Am I reading the 415(b) regs correctly

[Belgarath]

Just for the 100% of average annual comp limit, under 1.415(b)-1(a)(5).

Say you have an employer (1-person corporation) that hs been in business for 3 years. Further suppose that W-2 income has been exactly $100,000 each year.

For 2014 and onward, employer anticipates large increase in compensation - far above maximum comp level.

When calculating a 415 maximum benefit, I read the regs as requiring use of pre-participation income when determining the high 3-year average. So in the first year, (2014) average comp would be (100,000 + 100,000 + 260,000 = 460,000/3 = 153,333) rather than simply using the higher 260,000 figure. Have I got that right?

[AndyH]

Agree

[Belgarath]

Thanks Andy - now to take it one step further, since in my case, I think this equals knowledge without understanding. Does that mean that the first year accrued benefit for funding purposes must also be limited? Maybe this will make more sense if I give you the actual illustration example I'm looking at.

62 year old making way above comp limit for 2013, but 100,000 in all prior years. Now wants to install a DB plan. NRA is to be 65/5, so 67 is NRA. Benefit is a "unit credit of 20% of Average Monthly Compensation times Years of Participation limited to 5 years." So it is funding for 100% of pay at NRD, adjusted of course for 415. The illustration I'm looking at produces a monthly benefit at NRD of 9,554.87, (some adjustments go into arriving at that 9,554.87) and the monthly benefit accrued at 12/31/2013 but payable at NRD is $1,910.97. This results in a required contribution of app. 200,000 - 210,000.

So my real question is: since that benefit at NRD of 9,554.87 (21,250 monthly compensation, with various adjustments) is assuming an average annual compensation of 255,000, is it permissible to fund for that full benefit for 2013 when the actual average comp., as of 2013, is much lower than 255,000?

I probably should have posted all this first, but I didn't see the point in boring you if my initial fundamental reading was incorrect.

[AndyH]

Belgarath, the benefit at NRD is not relevant for a PPA valuation. It is the benefit accrued or accruing in the year of the valuation date (depending if BOY or EOY) that drives the numbers. You can have a formula that results in a benefit of $2 billion but the benefit that counts for funding purposes is limited to the benefit accruing in the current year (or prior years if past service is granted), but it is still limited by 415.

Look it another way. The plan might say that comp starts at DOP which would produce an average of $255k but the benefit is still subject to 415 which requires the use of the high consecutive 3 if there is one.

[Calavera]

As Andy said, the benefit at NRD is not relevant for a PPA valuation

For the 2013 Plan Year, looks like in your case the $415 limit somewhere around $230,000 at 66.5-ish reduced by years of participation less than 10.

I would calculate 1 year of accrued benefit by the formula and than limit it by min($415, Sal 415).

$415 limit will be 230,000 x Participation (1 year) / 10 = 23,000

Sal 415 limit would be (100,000 +100,000 +255,000)/3 x Service (at least 3 years based on your post) / 10 = 45,500