415b 3-year average comp

[Mister Met]

To determine the 3-year average comp limit for purposes of Section 415b, I believe 401(a)(17) applies. Was this always the case? Suppose a participant has comp of $1 million for the last 20 years. What would his 3-year average comp be?

[My 2 cents]

It had been the case a few years ago that it depended on what the plan said. Most of the plans we serviced had had a separate definition of earnings for limitation purposes (with no reference to 401(a)(17)), and the 3-year average earnings for 415 purposes were not then subjected to the 401(a)(17) limitations. This would matter primarily in the case of people working substantially past normal retirement age (say, with actuarial increase factors of 300%), for whom the 3-year average limit actually came into play. You might have people who earned $300,000 per year, with accrued benefits of $90,000 per year as of normal retirement age (calculated with earnings limited by 401(a)(17)). The 415 dollar limit (then $160,000 say) would be increased due to deferral, possibly to $400,000 or more, but the accrued benefit, increased for deferral, could not exceed what had actually been earned over a 3-year period, even if the result was greater than the 401(a)(17) limit.

Not sure if things have changed. Maybe regulations now prohibit the practice.

[Effen]

401(a)(17) always applied to the benefit formula, but not always to the 415(b) limits. It really only mattered if the person's NRD was later than 68 or 69 when the 415(b)(1)(A) limit would exceed the 401(a)(17) limit. In the past, as long as your actual comp was > 415(b)(1)(A) limit, you could have the (1)(A) benefit. Then the IRS came up with Regs that said your 415(b) limit could never exceed the 401(a)(17) limit, effectively cutting the maximum benefit for older participants.

I don't recall all the sites and dates, but this change was fairly recent...maybe last 5 years or so??

So, keep in mind that the most comp you could have ever used for benefit purposes was the 401(a)(17) limit of that particular year and therefore this person's average compensation for benefit accrual purposes would be based on the average of the limits in effect during those years. That said, if the benefit formula permitted him to accrue a benefit greater than the 401(a)(17) limit, he could have had it, assuming his less than his actual comp and the 415(b)(1)(A) limit.

[Mike Preston]

Effective date is first limitation year beginning after 6/30/2007. So, in the case of a calendar year plan the benefit calculated as of 12/31/2007 can use the unlimited compensation, but on 1/1/2008 compensation has to be restricted by 401(a)(17).