A participant has 2 complete plan years of compensation. They earned $500 and $19500 respectively for compensation. The hours worked were 100 and 2080 (part time in the first year for the sake of argument).

The plan requires 1000 hours for a year of accrual. Therefore, the participant has only 1 year of accrual.

Can the plan 'legally' have the average compensation be equal to $10000 ($500 + $19500 / 2) for benefit purposes???

I can not find anything to prevent it but it just 'smells' funny. The average would be $10000 for 415 because it just looks at how many years exist and not hours.

I have pretty much convinced myself that it is permissible but I just don't like it (sorry for the personal opinion)

Thanks for any and all comments.

Personal opinions and common sense are always useful. That's how we learn.

I think your question boils down to a plan definition. The plan could (for example) define avg comp as the average of comp for all years in which the participant earned a year of service.

If the plan is ambiguus, then you have the opportunity to use personal opinion and common sense to determine an administrative interpretation. Of course, precedent is important in such cases. And don't forget the provision in ERISA (and maybe in the plan document) to resolve questions in the favor of the participant.