27A. Definitions – plans providing for permitted disparity

Statement of Requirement: Treas. Reg. §§ 1.401(l)-1(c), 1.401(a)(4)-13(c)

Document Provision:_____

Sample Plan Language:

1. Covered compensation. A participant’s covered compensation for a plan year is the average (without indexing) of the taxable wage bases in effect for each calendar year during the 35year period ending with the last day of the calendar year in which the participant attains (or will attain) Social Security retirement age. No increase in covered compensation shall decrease a participant’s accrued benefit under the plan.

In determining a participant’s covered compensation for plan year, the taxable wage base for all calendar years beginning after the first day of the plan year is assumed to be the same as the taxable wage base in effect as of the beginning of the plan year for which the determination is being made. Covered compensation will be determined based on the year designated by the employer in section _____ of the adoption agreement.

(Note to reviewer: The blank above should be filled in with the section that corresponds with the sample adoption agreement language immediately following this Definitions section of LRM #27A.)

A participant’s covered compensation for a plan year before the 35-year period ending with the last day of the calendar year in which the participant attains Social Security retirement age is the taxable wage base in effect as of the beginning of the plan year. A participant’s covered compensation for a plan year after such 35-year period is the participant’s covered compensation for the plan year during which the 35-year period ends.

(Note to reviewer: A plan may also define covered compensation for plan years beginning prior to 1995 as the average (without indexing) of the taxable wage bases for the 35 calendar years ending with the year prior to the calendar year an individual attains Social

224 | Defined Benefit Plan LRM Package 08/2020 06/2026

Security retirement age.)

Sample Adoption Agreement Language:

Covered compensation will be determined based on the following year:

( ) current plan year

( ) plan year

( ) second prior plan year

(Note to reviewer: A plan must generally provide that an employee’s covered compensation is automatically adjusted for each plan year. However, a plan may use an amount of covered compensation for employees equal to each employee’s covered compensation, as defined in Treas. Reg. § 1.401(l)-1(c)(7)(i) or Treas. Reg. § 1.401(l)-1(c)(7) (ii), for a plan year earlier than the current plan year, provided the earlier plan year is the same for all employees.)

Sample Plan Language:

2. Final average compensation. [OFFSET PLANS ONLY]

A participant’s final average compensation is the average of the participant’s annual compensation, as defined in section _____ of the plan, from the employer for the threeconsecutive year period ending with or within the plan year. If a participant’s entire period of employment with the employer is less than three-consecutive years, compensation is averaged on an annual basis over the participant’s entire period of employment. Compensation for any year in excess of the taxable wage base in effect at the beginning of such year shall not be taken into account.

(Note to reviewer: The blank should be filled in with the plan section number that corresponds to LRM #6.)

(Note to reviewer: The plan may provide, or an election may be provided in the adoption agreement, that in determining a participant’s final average compensation, the year in which a participant terminates employment may be disregarded, as long as such year is disregarded in determining final average compensation for all participants.)

3. Taxable wage base. Taxable wage base is the contribution and benefit base in effect under Social Security Act § 230 at the beginning of the plan year.