calendar year plan year, I would have calculated your first example (where salaries clearly in excess of limits) as 6/12 of 160,000 for 1999 and 6/12 of 170,000 for 2000, so average for example 1 would be 165,000/12=13750.00, resulting in AB of 5% 13750.00 x 1 = 687.50. (As an aside, if you granted Service on Plan Year, amount would be double this).

I agree with your calc of $708 for the second example. I wouldn't think that your ending Example 3 calc would apply since this person was hired in 2000.

Is a little odd that Ees 1 gets lower benefit than Ees 2, but just the nature of a DB plan and how limits were applied by year (note that EGTRRA '01 will initially eliminate some of this as the new $200k limit will apply retroactively to past salaries, unlike prior COLA increases to the $150k limit).

Hope this is of help (BTW, how's the weather in MN been this year? By brother and father live west of the Twin Cities and have had few complaints so far.)

[Guest tomaney]

Taking half of each limit is the intuitive thing to do, but Example 3 of (a)(17) regs clearly specify that for plans that have MONTHLY FAP definitions, you use the 1999 limit. This is why I don't know which way this one goes.

As to your aside note, this is not the real plan but it more clearly illustrates my core issue. I set up the facts to make EmpB have higher benefit while working half the amount.

Weather is a balmy 45 today and sun is shining I might have to try to get in a run.

[mwyatt]

Good to hear that balmy weather is present in Minnesota. Perhaps this will show up here in a couple of days in New England!

I see your point on Ex. 3, although the exact terminology of your Average Salary definition would be helpful (was reading your 36 mo. to mean High 3 Year, take elapsed over all service if employee present less than 3 years). I still think that your EmpB would use the 170k limit even under Ex. 3 since his service started in 2000, hence use the limit in effect at beginning of period of 170k. Don't see in his case where 1999 limit could apply since never had any service or salary pertaining to that period. If he was hired 12/31/1999, could make case for Ex. 3 interpretation.

[Guest tomaney]

Thanks a lot for your comments. I've 'wasted' too much time on this!! In absense of a clear 'right' answer, I guess I'm gonna go with the 2000 limit, but the strange thing is that the (a)(17) limit is different for two people terming on same day in same year.

This would be a little more interesting/ironic Q if you change the facts so that EmployeeA was hired 12/1/1999 and B was hired one month later, 1/1/2000. Then both termed 7/1/2000. In this case, I think you'd have to go with the 1999 limit per Ex3 in regs.

By the way...the FAP language in question matches Ex 3 to a 'T'.