3 year average

[SSRRS]

Hi,

I know that almost all DB plans provide that the 3 highest salary years for the salsry average must be consecutive. However, is it allowed to provide for the salary average to be any 3 highest years, even if not consecutive. A bit generous, but for an owner only plan it might be preferred?

It appears that if not consecutive the it creates a definitely determinable issue?

Thank you

[david rigby]

In my 40+ years, I've probably seen one or two plans that permit non-consecutive years in the FAC definition.  Sorry, don't remember any of the details.  Is it allowed?  Of course.  Is it wise?  Probably yes for an owner-only plan.  Caution don't forget about the 415 definition(s).

 

[SSRRS]

Thank you David, as always, your knowledge and experience is much appreciated. I just don't understand, if it's allowed, why don't owner only plans include this non consecutive allowance?

[Bri]

I would suspect it's indeed the 415 issue, if the plan's aggressively maxing the owner out anyway.

[truphao]

usually plan's formula for oner-only plan is 10% of AAC (415 limit formula).   Thus, there is no need to complicate things.

[Effen]

You can use a non-consecutive year average to determine the plan benefit.  You can really use whatever you want, even a 1 year "average", however, the maximum 415 limit is still based on a highest 3-consecutive year average.  Since the 415 maximum limits the benefit, most tax-shelter plans just use that for plan definition. 

I see highest 3 In the non-tax shelter world.  I have several bargained plans that use a non-consecutive average.  I don't like it in that setting because it leads to "spiking", where a person works a lot of overtime in a year, then coasts a few years.  

[CuseFan]

Effen is correct - for benefit determination you need not use consecutive but for 415 FAE hi-3 it must be. 

Also, and this applies to traditional plans with employees that are integrated with social security, you lose 401(l) safe harbor if you use average of non-consecutive years. We took over a plan where prior actuary amended for non-consecutive years for the client (via an "end around" on the AA) but never told them their safe harbor design went away and they needed to general test.

[SSRRS]

Thank you very much, again,  CuseFan, Effen, truphao, bri and David.