Retroactive Increases to Reflect EGTRRA Pay Cap

[Guest Doug Goelz]

Although Notice 2001-56 allows the $200,000 pay cap to be fully retroactive, can all service be taken into account if the benefit formula is ALSO changed without worrying about the amendment timing issues of 1.401(a)(4)-5?

It seems to me that if a plan that had turnover of NHCEs but not HCEs, an amendment to just reflect the new pay cap retroactively would not present any (a)(4) timing issues (but the resulting modified benefits would still need to be nondiscriminatory). However, if the benefit formula was also changed, then the timing issues would have to be taken into account.

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For example, consider if a participant's benefit for 2001 was capped at $90,994 (415 Limit for Retirement Age 60, SSRA 66), based on the formula $170,000 x 3.35% x 16.

If $200,000 was used instead, the benefit would increase to $107,200. If we assume the 2002 415 limit for retirement age 60 is $138,658, there is $31,458 worth of benefit still available.

Due to turnover, I don't think it is acceptable to just amend the plan to use a formula of $200,000 x 4.33% x 16.

However, since I haven't had a chance to think about this in great detail, I would appeciate hearing what others think.

[Guest Keith N]

My initial reaction is that you are probably ok. If I remember correctly, the timing issues of 1.401(a)(4)-5 are a "facts and circumstances" test. If your HCE fired everyone, amended the plan up and then terminated it, I think you have a problem. But if it's an ongoing plan and you still have some NHCE's in the plan, then I would say you may be ok.

I think you could argue that all your doing is taking advantage of the new laws. You were providing the max ben prior to EGGTRA, and your providing the max after EGGTRA so how could that be an improper amendment?