401(a)(17) Limitations

[Guest jgarner]

Is there any way you can set up a plan that will pay benefits to offset the limitations of 401(a)(17) (salary limitations). We have an Excess Benefit Plan for the 415 limits, but have been told that we cannot use this plan to offset the 401(a)(17) limits. Has anyone set something up that accomplishes this?

[Peter Gulia]

A few suggestions without any advice.

First, it's important for a State or local government employer (or its worker) to be confident about what State law enables (or doesn't).

The Internal Revenue Code doesn't directly preclude deferred compensation between a State or local government employer and its worker. And if neither party wants the Federal income tax treatment of section 415(m), a plan could provide deferred compensation meant to replace the difference between what a retirement plan provides and what it would have provided if qualified-plan restrictions didn't restrain the retirement plan's benefit (whether a defined benefit or from an allocation of a contribution).

The hard part is that the portion of that deferred compensation that isn't under a section 457(b) eligible plan will result in income and tax under rules for deferred compensation. Culturally, many State and local government employers and their workers don't like those rules. In particular, many paymasters find it challenging to W-2 tax-report a wage for an amount other than, or a time earlier than, as paid.

But if increasing an official's or employee's salary or other compensation is politically a non-starter, a deferred compensation plan might be an outlet.

While many lawyers can be competent with deferred-compensation rules (especially since recent regulations and other interpretations have clarified the Treasury department's views), only a very few have experience with the intersection between tax-law knowledge and the environment of State and local government employers.