Pre-7/1/96 Employees

[Ken Davis]

Regarding a state DB plan with a 7/1-6/30 plan year.

When 401(a)(17) was amended in '93 by P.L. 103-66, I'm being told that state employees hired before 7/1/96 were grandfathered in with no compensation limit under 401(a)(17). But several IRS Notices since then, including the latest (IRS Notice 2002-71), apparently say that a compensation limit does apply to those employees. Notice 2002-71 says the limit for 2003 is $300K.

Which is correct? Pre-7/1/96 employees have no compensation limit, or the limit is $300K.

Thanks,

Ken Davis

[Guest Steve C]

My understanding is that it depends on the plan language in effect on July 1, 1993.

OBRA '93 allowed "eligible participants" in state and local gov't plans to retain their old compensation limits, if any (where "elig partic" means those who entered the plan no later than the year in which the plan was amended for the OBRA '93 compensation limit).

Here's an excerpt from 1.401(a)(17)-1©(4)(ii) [transition rule for governmental plans]:

"[F]or example, if a plan as in effect on July 1, 1993, determined benefits without any reference to a limit on compensation, then the annual compensation limit in effect under this section will not apply to any eligible participant in any future year".

- Steve

[MGB]

Also note that some of us disagree with the IRS's releases. They never did this in the past, they only started including the old compensation limit in the COLA notice for the last two years.

The old compensation limit was adjusted by 4th quarter CPI changes instead of the current 3rd quarter CPI changes. It also had a different rounding (5000 versus 10000, if I remember correctly). The IRS numbers being published are using the new methodology to bring forward the old limits. I don't think that is correct. The new methodology was not part of the plan provisions back then.

In some years you might get the same result, but usually they work out to be different numbers.

We have some very large governmental clients that use our numbers and ignore the IRS's announcements.