Mercer Suggests Sponsors Prepare in Case Plan Limits Drop

In a new GRIST report, Mercer points out that depending on inflation levels for August and September 2009, the statutory formula used for calculating limits on elective deferrals, catch-up contributions, plan compensation, Code Section 415 annual additions and maximum defined benefit (DB) annuities, and compensation amounts for identifying highly compensated and key employees could produce lower figures in 2010 relative to 2009.

Employers may want to prepare now by assessing the implications for participant communications (including whether a 204(h) notice might be required for pension plans), financial planning tools, benefit calculation systems, and discrimination testing (including ADP/ACP testing for 401(k) plans), Mercer suggests.

The code is unclear what happens when the rounded value under the statutory formula goes down. Mercer said one interpretation is that the prior year's limit remains in effect, and another possibility is that the limit goes down, but not below the base amount ($15,000 for the elective deferral limit and $200,000 for the compensation limit).

The second interpretation, if adopted, also could adversely affect ADP/ACP nondiscrimination testing for 401(k) plans, as some limits could go down while others remain unchanged under the statutory formula, Mercer warns.

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