Covered Compensation for 2003

[Guest Judy S]

When the plan document sets the covered compensation level at a flat amount equal to the covered compensation for someone retiring in the current plan year, what amount should be used for 2003?

[david rigby]

I hope the document is more specific than that in its definition. Can you give us the exact language?

[Guest Judy S]

We are using a Corbel prototype document. The language in the adoption agreement says:

"Integration Level means the greater of $10,000 or one-half of the Covered Compensation of any person who attains Social Security Retirement Age during the calendar year in which the Plan Year begins."

[mwyatt]

Well, if you mean Social Security Retirement Age for 401(l) purposes (i.e., 65 if born 1937 or earlier, 66 if born between 1938 and 1954, and 67 if born in 1955 or later), you kind of have a problem with your definition here.

person born in 1937 attains age 65 in 2002.

person born in 1938 attains age 66 in 2004.

Uh oh, what about 2003?

So for 2003, noone attains SSRA (401(l) definition), so what level do you use?

Now if using SS definition for determining SSRA, someone born in 1938 attains SSRA at 65 and 2 months. But this could be in 2003 or 2004 depending on date of birth. I think that this language didn't contemplate the subtleties inherent in the transition period.

Any comments?

[david rigby]

This should not be a problem. It appears from the definition given that the plan is intended to use IRS safe harbor provisions relating to SS integration. The last sentence of IRS reg. 1.401(l)-3(d)(4) should provide the answer to this question:

"(4) Single Dollar Amount.

The requirement of this paragraph (d)(4) is satisfied only if the integration or offset level under the plan for all employees is a single dollar amount (either specified in the plan or determined under a formula specified in the plan) that does not exceed the greater of $10,000 or one-half of the covered compensation of an individual who attains social security retirement age in the calendar year in which the plan year begins. In the case of a calendar year in which no individual could attain social security retirement age, for example, the year 2003, this rule is applied using covered compensation of an individual attaining social security retirement age in the preceding calendar year."

My understanding of this last sentence is one-half of the CC for someone attaining 65 in 1937: one-half of $39,444 is $19,722. Anyone agree or disagree?

[mwyatt]

Pax:

You da man... sounds good to me (nice that our IRS buddies had the foresight to deal with this problem). (and I comment: I responded on logic but probably should have RTFM;) ).

[Guest Judy S]

I agree. Thank you, thank you. I also should have looked at the regs. I'll try not to be so lazy next time.

[MGB]

Judy,

The regs only provide what the IRS expects to be done to follow the regs. It is not providing rules to follow for situations like your plan that doesn't contain these words. That doesn't solve the problem of your plan document being poorly written, ambiguous and not following the regs. Your plan needs to be cleaned up to state exactly what is intended.

Also, Pax's calculation may not be correct for your plan. You need to look at the definition of Covered Compensation in the plan, which may not be an exact value like Pax used.