Understanding Section 401(a)(17) Limits

Section 401(a)(17) limits are the maximum amounts that the Internal Revenue Service (IRS) sets for the annual earnings that can be used in pension benefits (these limits are also called "pay limits"). The IRS changes these limits every year or so.

There are a number of ways to apply these limits. You set up 401(a)(17) parameters to reflect your plan's interpretation of how these limits are used.

Three of the Pension Administration core functions incorporate earnings data and thus may need to apply 401(a)(17) limits:

  • Final average earnings (FAE).

  • Cash balance accounts, which calculates credits as a percentage of earnings.

  • Employee accounts, which uses projected earnings to estimate future contributions.

You apply 401(a)(17) limits after consolidating earnings; therefore, consolidation rules do not use limit rules.

When you use 401(a)(17) limits for final average earnings, the limits are applied before the system determines the periods of highest earnings. For example, if a final average earnings definition averages the five years of highest earnings, the system applies the limits to the consolidated earnings before determining which years have the highest earnings. Additionally, the final average earnings cannot be higher than the 401(a)(17) limit in effect on the event date.

If your consolidated earnings use a payroll special accumulator that is already set up to conform to 401(a)(17) limits, you do not need to set up or apply these limits in the pension system. However, if you sponsor a nonqualified limit plan that gives participants the difference between their limited and unlimited benefit from a qualified plan, you will find that there are advantages to using the pension system's 401(a)(17) functionality. If you incorporate 401(a)(17) limits into pension rather than payroll, the system can calculate both limited and unlimited values for final average earnings and cash balance accounts. When you build your nonqualified plan, therefore, you can simply reference existing results; there's no need to clone the entire qualified plan.