Definition of Compensation

[Guest DLearning]

Rather than providing that Compensation will be adjusted each year for cost of living increases, may a plan state that Compensation will be limited to a certain amount (e.g., $200,000) and that such amount may be amended in the discretion of the benefits committee? (Of course, such amount could never exceed the maximum limit established by the Internal Revenue Code.)

If this is permissible, would a simple amendment of the plan suffice - simply saying that this definition of Compensation will apply for all purposes of the plan? Or is it necessary to address the different sections that could be affected by the definition (e.g., employee deferrals, employer matching and profit sharing contributions, discrimination testing, etc.).

Thank you very much for any suggestions.

[david rigby]

Might be a problem. Whenever the plan is amended (say amend in 2006 to increase the comp limit from $200K to $210K), that amendment will have impact only on HCEs. 1.410(a)(4)-5.

[Mike Preston]

I can't imagine it is a problem to impose such a cap and then eliminate it. Even if the elimination (or the partial elimination by way of an increase) is only beneficial for HCE's.

As far as whether the limitation can be applied to the multiple places in the document that such a limitation would normall occur, I see no reason why most of them can't be bunched together and limited. Of course, this depends on the language of the plan and how those amounts are currently referenced. If there is a reference, for example, to the compensation limitation of Section 401(a)(17) you will need to find that reference and it won't be as simple as searching for "$200,000" in the document.

However, to the extent that compensation is defined for testing purposes in the plan, I don't think the IRS will allow anything other than the statutory limitations unless you can guarantee they will only apply to NHCE's. Of course, you can't do that theoretically because it is possible to hire somebody and pay them $250,000 in the first year and they would not be an HCE.

[Guest DLearning]

My thoughts were that imposing such a cap should not be a problem if any subsequent amendments to increase the compensation limit are within the cost of living increase limits established by the IRS.

Does anyone have any other comments or suggestions?

By the way, is 1.410(a)(4)-5 the correct cite? I can't seem to find it.

Thank you to everyone.

D.L.

[Mike Preston]

1.401(a)(4)-5

[Guest DLearning]

Thank you for the clarification. I should have thought of it.