Compensation Limits
“Compensation limits” do not refer to restrictions on the amount of salary your employer can pay you. Instead, this term refers to the maximum amount of annual compensation SBCERA can consider when determining your contributions and calculating your monthly pension benefit under your retirement plan.
Two primary compensation limits that affect SBCERA members are: 1) Limits set forth in the United States Internal Revenue Code regarding the maximum amount of annual compensation that can be used to calculate the pension benefits of any SBCERA member, regardless of their plan; and 2) Limits set forth in the Public Employees’ Pension Reform Act (PEPRA) which establish the maximum amount of annual compensation that can be used to calculate the pension benefits for Tier 2 members (membership on or after January 1, 2013).
Internal Revenue Service (IRS) 401 (a)(17) Compensation Limit
If you are a Tier 1 member (membership prior to January 1, 2013), the Final Average Compensation (FAC) used to calculate your retirement benefit may be affected by the IRS annual compensation limit provided by Internal Revenue Code (IRC) section 401(a)(17) and IRS guidance issued under that Code section. This limits the amount of compensation that may be considered under a tax-qualified plan. Compensation limits do not refer to restrictions on the amount of the salary your employer can pay you, but instead refer to the maximum amount of compensation SBCERA can consider when determining your contributions and calculating your future monthly retirement benefit. This means if your compensation is at or above these limits for the current year, SBCERA will use the limit amount when calculating your future benefit. Compensation limits may vary by year.
The Internal Revenue Service (IRS) determines and publishes their compensation limits annually. Members with membership in SBCERA on or after July 1, 1996, are affected by the IRS annual compensation limit, even if a member has established reciprocity prior to July 1, 1996.
401 (a)(17) Annual Compensation Limit
| 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|
| $345,000 | $330,000 | $305,000 | $290,000 | $285,000 |
Public Employees’ Pension Reform Act (PEPRA) Pensionable Compensation Limit
If you are a Tier 2 member, the Final Average Compensation (FAC) used to calculate your retirement benefit may be affected by the Public Employees’ Pension Reform Act (PEPRA) pensionable compensation limit (also known as the “PEPRA cap”). Compensation limits do not refer to restrictions on the amount of the salary your employer can pay you, but instead refer to the maximum amount of annual compensation SBCERA can consider when determining your contributions and calculating your future monthly retirement benefit. This means when you retire, if your compensation is at or above the annual compensation limit, SBCERA will use the limit amount when calculating your benefit. Compensation limits may vary by year, and the applicable limit will apply to the three years included in your FAC.
PEPRA Pensionable Compensation Limit
| 2024 | 2023 | 2022 | 2021 | 2020 |
|---|---|---|---|---|
| $181,734 | $175,250 | $161,969 | $153,671 | $151,549 |
Frequently Asked Questions
When are the 401 (a)(17) annual compensation limits applied?
Since SBCERA uses a “plan year” aligned with the fiscal year beginning on the first day of July, the annual compensation limit effective January 1 of the calendar year will be applied at the beginning of SBCERA’s plan year (July 1). For example, if the annual compensation limit for 2024 is $345,000, the limit for 2024 is applicable at the beginning of SBCERA’s plan year, which is July 1, 2024, through June 30, 2025.
When are the PEPRA pensionable compensation limits applied?
The annual PEPRA pensionable compensation limit is applied at the beginning of the calendar year (January 1).
How do the limits affect my contributions?
Member contributions are not made on compensation earnable pay items that exceed the annual compensation limit. In other words, when a member’s salary for the year hits the compensation limit for the plan year (July 1–June 30), the employer no longer collects or reports the contributions that exceed the annual compensation limit to SBCERA.
How will I know which limit will be applied to my final average compensation (FAC) at retirement?
It depends on your highest final average compensation (FAC) and the year your FAC is being used to calculate your retirement benefit. This includes and is subject to the annual compensation limit in place for that year.
For example, if you are a Tier 1 member and retired on July 1, 2023, your highest FAC for 12-consecutive months might be the period of July 1, 2022, through June 30, 2023. In this example, the annual compensation limit used to determine your benefit would be $305,000, the limit for 2022, because this is the limit in effect as of January 1 for the calendar year that is applied at the beginning SBCERA’s plan year in which your 12 consecutive month FAC period began.
IRS Compensation Limit Example
A Tier 1 safety member, age 52, retired on July 1, 2023, with a Final Average Compensation (FAC) of $325,000 with 25 years of service. The member’s 12-consecutive months of earnable compensation is for the period of July 1, 2022, through June 30, 2023.
The IRC limit used for calculating this member’s benefit is $305, 000, the limit for 2022, because this is the limit in effect for January 1 of the calendar year that is applied at the beginning of SBCERA’s plan year in which the 12 consecutive month period began.
Instead of using $325,000 as the FAC, Internal Revenue Code 401(a)(17) requires the annual compensation limit be applied, which means the member’s benefit will be calculated using $305,000, the limit for 2022.
Note: As a Tier 1 safety member, their benefit formula is 3% at 50.
Formula
Years of Service x % Formula x Final Average Salary
25 years x 3% x $305,000 = $228, 750
The member’s base retirement benefit would be $228,750 a year.