Conversion from Final Average Pay Plan to Career Average Pay Plan

[Guest t936]

A plan sponsor is switching from a Final Average Pay Plan to a Career Average Pay Plan in the middle of a Plan Year (5/31 for a calendar year plan). My question pertains to the 401(a)(17) compensation cap. Is it permissible to use the following approach:

Final Average Pay Benefit = Use full $210,000 comp cap but employees would only be credited with 5/12 of a year of service (service completed before amendment). So an HCE over the comp cap would receive $210,000 X benefit formula X 5/12.

Career Average Benefit = Prorate $210,000 comp cap to 7/12 for partial year. So an HCE over the comp cap would receive $122,500 ($210,000 X 7/12) X plan formula

Is there any guidance on this type of situation or would a private letter ruling be the only method by which to obtain comfort?

[Blinky the 3-eyed Fish]

The change in plan provisions can be handled many different ways, so it's a matter of the intent of the amendment and the current document provisions. Are you intending with wear-away or without wear-away (or with extended wear-away, but no one chooses that)? How is a year of benefit service credited? 1,000 hours? You just need to make sure that there is no 411(d)(6) violation.

So for example if a year of benefit service is 1,000 hours and someone had compensation of $210,000 and 1,000 hours at 5/31, you would need to grandfather a whole year of benefit service and the full $210,000 to avoid a cutback.

[david rigby]

I'm not sure your plan change requires you to grandfather a "whole year of benefit service to avoid a cutback." The accrued benefit at the change (later of effective date or adoption date) is what must be provided as a minimum. The plan amendment will (should) include that provision. Blinky's suggestion may provide the same result, but the testing is done on the benefits, not the service or the comp.