401(a)(17) Limit and Decreasing Compensation

[John314]

Until about a month ago I was certain I knew how this worked, but I am getting push back from a plan sponsor and their legal counsel. I am hoping someone here may be able to point me to guidance (even if informal) on how this should work.

Traditional average pay DB plan. Pension plan formula is based on the highest consecutive 12 months of earnings. Plan year is 7/1 - 6/30. Earnings are as follows:

• Plan Year beginning 7/1/2019= 400,000; 2019 comp limit = 280,000
• Plan Year beginning 7/1/2020= 300,000; 2020 comp limit = 285,000
• Plan Year beginning 7/1/2021= 325,000; 2021 comp limit= 290,000

Approach 1: apply the comp limit to each 12 months of earnings, then look for the highest, and divide by 12 to get the FAE. In this case, that would mean using 7/1/2021-6/30/2022 earnings capped at $290,000/12 = $24,167.

Approach 2: find the highest 12 months of earnings, then apply the cap, and divide by 12 to get the FAE. In this case, that would mean the highest 12 months of earnings is $400,000 in 7/1/2019, capped at $280,000 /12 = $23,333.

[Bri]

Ignore the pay beyond the 401(a)(17) limit in every single year.  His formula will be based on 290.  But his 415 limit will be based on an average of 280+285+290, so depending on if this is a max accrual formula there could be an override in play.

Does your plan document's definition of Compensation or Average Compensation have language referencing 401(a)(17)?