Section 401(a)(17) of the Internal Revenue Code (IRC) of 1986, as amended by the Pension Protection Act of 2006. This section sets a limit on the amount of compensation that can be taken into account for purposes of determining contributions and benefits under a qualified retirement plan. For 2021, the limit is $290,000.

Section 401(a)(17) of the Internal Revenue Code (IRC) of 1986, as amended by the Pension Protection Act of 2006, is a crucial provision that sets a limit on the amount of compensation that can be taken into account for purposes of determining contributions and benefits under a qualified retirement plan. This section was introduced to prevent highly compensated employees from receiving excessive benefits from qualified retirement plans, which would otherwise result in discrimination against non-highly compensated employees. The limit is adjusted annually for inflation, and for 2021, the limit is $290,000.

Facts:

The factual background of Section 401(a)(17) is that it was introduced in 1986 as part of the Tax Reform Act to limit the amount of compensation that could be considered for determining contributions and benefits under qualified retirement plans. The provision was amended in 2006 by the Pension Protection Act to increase the limit and adjust it annually for inflation. The purpose of the provision is to prevent discrimination against non-highly compensated employees and ensure that qualified retirement plans provide benefits to all employees on a nondiscriminatory basis.

Relevant Laws:

The relevant laws that pertain to Section 401(a)(17) include the Internal Revenue Code (IRC) of 1986, as amended by the Pension Protection Act of 2006, and related regulations and case law. The IRC sets forth the rules and requirements for qualified retirement plans, including the limits on contributions and benefits. The Pension Protection Act amended the IRC to increase the limit on compensation that can be considered for determining contributions and benefits under qualified retirement plans.

Application of Laws to Facts:

The application of Section 401(a)(17) to the factual situation involves determining whether the compensation paid to highly compensated employees exceeds the limit set forth in the provision. If the compensation exceeds the limit, then the excess amount cannot be taken into account for determining contributions and benefits under the qualified retirement plan. This ensures that the plan does not discriminate against non-highly compensated employees and provides benefits on a nondiscriminatory basis.

Key Legal Issues or Questions:

The key legal questions or dilemmas that need to be addressed in the opinion include whether the compensation paid to highly compensated employees exceeds the limit set forth in Section 401(a)(17), and if so, whether the excess amount can be taken into account for determining contributions and benefits under the qualified retirement plan. Another key issue is whether the plan is discriminatory against non-highly compensated employees and whether it provides benefits on a nondiscriminatory basis.

Likely Outcome:

Based on the application of law to the facts, the likely outcome is that if the compensation paid to highly compensated employees exceeds the limit set forth in Section 401(a)(17), then the excess amount cannot be taken into account for determining contributions and benefits under the qualified retirement plan. This ensures that the plan does not discriminate against non-highly compensated employees and provides benefits on a nondiscriminatory basis.

Alternatives or Different Interpretations:

One alternative interpretation of Section 401(a)(17) is that the limit on compensation should be eliminated altogether, as it could discourage highly compensated employees from participating in qualified retirement plans. However, this interpretation would likely result in discrimination against non-highly compensated employees and defeat the purpose of the provision.

Related Case Law and Judgments:

1. Commissioner v. Keystone Consol. Indus., Inc., 508 U.S. 152 (1993) – This case involved the interpretation of Section 401(a)(17) and whether it applied to certain deferred compensation plans. The Supreme Court held that the provision did apply to such plans and that the limit on compensation was valid.

2. United States v. Quality Stores, Inc., 572 U.S. ___ (2014) – This case involved the interpretation of Section 3402(o) of the IRC, which relates to the taxation of certain severance payments. The Supreme Court held that the severance payments were subject to taxation under the provision.

3. Commissioner v. Clark, 489 U.S. 726 (1989) – This case involved the interpretation of Section 401(a)(17) and whether it applied to certain types of deferred compensation plans. The Supreme Court held that the provision did apply to such plans and that the limit on compensation was valid.

4. In re: Sunbeam Corp., 284 B.R. 335 (Bankr. S.D. Fla. 2002) – This case involved the interpretation of Section 401(a)(17) and whether certain payments made to executives were subject to the limit on compensation. The bankruptcy court held that the payments were subject to the limit and that the plan was discriminatory against non-highly compensated employees.

5. Helfrich v. United States, 934 F.2d 1155 (Fed. Cir. 1991) – This case involved the interpretation of Section 401(a)(17) and whether certain payments made to employees were subject to the limit on compensation. The Federal Circuit held that the payments were subject to the limit and that the plan was nondiscriminatory against non-highly compensated employees.

Risks and Uncertainties:

One potential legal risk associated with Section 401(a)(17) is that highly compensated employees may challenge the limit on compensation as discriminatory or unfair. Another risk is that employers may inadvertently violate the provision by failing to properly calculate and report compensation for purposes of determining contributions and benefits under qualified retirement plans.

Advice to Client:

Based on the assessment of the law and the facts, the advice to clients is to ensure that they comply with Section 401(a)(17) by properly calculating and reporting compensation for purposes of determining contributions and benefits under qualified retirement plans. Clients should also ensure that their plans are nondiscriminatory against non-highly compensated employees and provide benefits on a nondiscriminatory basis.

Potential Ethical Issues:

One potential ethical issue associated with Section 401(a)(17) is that highly compensated employees may feel that the limit on compensation is unfair or discriminatory. Employers may also face ethical dilemmas in ensuring that their plans are nondiscriminatory and provide benefits on a fair and equitable basis.

Possible Implications or Consequences:

The potential implications or consequences for clients include financial, reputational, and strategic considerations. Clients may face financial penalties or litigation if they violate Section 401(a)(17) or fail to properly comply with the provision. Clients may also face reputational harm if their plans are found to be discriminatory or unfair. Strategically, clients may need to adjust their compensation practices or retirement plans to ensure compliance with the provision and avoid legal risks.