Post Age 65 Retirement 415 Limit

[Dougsbpc]

We always thought post age 65 retirement 415 limit is based on the following:

The lesser of:

A) Maximum Average Compensation X all YOS (up to 10 Years) as of valuation date / 10 Years.

Or

B) Maximum dollar limit (age 62 - 65) X YOP as of valuation date (up to 10 Years) / 10 Years X dollar limit adjustment factor.

The dollar limit adjustment factor can make the limit high especially if the participant is older. However, the APR for someone who is that much older will be low and besides, the comp limit under A will keep the limit in check.

Have been told B needs to be capped / replaced with A but instead of all YOS as of the valuation date / 10, YOP as of valuation date / 10.

[Effen]

The IRS takes the position that the actuarially increased $ limit for post 65 retirements cannot exceed the 401(a)(17) maximum compensation.  Therefore, for 2023, the maximum DB dollar limit is effectively capped at $330,000 for ages > 68 or so.   This wasn't always true, but recent (10+ years) IRS guidance has followed this thinking. 

That isn't exactly what you were asking, but it might be what you are thinking about.  

I am not sure if you can use a higher $ limit (based on AE), as long as the end result isn't higher than the comp limit / YOS.  Hopefully someone else will confirm that.

[Dougsbpc]

Thanks for your take Effen

So for example, suppose you have a one participant plan where the business was started 5 years ago and the participant worked more than 1,000 hours every year since the start of the company. Now in the 6th year they started a DB plan. Suppose the participants' retirement age will be 74 and the dollar limit works out to be a first year accrued benefit of $3,800 / month. If we take the comp limit x YOS / 10 we would get $27,500 x 6 /10 = $16,500 in this case. It would appear in this example then that $3,800 / month would be acceptable.

 

[Effen]

Lets ignore averages and COLAs and assume the comp limit is $300,000 and the $ limit at 65 is 245,000.  Therefore, the $ limit at 74 is around $494,000.  Also assume the employees has 10 YOS, but 0 YOP at BOY.

Max DB accrual at EOY 1 = 49,500  (min 300000/10*10, 495,000/10)

EOY 6 = 297,000 (min 300000/10*10, 495000/10*6)

EOY 7 = 300000

EOY 8 = 300000

At least I think this is right.  Does anyone think I would need to limit Yr1 accrual to 30,000?

[Effen]

Sorry, I posted my response before I saw your follow-up, but yes, I agree the 3,800/mo would be acceptable EOY1