Average Compensation for High 3 Years

[Guest JPitcl]

I'm having a bit of trouble convincing an IRS agent that Average Compensation for a DB Plan can be determined without regard to when the plan began (i.e. a participants high 3 years can be derived from year's prior to the inception of the plan.)

The agent is insisting that the definition of IRC 415(B)(3), "a participant's high 3 years shall be the period of consecutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer," applies to a participant who's years prior to the inception of the plan yeiled a higher average compensation.

I have directed the agent to Reg 1.415-3(a)(3) which states: "...a participant's high 3 years of service is the period of 3 consecutive calendar years during which the employee had the greatest aggregate compensation from the employer"

My comment to the agent was that the regulations clarify the code, and are what should be relied upon in this instance. Her response is that the regulations do not modify the code, and cannot be relied upon.

I am looking for a cite that states that the regulations should be the overriding factor (even if they are more lenient than the code), and may be relied upon.

[david rigby]

"The regulations do not modify the code, and cannot be relied upon."

Can we get that in writing?!

[Guest JPitcl]

Thank you very much for your helpful post. I think that this should clarify this issue.

[Guest Ed F]

The IRS's own examination guidelines will be useful to you here. The exam guidelines, designed for use by the IRS's auditors, say:

"NOTE: Because the regulations allow the use of a participant's high 3 consecutive years of SERVICE (rather than participation), if such high 3 years occurs before the plan's effective date or before the employee becomes an active participant in the plan, use of such high 3 years will NOT cause the plan to fail to satisfy the requirements of Section 415(B)."

The exam guidelines for 415(B) are available from the IRS's website.

[AdKu]

Hi Ed F,

Your answer to JPitcl question is still helping many pension professionals like me after 15 years.

You only had 9 posts back then but was able to provide exact solution to the problem.

I hope all other forum participants learn from you reply when they respond to other forum participant questions.

With all due respect, we should refrain from posting discouraging reply to some inexperienced pension professional questions.

Regards,

AD