Determination of compensation limit

[Guest RRO]

I have a plan with a beginning of year valuation date of 12/31 that uses calendar year pay for the year ending on the 12/31 valuation date - 12/31 to 12/30 plan year and 1/1 to 12/31 compensation year. Let's use a 12/31/2013 to 12/30/2014 plan year and a 1/1/2013 to 12/31/2013 compensation year for example. Several participants have compensation well in excess of the 401(a)(17) limit every year, and I'm confused about which limit to apply.

For reference, 401(a)(17) limits for years beginning:

2014 - 260,000

2013 - 255,000

2012 - 250,000

2011 - 245,000

2010 - 245,000

The plan uses a high 3-year average. To calculate average pay to determine the 12/31/2013 accrued benefit, should I look to the plan year that ended on 12/30/2013, and then to the compensation year for that plan year, 1/1/2012 to 12/31/2012, and use the limits for 2012, 2011 and 2010 to calculate the average, or should I look at the limit that applies for the current plan year beginning on 12/31/2013 and use the 2013, 2012 and 2011 limits for the average?

I think for the end of year average, I should use 2013, 2012 and 2011, but I'm not sure if I should be using the same average at the beginning and end of the year. I've gotten myself confused and would appreciate some outside input.

[My 2 cents]

To help clarify your question: Did you say that the earnings for the 12/31/12-12/30/13 plan year equals the compensation during calendar 2012? That would virtually equate to a one-year lag between the plan year and the earnings for the plan year. That is, earnings are defined in terms of the 1 day overlap and not the 364 day overlap?

It is my understanding that the limit for the 2012-13 plan year (assuming that the limitation year is defined as the calendar year, as it usually is) would be the 401(a)(17) limit for the plan year beginning in the limitation year (i.e., $250,000, the 2012 limitation, would apply to the 12/31/12-12/30/13 plan year, which, as I understand it, defines the plan year earnings in terms of calendar 2012 compensation). So if the person earned $300,000 every single year, the three year average as of 12/30/13 (and, thus, also as of 12/31/13) would be based on the 401(a)(17) limitations for calendar 2010, 2011 and 2012.

Just wondering - and for this assume that we are not talking about someone over the compensation limit - if someone retired effective 12/31/13, with payments starting 1/1/14, would what the person earned during calendar 2013 ever come into play? This is one of the reasons that I personally dislike plans not defining earnings in terms of actual compensation during the applicable period. Non-synchronous earnings definitions don't really line things up too well. But then, I don't think too much of plan years starting on the last day of a fiscal year, either.

[Guest RRO]

I actually used a plan year of 12/31/13 to 12/30/14 with 2013 calendar year pay.

When the plan year and the compensation year are the same and you use a beginning of year valuation date, compensation for the plan year ending on the day before the val date is input as current comp, and the limit in effect for the prior plan year is applied to that compensation for determining average compensation at the beginning of the year.

PY =1/1/2014 to 12/31/2014; val date = 1/1/2014; 2013 calendar year pay = current compensation, and average comp on the 1/1/2014 val date is limited to the 2013, 2012 and 2011 (a)(17) limits.

Do I use that same methodology here?

PY = 12/31/2013 to 12/30/2014; val date = 12/31/2013

Comp year = 1/1/2013 to 12/31/2013

Is average comp limited on 12/31/2013 based on the comp year applicable to the 12/31/2013 to 12/30/2014 plan year, or is it based on the comp year that applies to the prior plan year, 12/31/2012 to 12/30/2013, which is the 2012 calendar year?

If I understand your answer, you would apply the 2012, 2011 and 2010 limits to the compensation on the 12/31/2013 val date.

Correct?

[My 2 cents]

I think that the 2012 limitation year limit on compensation (presumably, the limitation year is the calendar year and not the plan year) would apply to compensation applicable to the plan year beginning in 2012 (i.e., 12/31/12 to 12/30/13). If I understand you correctly, that would be calendar year 2012 earnings.

Unless I have succeeded in confusing myself more than everybody else, I think that means that the 3-year average compensation used to calculate the accrued benefit as of the first day of the plan year 12/31/13 to 12/30/14 would take into account the 2010, 2011 and 2012 limitations. If you are using the 2013 calendar year earnings as your "current compensation" for the 12/31/13-12/30/14 plan year, you would apply the 2013 limit to that. So if you are trying to project the accrued benefit to the end of the 12/31/13 to 12/30/14 plan year, you would use the 2013 calendar year earnings, limited by the 2013 compensation limitation.

I think that it would be reasonable, in projecting the accrued benefit to the end of the 12/31/13 to 12/30/14 plan year, to take into account the 2011, 2012 and 2013 limitations if the participant at all times earned more than the compensation limit. The 2014 compensation limitation would only begin applying to earnings recognized with respect to the plan year beginning 12/31/14.

Did that help (or at least make sense)?

[Rball4]

Regulation 1.401(a)(17)-1(b)(3)(ii) provides some clarification. My 2 cents is correct. 401(a)(17) limit applied is based on the plan year beginning date. Just to be safe, I would suggest checking the plan document, but it will probably be silent on this issue.

[Guest RRO]

Got it. Thanks My 2 cents and Rball4.