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 Safety Plan B members as described below; Safety Plan A members are exempt.
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 Safety Plan B 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).
IRC Section 415(b) applies to Safety Plan B members with membership dates on or after January 1, 1990. Section 415(b) limits the amount an individual can receive from a tax-qualified defined benefit plan (such as LACERA's) each year. Factors that determine if the 415(b) limit applies include income, age, mortality tables, taxable and nontaxable contributions, service credit purchases, marital status, and several other factors.
Members affected by 415(b) limits will be notified and covered by the County's Replacement Benefit (RB) Plan.
Since LACERA benefits are promised under the County Employees Retirement Law of 1937, the County-funded and administered Replacement Benefit (RB) Plan Plan) pays the difference if your annual LACERA allowance exceeds the Section 415(b) annual dollar limit. If you are subject to 415(b) limits and are covered under the RB Plan, you will continue to receive your full retirement benefit, except that it will be paid in two separate checks (direct deposits)—one from LACERA and the other from the County. The County’s RB Plan payment includes a deduction for the Health Insurance Tax (HIT).
How Section 415(b) Is Applied
LACERA's actuary determines whether your benefit exceeds the IRC 415(b) limit and provides the maximum amount of retirement benefit LACERA can pay in a given year. The remaining retirement benefit you are entitled to receive (that LACERA cannot pay) is paid to you separately by the County through the RB Plan.