Short Plan Yr & Ave. Comp.

[Penman2006]

I have a restated plan with a short initial plan year (9 mo). The definition of average comp is high 5 consecutive plan years. The definition of comp for the short plan year seems to imply a 9 month comp period because it is defined as "comp for a plan year" and the plan year definition indicates an initial short plan year. The ave comp definition does not address the short plan year. Based on that, it would seem that you would treat the short plan year pay as just another plan year without taking into account it is only a 9 month period, effectively averaging 57 months of pay over 60 months. That doesn't seem right though. I can't remember the last time I did a short plan year val, can I get some input on average pay and a short plan year? Are there guidelines in the Code? I couldn't find any. Thanks.

[david rigby]

This seems to be a question of proper plan definitions. If not clear, then maybe an amendment is in order. Also, does it matter? That is, does anyone get vested without having 5 full years?

[rcline46]

Review the plan carefully to see if the LIMITATION (YEAR) (PERIOD) is defined in the document. If in spite of the short plan year (bad design probably) the document may still provide a full limitation year!

[Penman2006]

I didn't mention it because I don't think it matters theoretically but this is a target benefit plan. Average monthly pay is used to develop the contribution. If you average a 9 month salary into the high 5 consecutive average the average will go down (and not properly reflect a participants pay level). Regarding vesting, I don't see any problems because for the short plan year, a year of vesting service is prorated to 750 hours. Also, the Limitation Yr is defined as the Plan Yr and the Plan Yr is defined as 4/1 -12/31.

As an example, let's say someone has 5 years of service from DOH to 12/31/05 and has always earned a salary equal to $100,000 per year. Then, since comp is defined as comp for the plan year, for the short plan year period from 4/1/05 to 12/31/05 their comp would be $75,000. Average Monthly Comp is defined as the high 5 consec. plan years so you have ($100,000+$100,000+$100,000+$100,000+$75,000)/5 = $95,000. The participant gets screwed and they would continue to get screwed for the next 4 years, as long as that $75,000 is averaged in.

I think the plan amendment is a good idea.

[Chester]

You would use projected pay to calculate the target benefit. For short plan years you would want to use annualized pay for the projection of the target benefit. The current average pay should not be an issue unless a participant is within 5 years of the normal retirement age.

[Penman2006]

Chester,

This is a takeover plan. The the plan has been administered for who knows how long using the current average pay for the target benefit calculation that drives the funding. Initially I had the same thought as you, to project current comp. Based on how the plan reads, I don't think that using the current average pay to calculate the contribution violates any plan provision. I think using AMC is fine in this case but I would welcome any other thoughts because this is my first target benefit plan (that I can remember).

[AndyH]

Chester, with all due respect I must disagree. This happens to be a pet peeve of mine since I see takeover targets all the time that are not done using average comp and I think they are wrong. A safe harbor target plan must use average compensation, not projected average compensation. There are a couple of threads about this subject going a couple of years back if you are interested in further discussion.

The cite is hard to identify in my copy of the regs with the changes to 1.401(a)(4)-8 in recent years. Prior to the changes, the cite was 1.401(a)(4)-8(b)(3)(iv)©(1) which references 1.411(b)-1(b)(3)(ii)(A).

I think that Penman should consider the two or three options and then use the one that benefits the participants. Several methods could be used, but if they are not in the document then an amendment could be to the detriment of the participants unless it happens to be the most favorable amendment. I think a reasonable procedure is sufficient.

[Penman2006]

Thanks Andy. I will read those cites tomorrow and see what that tells me. I searched on "target benefit" but I didn't read all the threads that came up so I must have missed the discussion on ave. comp. I will go back through them.

[AndyH]

Here is one of the discussions. I took the discussion on a tangent in comment 9:

http://benefitslink.com/boards/index.php?s...c=22676&hl=