I have a client who retired from a Fortune 500 company in the middle of the year. When the company calculated her pension benefit, they prorated the section 401(a)(17) compensation limit for her last year. Even though she made less than the $170,000 limit for 2001, because of the prorated limit based on her mid year termination date, a portion of her pension was excluded from the qualified pension fund. Is this allowable?

Steve

You'd have to check the document. A compensation cap that impacts those who make $170,000 or more on a pro-rata basis is not likely to upset the IRS very much. So, if the document says that this it the way it is, then there isn't likely to be much recourse.

Is it allowable? Yes. A plan can always limit compensation more than the law requires.

Is it mandatory? No. (There is one case where it is: If the accrual of the benefit is on other than annual, e.g., monthly, and the salary for that month determines the accrual for that month, then it must be prorated. However, there are very, very few plans designed like this.)

So the real question is whether or not they applied the plan's provisions correctly.

Folks,

Thanks for the responses. Since this is not an IRS requirement, it sure makes me wonder why any company would put such a rule into their plan document

Anyway, I have requested a copy of the plan document to see what it says. It's interesting, to me at least, that when I requested the document they told me, in effect, regardless of what the plan documents say, the Administrator is the final authority on interpreting them.

Steve

Well, I'm not sure that you heard them correctly. In the case of language which is clear and unambigous, there is nothing to interpret, so the Plan Administrator must follow the terms as written. If, however, there is something which has some ambiguity in it, then the Plan Administrator's responsibility is indeed to interpret the document. People try very hard, however, not to draft plan documents with ambiguities. But there is always the possibility that one exists.