Average Annual Compensation

[Guest krijowri]

Suppose your defined benefit plan defined "average annual compensation" as the average of compensation paid in the 60 highest-paid consecutive months of employment.

When determining the 60-consecutive-month period, do you use whole calendar months?

Or do you use some other measuring period, for example, the period ending on the participant's date of termination and beginning 5 years earlier (e.g. the participant terminates on November 4, 2008. His 60-month period begins on November 5, 2003 and ends November 4, 2008.)? If you use a measuring period like this, what do you do when the date of termination isn't among the highest-paid months?

[JAY21]

This is usually spelled out in the definition section of Average (Monthly) Compensation. Typically most small DB plans that I see use the averaging period over the plan years (often calendar years) vs. using the exact employment years (e.g., 11/3/07 - 11/30/08) since administratively the latter is a hassle for clients to track and put together compensation for differing periods for each employee.

[Andy the Actuary]

Suppose your defined benefit plan defined "average annual compensation" as the average of compensation paid in the 60 highest-paid consecutive months of employment.

When determining the 60-consecutive-month period, do you use whole calendar months?

Or do you use some other measuring period, for example, the period ending on the participant's date of termination and beginning 5 years earlier (e.g. the participant terminates on November 4, 2008. His 60-month period begins on November 5, 2003 and ends November 4, 2008.)? If you use a measuring period like this, what do you do when the date of termination isn't among the highest-paid months?

Truly one of the most administratively horrid concepts employed byDB plans, especially since Plans are sometimes incomplete in their definition. No matter what you spell out, it is easy to produce an exception, in particular, when there are brief service breaks or the employee is paid for fewer than 60 months. If the definition does not say completed months, then use the highest consecutive 60 months and if fewer than 60 months of compensation, then average over the working period (I use days/365). I've seen plans that collapse the compensation history to account for service breaks. I've also seen plans that use calendar years and pro-rate the first and final years by days. Would suggest keep the Plan document definitions flexible and document in the plan's administrative procedures manual as adopted by the plan administrator. Oh, don't have one of these?

[david rigby]

I agree this is a very undesirable definition.

However, in my observation, the intent (not necessarily application) of the term "month" has always been "calendar month". Then, the plan administrator must focus on when the compensation is earned vs. paid (I vote for the latter).