Is Pre-Participation Compensation Excludable?

[AndyH]

Takeover plan (unit accrual) effective in 2000 defines compensation as three year average starting with date of participation. Two principals at the 401(a)(17) limit shown in 2/28/2002 (EOY) val with average comp of $170,000 which would be $166,666.67 if not for the pre-participation comp exclusion.

Another person (with 10 YOS) paid out based upon post-participation comp only after two years in the plan.

I think that this is not permitted for a safe harbor plan unless each participant has a compensation history at least equal to the number of years in the average. So, in other words, pre-participation comp can be excluded once a participant has three or more years of participation.

Cite is 1.401(a)(4)-3(e)(2)(i) "be no shorter than the averaging period"

This is less than 100% clear, however. Opinions? The plan has no FDL.

[Mike Preston]

Every pre-approved document I've seen has the language you cite. You are correct.

[Blinky the 3-eyed Fish]

I looked at three since reading this post and none of them have that language.

[Mike Preston]

In the adoption agreement or in the plan document? I find it even is in the plan where it defines Final Average Compensation.

Here's the language from our current document with respect to FAC:

"If a Participant’s period of service with the Employer is less than three (3) consecutive years, Compensation is averaged on an annual basis over the Participant’s entire period of service."

Here's the language on the regular compensation average:

"If the Participant has less than the above number of consecutive years, Compensation shall be averaged over the total period of service. In no event shall Compensation be averaged over a period of less than three (3) consecutive Years of Service unless the Participant has less than three (3) Years of Service."

Going back to my TRA document, it has the following language:

"If a participant has not been an employee for the applicable period, the averaging period is his entire period of employment. "

I'm pretty sure that you'll be able to find a cite in the LRM's.

[AndyH]

I looked back at the language I was reading and I find it vague. I think the prior actuary mis-interpreted the existing language (and the regulations applicable to safe harbor plans).

It is a Benetech volume submitter, if anybody out there who cares to comment has one of those, but I have no FDL so I have no way of knowing if it is an approved version.

[Blinky the 3-eyed Fish]

Starting on page 9.91 of the 2003 ERISA Outline Book, Sal certainly agrees with your conclusion Andy. It appears I have some documents that are deficient in keeping my plans as a safe harbor.

As an addendum, most of my plans are career average and most of the FAP plans consider compensation from date of hire, so it is at least a limited few that may have a problem.

[AndyH]

Yes, Blinky, right on point (page 9.85 of the 2002 Book). Thank you both.