415 Limit and Average Compensation

[emmetttrudy]

415 statute uses the high 3 year average for definition of average compensation. what happens if a participant doesnt have three years of compensation - how does this affect the calculation of the 415 limit for that participant?

[SoCalActuary]

Your plan doc will govern. Most use months of actual pay.

[Hojo]

The comp limit if there are less than 3 years of service takes the average based upon actual service, including fractions of a year. However, the total number of years cannot be less than 1.

If service is not over consecutive months, then months during which there is no employment can be ignored. For example, if an employee is hired on 1/1/2008, terminates employment on 6/30/2008 and is rehired on 10/1/2008, then the average compensation as of 12/31/2009 would be the total compensation while employed, dived by (1 + 9/12) years. (per Dave Farber)

[Andy the Actuary]

The comp limit if there are less than 3 years of service takes the average based upon actual service, including fractions of a year. However, the total number of years cannot be less than 1.

If service is not over consecutive months, then months during which there is no employment can be ignored. For example, if an employee is hired on 1/1/2008, terminates employment on 6/30/2008 and is rehired on 10/1/2008, then the average compensation as of 12/31/2009 would be the total compensation while employed, dived by (1 + 9/12) years. (per Dave Farber)

Would the result be the same if terminated employment on 6/2/2008 and rehired on 10/31/2008?

[david rigby]

1.415(b)-1(a)(5)(ii)

[emmetttrudy]

thanks. i did check the plan document and it says to average over the period of months of employment. someone was telling me that if you do not have three full years of compensation that the monthly average is still calculated by dividing by 36, even if the participant only had for example 2 years of service. this didnt make sense to me.