401(a)(17) Limit for Year of Benefit Accrual Freeze

[J. Bringhurst]

Per section 1.401(a)(17)-1(b)(3)(iii)(A) of the Treasury regulations, "if compensation for a period less than 12 months is used for a plan year, then the otherwise applicable annual compensation limit is reduced in the same proportion as the reduction in the 12-month period." However, section 1.401(a)(17)-1(b)(3)(iii)(B) goes on to indicate that "a plan is not treated as using compensation for less than 12 months for a plan year merely because the plan formula provides that the allocation or accrual for each employee is based on compensation for the portion of the plan year during which the employee is a participant in the plan." We do not have a short plan year, since the plan has been frozen rather than terminated, so I guess that the question here is what is meant by the term "participant." Technically, still a participant until benefits are distributed, the individual is not a participant for accrual purposes, so I'm in a bit of a quandary on this one.

Does anyone have any thoughts on whether the 401(a)(17) limit is pro rated with regard to compensation that is disregarded after the effective date of a DB plan freeze?

[AndyH]

Let's say you have somebody hired 1/1/06 and the plan freezes 6/30/2007. Assume his pay is $200K each year. I think the rule is that you can recognize 200K each year, but not average over a period less than 2 years.

So average comp is normally ($200K+200K)/1.5 years =$2.67K average which bypasses the intent of 401(a)(17). In this case you would have to limit the average to (200k+200K/2)/1.5=200K.

But take another that earned $50K in 2006 and 100K through 6/30/2007. I think then you could use (150K/1.5)=100K for an average.

p.s.

Just to be clear, I am suggesting that comp after 6/30/07 (freeze date) must be ignored.