Election to Limit Plan Compensation

[Blinky the 3-eyed Fish]

This language is copied from one of our restated DB plans within the definition of compensation.

Compensation Limitation Election Available To Certain Participants: Except for purposes of determining Minimum Top Heavy Benefits in Section 4.7 or Code §415 limitations of Article 6, any Participant who is a Key Employee, an Owner-Employee, a Self-Employed Individual, or a Highly Compensated Employee may elect for any Plan Year, on a form prescribed by the Administrator, to limit his or her Compensation for all purposes under this Plan.

I thought the ability to limit compensation, which effectively reduces a person's accrued benefit, was not allowable anymore, yet I see this language in this document with a determination letter. How can this be or am I mistaken?

[FAPInJax]

I am reading the language a little differently.

The participant may elect a smaller compensation limit as long as on the day of the election the accrued benefit is preserved. The limitation of compensation to less than the legal limit has always been permitted.

They are not permitted to reduce their accrued benefit. I agree with you on this point.

[Mike Preston]

I'm with Frank. The limit is essentially prospective in nature and does not provide an exception to 411(d)(6). It is a good planning tool if used to determine compensation limitations for an upcoming year.

[Blinky the 3-eyed Fish]

We are definitely in agreement on how this provision should be operated. However, regarding the language, it would be nice if it spelled out 411(d)(6) and that this is a prospective limitation, as it certainly is not clear wording. I especially think the phrase "...may elect for any Plan Year..." is quite misleading.

[Mike Preston]

True, but the nature of average pay plans, be they career or final pay, requires that a participant be able to modify the compensation taken into account with respect to a past year at times in order to have any impact. In general, documents do not reference 411(d)(6). In this case, it sure would be a good idea.

[RTK]

My initial reaction to the question was whether there is a cash or deferred arrangement issue. If the electing participant were to be provided with cash or other taxable benefit in exchange for reduced benefit accrual under the election, this would fit within the cash or deferred arrangement and election definitions of the IRS regs.

[Belgarath]

Blinky - I understand your concern. The IRS was, at one time anyway, much concerned that this represented a CODA for self employed.

We had a similar provision in our prototype. The IRS reviewer made us remove it. Said that their "prototype group" had determined that they would not allow this in prototypes, but would be ok in a Volume Submitter plan.

I've since heard from another document provider who got through a provision similar to yours. Guess it just depends upon who was the reviewer assigned to your documents.