An easy question (from someone not in this field) follows:

Does the annual compensation limit (currently set at $170,000) mentioned in Section 401(a)(17) apply to earnings only in the tax year 2000 or to previous earnings as well?

Specifically, if a company has a db plan based on final average earnings (an average taken from the last xx years of earnings), should each year's earnings be compared to that year's limit or to the present limit?

If the former, do earnings prior to 1982 face no annual compensation limit?

Thanks in advance,

Brian Mason

My understanding is that it is a year-by-year calculation so that if you terminated at 12/31/2000, your maximum highest three year average would be $163,000 (170000,160000,160000)

Also, although I admire your idea regarding pre-82 participants, you can't have a previous year, higher than the current year. You may have a protected accrued benefit as of 1982, calculated on a very high pay, but in 1983 you couldn't have used more than 200K?? for any prior year (It's been a while, I don't remember the exact limits)

Keith is correct. When the comp limits were lowered by statute (200K was effective in 1989, indexed to about 235K in 1993, lowered to 150K in 1994), the "grandfathering" was based on the benefit as of the day before the change, not a grandfathering of the comp itself.

See 1.401(a)(17)-1(a)(3)(ii) and (B)(2).

My thanks go to both Keith and pax. I've been thinking about you wrote, and ... maybe I've got it now. I appreciate your time and your expertise.

Brian Mason