Final Average Compensation

[Guest calcu]

For purposes of determining final average comp, it has always been my understanding that all years in which a participants accrues credited service is counted, even years prior to a break-in-service, if applicable. Suppose an employee accrues credited service in years 1980 through 1995, incurs a break in service from years 1995 through 2001, comes back in 2002 and retires in 2006. The plan's definition for final average pay is the highest 5 out of the last 10 consecutive years. How exactly is final average pay determined in this case? The last 10 consecutive years would put it at 1996, where no comp is earned, so it is just figured on the last 4 years since out of the last 10, those are the only years the participant had compensation?

And will that final average pay apply to all service both pre and post break service? It has always been my understanding that the final average pay will apply to all the service (1980 through 1995 and 2002 through 2006). Any guidance, citation, authority will be greatly appreciated!!

Thanks

[SoCalActuary]

I think you must look at your document carefully. Does it define compensation to exclude years in which no benefits were earned? If that language applied, then you could make the case to include compensation in each of the last ten years when benefits were being earned.

[david rigby]

Absolutely. However, many definitions of FAC will not address this. Then, look for precedent. Finally, consider amending the plan.

[Guest calcu]

The plan actually does state that plan years in which the participant does not earn credited service are excluded.

So, when the FAC is applied to the participant's credited service, is it applied to ALL, even pre-break service?

[david rigby]

See prior answers.

[Guest calcu]

Is there anything in either the Code or ERISA that would prohibit drafting a plan to provide that if a participant incurs a break in service his or her benefit will be determined in by adding together the two separate pieces based on the compensation earned and credited service accrued during the two separate time-frans (pre and post break)?

[david rigby]

Not sure. You could probably do it that way, but I doubt it would be a simple amendment. It goes to the heart of how the benefit formula is designed. It would work more easily if the benefit is defined on each year's comp, rather than FAC (that is, your suggestion does not fit the usual definition of FAC).

If you have SS integration that is intended to be safe harbor, be careful of the rules under IRS reg. 1.401(l).

[MGB]

Calc

I have drafted such plans in the past, including the repurchase of prior service (actually, repurchase of prior benefit) from a prior cashout.

I don't think you need to limit the second FAC to do this. You should be able to still do the "bridged" FAC in the second piece, even though benefit service from pre-break is not entering into the formula.