Special Grandfathered Compensation Limit for Rehires

“I recently read your Ask the Experts column on the special/grandfathered 401(a)(17) compensation limit. My question is, if a qualified governmental plan participant was participating prior to 1/1/1996 but later retired and returned to participating employment in the same qualified plan, would that individual still be able to take advantage of the special/grandfathered limit?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

Thanks for reading the column! To get to your answer it is helpful to read the relevant language of the regulation on which the column was based (Treasury Regulation § 1.401(a)(17)-1(d)(4)(ii)(B)), as follows:

“(B) Eligible participant. For purposes of this paragraph (d)(4)(ii), an eligible participant is an individual who first became a participant in the plan prior to the first day of the first plan year beginning after the earlier of –

(1) The last day of the plan year by which a plan amendment to reflect the amendments made by section 13212 of OBRA ’93 is both adopted and effective; or

(2) December 31, 1995.”

You will note that the language refers to when someone first became a participant in the plan and makes zero mention of any other eligibility factor, such as termination and subsequent rehire. Thus, a plain reading of the provision would presumably mean the fact that a participant was rehired would be irrelevant to the determination. Thus, in the example you provided, the rehired individual would still be able to take advantage of the special grandfathered limit. However, there does not appear to be any guidance expressly on the issue.

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

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