Compensation and Benefit Limits
To achieve and maintain tax-qualified status, retirement plans such as LACERA’s must meet requirements set forth in the Internal Revenue Code (IRC). Two IRC sections apply to LACERA members’ compensation and benefits, Section 401(a)(17) and Section 415(b).
Sections 401(a)(17)and 415(b) apply to some Plan D members, as described below.
Section 401(a)(17) is a federally imposed cap on the amount of annual compensation that can be used for calculating retirement benefits. It applies to high-earning General Plan D members who first entered LACERA membership on or after July 1, 1996. Those with membership dates prior to July 1, 1996, have no compensation earnable limit.
How Section 401(a)(17) Is Applied
In the event your annual earnings reach the maximum amount permitted under Section 401(a)(17), LACERA will discontinue deducting retirement contributions for the remainder of the year. Deductions for contributions will resume the following January. You will still receive service credit if you continue to earn enough compensation such that a contribution would have been made if not for the compensation limit.
Final compensation is one of the factors (along with your retirement plan, age at retirement, and amount of service credit) that is used to calculate your retirement allowance. In compliance with the IRC, for purposes of retirement calculations, the amount of annual final compensation is limited to the amount set forth under Section 401(a)(17).
415(b) limits apply to a small percentage of retired Plan D members. LACERA has established a process for identifying and testing retirement benefits that may exceed the 415(b) limit for the year. Factors that determine if the limit applies include income, age, mortality tables, taxable and nontaxable contributions, service credit purchases, marital status, and several other factors.
A member’s highest final average compensation (FAC) over a specified time period is one of the factors used for determining monthly benefits as well as testing benefits under the 415(b) rules. How FACs are applied depends on membership date.
Since LACERA benefits are promised under the County Employees Retirement Law of 1937, members subject to 415(b) limits will still receive their maximum allowable benefit through the County-funded and administered Replacement Benefit Plan (RB Plan), which pays the portion of the LACERA benefit that exceeds the 415(b) limit. If the testing confirms that any member’s benefits paid by LACERA will exceed the annual limit, that member is enrolled in the RB Plan.
Replacement Benefit Plan Payments
If you are subject to 415(b) limits and enrolled in the RB Plan, you will continue to receive your maximum allowable retirement benefit, except that it will be paid in two separate payments—one from LACERA and the other from the County.