FAE for HCE ben calc

[Rball4]

Person makes $1m per year, so always well over 401(a)(17) cap. FAE is highest 60 months. If they had retired on 7/1/2011, would FAE be:

A) Actual highest 60 months:
2011 (6 months prorated $245k cap) - $122,500
2010 - $245,000
2009 - $245,000
2008 - $230,000
2007 - $225,000
2006 (6 months prorated $220k cap) - $110,000
FAE = $235,500

B) Highest 5 years:
2011 (received more than $245,000 prior to termination) - $245,000
2010 - $245,000
2009 - $245,000
2008 - $230,000
2007 - $225,000
FAE = $238,000

C) Actual highest 60 months without 2011 pay cap proration:
2011 (received more than $245,000 prior to termination) - $245,000
2010 - $245,000
2009 - $245,000
2008 - $230,000
2007 - $225,000
2006 (6 months prorated $220k cap) - $110,000
FAE = $260,000

I've heard it argued several ways and just wanted to get some additional opinions. Thanks.

[Dan Moore]

(D) None of the above. It's the average of the 5 annual pay limits beginning with the 12 month period that begins 60 months before retirement (i.e., 7/1/2006 - 6/30/2007). So, $233,000. The regulation (1.401(a)(17)-1(b)(3)(ii)) is crystal clear on this, BTW.

[Kenny]

(D) None of the above. It's the average of the 5 annual pay limits beginning with the 12 month period that begins 60 months before retirement (i.e., 7/1/2006 - 6/30/2007). So, $233,000. The regulation (1.401(a)(17)-1(b)(3)(ii)) is crystal clear on this, BTW.

It has been a while since I have gone through this in detail but I disagree. I think it depends on how average compensation is defined. Sometimes prorating a given year is the correct approach so I think A can be okay. I can't cite anything specific for you because for our particular situation your approach was the correct approach and it has been too long for me to remember the details.

[Rball4]

1991 Gray Book, Question 6, sides with Dan's approach. What's also interesting is it mentions for a career pay plan, if someone makes $200k from 1/1/11 to 1/31/11 and terminates, then the entire $200k can be used for the 2011 accrual, so no pay cap proration.

Looking at Regulation 1.401(a)(17)-1(b)(3)(iii), it seems that the pay cap is only prorated for short plan years.

[BadBeatMe]

(D) None of the above. It's the average of the 5 annual pay limits beginning with the 12 month period that begins 60 months before retirement (i.e., 7/1/2006 - 6/30/2007). So, $233,000. The regulation (1.401(a)(17)-1(b)(3)(ii)) is crystal clear on this, BTW.

:iatp:

There's also an example in the regulation that describes this situation.

Example 3. Plan Y is a defined benefit plan that bases benefits on an employee's high consecutive 36 months of compensation ending within the plan year. Employee B's high 36 months are the period September 1995 to August 1998, in which Employee B earned $50,000 in each month. Assume that the annual compensation limit is first adjusted to $160,000 for plan years beginning on or after January 1, 1997. The annual compensation limit is $150,000, $150,000, and $160,000 in 1995, 1996, and 1997, respectively. To satisfy this paragraph (b), Plan Y cannot base Employe[e] B's plan benefits for the 1998 plan year on compensation in excess of $153,333. This amount is determined by applying the applicable annual compensation limit to compensation for each of the three 12-consecutive-month periods. The September 1995 to August 1996 period is capped by the annual compensation limit of $150,000 for 1995; the September 1996 to August 1997 period is capped by the annual compensation limit of $150,000 for 1996; and the September 1997 to August 1998 period is capped by the annual compensation limit of $160,000 for 1997. The average of these capped amounts is the annual compensation limit applicable in determining benefits for the 1998 year.