Opinion ID: 2522
Heading Depth: 3
Heading Rank: 5

Heading: Claim VII: Method of Annualizing Partial Payment Violates Regulations

Text: Kendall contends that the calculation used to determine Average Final Compensation (AFC)  the dollar amount upon which benefits calculations are based  under section 1.5 of the 1994 Plan violates IRS Regulation 26 C.F.R. 1.411(a)-7(c)(5). Under 26 C.F.R. 1.411(a)-7(c)(5), if a plan bases its normal retirement benefits on compensation, the compensation must reflect the compensation which would have been paid for a full year of participation in the plan. Under the 1994 Plan, the AFC is the employee's five highest years of compensation within the last ten years of employment. All partial-year compensation is annualized. If the annualized compensation is one of the five highest years of compensation, the annualized compensation year will be replaced by the sixth highest compensation year. Kendall claims that this replacement reduces the AFC and therefore the benefit that has accrued under the Plan. 26 C.F.R. 1.411(a)-7(c)(5) requires that compensation used to calculate benefits must reflect what would have been paid for a full year of participation in a plan. Kendall argued in the district court that substituting a theoretical higher earning year, the annualized year, for the lower earning year, violated the regulation.