Underfunded DB Restrictions on Plan Amendments

[jpokusa]

Is the increase in the 401(a)(17) compensation limit considered to be a plan amendment increasing benefits as restricted by 436 for an underfunded DB plan and therefore cannot be used to calculate benefits, or is it only considered as such an amendment as applied to the 415 limit?

[Lou S.]

Does your current plan document limit compensation to the 401(a)(17) limit but reference with increases already built in or does the plan document have a compensation limit dollar amount that needs to be amended every time the limit increases?

If you have the former you're not amending anything, if you have the later I believe the restriction would apply.

[jpokusa]

The plan has the compensation limit increases built it, so it looks like they can recognize the higher comp limit in benefit calculations. Thanks.

[david rigby]

Some help from the Gray Book?

QUESTION 2008-21
PPA Benefit Restrictions: Deemed Plan Amendments
For purposes of the benefit restriction rules, are any of the following changes regarded as plan amendments that increase liabilities?
a) Increase in IRC §415 limit due to statutory COLA adjustment.
b) Increase in IRC §401(a)(17) limit due to statutory COLA adjustment
If the answer to any of these is yes, what happens if the plan is not sufficiently well-funded to allow the amendment to take effect?

RESPONSE
a) Yes. If the increase in the IRC §415 limit results in an increase in benefits currently in pay status or an increase in the accrued benefit of any participant, then this increase is an amendment that is potentially subject to benefit restrictions. If the plan is not sufficiently well-funded to allow the amendment to take effect, then the increase in the limit is deferred until such time as the plan is sufficiently well-funded to allow it to take effect.

b) Yes. However, the increase in the IRC §401(a)(17) limit only affects accruals at future dates and does not increase accrued benefits on the date the new limit first takes effect. As a result, the amendment cannot push the AFTAP below 80% if it was not already below 80%, and if the AFTAP was already below 80%, the amount of the section 436 contribution that would be required for the amendment to take effect is zero.


QUESTION 2013-26
PPA Benefit Restrictions: IRC §401(a)(17) Increases for Non-Calendar Year Plan Year
As discussed in 2008 Gray Book Q&A 21, annual increases in the §401(a)(17) pay limit are treated as plan amendments, but they do not need to be tested under §436 because they do not immediately increase the accrued benefit, and therefore do not increase the FT. However, the special rule in §1.430(d)-1(d)(2) requires that a mid-year amendment (i.e., an amendment adopted after the valuation date and effective during the plan year) be reflected in the valuation for the plan year if it would not have been able to take effect if the increase in TNC had been treated as an increase in FT. Plan A, with a July 1 to June 30 plan year, has a 2012 certified AFTAP of exactly 80%. Does this mean that the January 1, 2013 increase in the §401(a)(17) pay limit must be reflected in the July 1, 2012 valuation?

RESPONSE
Yes, if the TNC would be increased if the higher §401(a)(17) pay limit were reflected. Note that many plans limit pay during the year based on the §401(a)(17) limit in effect at the beginning of the plan year or at the beginning of a 12-month computation period, in which case a mid-year increase in the limit would have no effect until the following plan year. This is frequently true of plans where benefits are based on final average compensation, because the limit that applies to the final 12-month period in an averaging period is the limit in effect at the beginning of such 12-month averaging period. However, an increase in TNC could occur where a plan bases benefits on a period shorter than a full year, such as a final average pay plan where benefits are based on “high x-months” (not necessarily consecutive), or for a cash balance plan or career average pay plan that determines the benefit accrual for each month based on compensation for that month, limited to a one-month pro-ration of the §401(a)(17) pay limit.