Projected Compensation and Application of Compensation Limit

[Guest HaroldA]

I'm trying to calculate a participant's average monthly compensation in order to calculate his projected benefit with salary scale. I'm not sure how the 401(a)(17) limit comes into play for partial years.

For example (for 1/1/2005 valuation):

Salary Scale = 5%

Average Compensation for benefits is high 5 consecutive calendar years out of last 10

Normal Retirement Date = 11/1/2008

Compensation History:

2003 compensation = 170,000

2004 compensation = 185,000

2005 compensation = 194,250 <--(185,000 x 1.05^1)

2006 compensation = 203,963 <--(185,000 x 1.05^2)

2007 compensation = 205,000 <--(185,000 x 1.05^3) limited by 401(a)(17)

2008 compensation = 187,391 <--(185,000 x 1.05^4) / 12 * 10 <--Comp to 11/1/2008

Can I use the $187,391, or do I have to use $170,833 (10 months of the 401(a)(17) limit)?

[Blinky the 3-eyed Fish]

401(a)(17) is only prorated if the plan year is short. You are merely running a valuation in which you are assuming the person is retiring on his NRD. You are not assuming 2008 is going to be a short plan year.

FWIW, a valuation is an estimate based on assumptions, so even the assumption that he will only earn 10 months of salary in the final year is far more specific than most actuaries or their software programs will assume. Most would assume a full year's pay.