Actuarial increases past average compensation

Hi All,

A DB participant terminated at age 60. Was entitled to his benefit at the plan's NRA of age 62. Did not get paid his benefit until age 74. Actuarial increases are bring given to reflect the benefit payments that were not made for the period of age 62 until age 74. Question: The increased a accrued benefit at age 74 is $2,950. The participant's average monthly comp was $1,964. Is this increase up to 2,950 that is greater than his avg comp allowed or is the increase capped at $1,964, his average monthly comp (as cannot increase the benefit past 100% of comp)?  Thank you.

The 415 regs address this issue.  The 100% pay limit is what it is, and the actuarial increases cannot exceed it.  Therefore, you will have to determine (as best you can) the precise point in time at which the increases reached that limit and create an immediate benefit commencement date.  A BCD means you must offer the retiree all the payment form options available under the terms of the plan.  This means some determination of retroactive payments.  (No comment about how you determine a J&S benefit if that is chosen, because there are some other facts needed for that discussion.)

Also not opining on whether there is any issue w/r/t late payment under RMD requirements.

The compensation limit can be increased by some annual COLA percentage after a participant separates, I think most pre-approved plans allow for that. These are less than post-NRA increases but apply from separation. This might delay the required (retro) commencement date.

From Google AI:

• For 2026: The adjustment factor is 1.0284 (a 2.84% increase) for participants who separated before January 1, 2026.
• For 2025: The adjustment factor was 1.0258 (a 2.58% increase) for those who separated before January 1, 2025.
• For 2024: The adjustment factor was 1.0351 (a 3.51% increase) for those who separated before January 1, 2024. 
  IRS (.gov) +4

1. Annual Indexing: Under Section 415(d)(1)(B), the compensation limit (the "high-3" average) for a separated participant is adjusted annually using procedures similar to Social Security benefit adjustments.
2. Cumulative Calculation: The adjustment is applied by multiplying the participant's compensation limit, as previously adjusted through the prior year, by the current year's factor.
3. Plan Provision Requirement: A participant's benefit can only be increased to reflect these cost-of-living adjustments if the specific retirement plan document includes language allowing for such scheduled post-retirement increases.
4. Comparison to Dollar Limit: The final benefit remains limited by the lesser of this adjusted 100% compensation limit or the overall 415(b) dollar limit (which is $290,000 for 2026 for those aged 62+). 
   IRS (.gov) +6

In addition, a BCD should be the first of the month in which your AE increases cross the 100% pay limit. So, the final benefits will be slightly below the 100% pay limit.

1 hour ago, CuseFan said:

The compensation limit can be increased by some annual COLA percentage after a participant separates, I think most pre-approved plans allow for that. These are less than post-NRA increases but apply from separation. This might delay the required (retro) commencement date.

From Google AI:

For a participant who has separated from service, the IRC Section 415(b) 100% of compensation limit is adjusted annually for cost-of-living increases. 

IRS (.gov) +1

The specific percentage increase for recent and upcoming years is as follows:

• For 2026: The adjustment factor is 1.0284 (a 2.84% increase) for participants who separated before January 1, 2026.
• For 2025: The adjustment factor was 1.0258 (a 2.58% increase) for those who separated before January 1, 2025.
• For 2024: The adjustment factor was 1.0351 (a 3.51% increase) for those who separated before January 1, 2024. 
  IRS (.gov) +4

 

Key Rules for Post-Separation Adjustments

1. Annual Indexing: Under Section 415(d)(1)(B), the compensation limit (the "high-3" average) for a separated participant is adjusted annually using procedures similar to Social Security benefit adjustments.
2. Cumulative Calculation: The adjustment is applied by multiplying the participant's compensation limit, as previously adjusted through the prior year, by the current year's factor.
3. Plan Provision Requirement: A participant's benefit can only be increased to reflect these cost-of-living adjustments if the specific retirement plan document includes language allowing for such scheduled post-retirement increases.
4. Comparison to Dollar Limit: The final benefit remains limited by the lesser of this adjusted 100% compensation limit or the overall 415(b) dollar limit (which is $290,000 for 2026 for those aged 62+). 
   IRS (.gov) +6

 

Thank you Cuse Fan, as always. So if his average comp was 23,000 and terminated in 2012, then based on the adjustments that you mention, his avg comp and his benfit  can actually be increased higher than 23,000?

Thank you Calavera, always appreciate your knowledge. If his benefit hit 100 of comp 5 years ago, then  besides that being his benefit as capped,  are you saying that a BSD must be established from then,and therefore he is owed back payments from then? And if paying a lump sum now, would he receive in addition to his lump sum, the monthly befits for the past 5 years from the BCD? Thank you.