Retroactive application of 401(a)(17) limit

[Guest Steve C.]

Notice 2001-56 states that a plan is permitted to provided that the $200,000 compensation limit effective for plan years beginning on or after January 1, 2002 applies to annual compensation for such prior periods used in determining accruals.

The Notice is silent, though, on pre-1994 compensation (pre $150,000 limitation). So the question is, may an employer use a higher pre-94 compensation limit (e.g. 222,000) where the benefit formula would otherwise pick up such a year for inclusion in the average comp, and where the plan is amended to permit retroactive application of the higher 401(a)(17) limits? Thoughts?

[Mike Preston]

I don't think the rule is any different than it has been in the past, with the exception that the floor is now $200,000. Hence, you can use the $222,220 only in the determination of the benefit accrued through the plan year ending in 1994. (Or is it the end of the plan year beginning in 1993?).

In any event, if you are doing a calculation of an accrued benefit after the effective date of EGTRRA, you can use $200,000 going back. You can't use $222,220 or any higher amount.

[MGB]

Mike's last statement of the "calculation of the accrued benefit" is true in the context of an average compensation calculation. However, higher compensation in 1993 and earlier can be part of the current accrued benefit in annual accrual-based plans such as career average (where the benefit is defined as yearly accruals rather than a true career average) and cash balance plans. Also, where there was a freeze in 1993 and restart for later accruals on any final-average plans.

[Mike Preston]

I so seldom work on career average type plans that I didn't focus on them as part of my response. I agree with MGB.