Double Proration?

[nancy]

A DB plan defines average compensation as the high 5 consecutive years. If in one of those years a participant did not work 1,000 and receives no credit for service can you still use the compensation in the average? It seems that the rule regarding double proration deals with plans that require more than 1,000 hours for benefit credit and give credit for a partial year. I know many documents allow you to exclude from compensation any year that you do not receive credit or have a break in service. This document does not address this.

[RTK]

There are two regulatory requirements to address.

The first is the "prohibited double proration" of DOL Reg. 2530.204-2(d). I think you are right that it does not apply if the db plan is not prorating service and compensation for a year.

The second is the less well-known "special limitation" of IRS Reg. 1.411(a)-7©(5). Under the regulation, if a db plan bases normal retirement benefits on compensation, compensation must reflect the compensation that would have been paid for a full year of participation under IRC 411(b). An exception is made though for a compensation base that cannot decrease. The regulation cites as an example a benefit based on high five consecutive years. Since your db plan uses highest five consecutive years, this provision would not apply. Otherwise, I believe it would require the compensation to be annualized for no service years.

That said, virtually every db plan I have ever worked with has not used years of no service credit in the averaging period as a matter of plan design. Thus, this issue has not come up much for me. You may want to go back and see if you interpret the document to exclude that year.

Finally, don't overlook the requirement that the normal retirement benefit be no less than the benefit commencing at early retirement if your participant is early retirement age.