Hmmm. I'm guessing my guy has maybe 150 item AC, which would put him over the cap until L50. It's actually kind of funny if it works that day, because I was checking out the Velious gear out of curiosity yesterday and I'm pretty certain the quest armor alone would put a warrior over the hard cap, let alone neck/ring/etc slots or actual dragon drops or whatnot.
However I'm pretty sure that's not the way its implemented here. Zapatos and I described different scenarios: in my case the mob's level changed, and in his case the PC's level changed. The effect was identical. In your case only the PC's level changing should have such a large effect.
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