401(a)(17) and application of IRS Notice 2001-56

[Belgarath]

We're having a bit of discussion on this subject, and there are two opposing viewpoints (at least). Assuming you have a 2005 plan year, and you are determining the benefit accrual, and that accrual is based in part on pre-2002 compensation:

1. You can use 200,000 for all years prior to 2002, and the limit as adjusted for COLA's for years after 2002, but you cannot apply the current increased limit to years prior to 2002. (This happens to be the side I fall into)

2. You can take the current limit as adjusted, and apply it to all years, including years prior to 2002.

Opinions? Thanks in advance.

[WDIK]

I would also choose option one based on the following line from Notice 2001-56.

As under pre-EGTRRA law, any such increases shall apply only with respect to annual compensation during the plan year or other 12-month period over which compensation is determined that begins with or within such calendar year (and any subsequent calendar year).

[AndyH]

#1 should be edited so that a future increase applies only to that year and subsequent years. For example, the 2005 limit cannot be used for 2004.

[Belgarath]

Agreed. I should have made that clearer, but didn't think about it. Was just focusing on applying current limits to pre-2002 years - and apparently you agree with #1, subject to your modification?

[AndyH]

definitely, if the plan provides for it of course. I actually had a client insist that the limit be capped at $180K because anything above that was "unfair".

[JAY21]

Our company also believes interpretation #1 is the correct interpretation.

[SoCalActuary]

If you have a frozen benefit with extended wearaway, you can index the prior accrued benefit under some situations to use the $205 k , (now 210 k), on the frozen benefit. Otherwise, I agree with method 1.