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New plan - short plan year and short sponsor year


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Hi all

Have not done of these in a long time.

Company started 3/1/2020 with FYE 12/31/2020 so in existence for 10 months in 2020.

Want to set up a 401k/PS plan (no SH can be done for 2020 but can be done for 2021)

My census

Key-HCE1 - salary 285k

HCE2 - salary 250k - can he be categorized as non-HCE for 2020

HCE3 - salary 200k - can he be categorized as non-HCE for 2020

Non-HCE - salary 50k

What prorations are required between the salary, 401k deferral and profit sharing (ADP issues aside)?

If need to prorate the salaries, what salaries do I need to use for ADP, 410(b) and 401(a)(4) purposes?

If my memory serves me right, I can start the plan from 1/1/2020 i/o short year as well as the limitation year, correct? If this the case, do I need to prorate anything?

Last, as the HCE's (assuming that the non key HCE cannot be categorized as non-HCE) will have enough of payroll to maximize the deferrals where the non-HCE will not, is this a BRF issue (again please ignore the ADP testing).

Thank you and happy Thanksgiving.

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I think you have a problem adopting a plan retro to 1/1/2020 for a business that started 3/1/2020.

You don't prorate salaries, you prorate 415 and 401(a)(17) limits at 10/12 of the annual limit. 

For 2020 there is no lookback year compensation for anyone so your only HCE(s) in 2020 is (are) 5%+ owner(s) in 2020.

I do not think you have a BRF issue.

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36 minutes ago, CuseFan said:

I think you have a problem adopting a plan retro to 1/1/2020 for a business that started 3/1/2020.

I'm absolutely NOT disagreeing with this; in fact, I agree. But to relate ancient experience...

In a prior life some 20-odd years ago, wen I worked for a company that had an Enrolled Actuary and the EA always attended the EA annual convention, this issue came up. At the time, the IRS representative opined (of course, this was unofficial) that it was ok establish the plan on, say, 1/1 even though the employer didn't exist until later.

Back then, all plans other than standardized were submitted for determination letters, and we had plans like this approved with nary a question.

Haven't done this for a long time, and wouldn't do it now without some sort of clear guidance.

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21 hours ago, Belgarath said:

I'm absolutely NOT disagreeing with this; in fact, I agree. But to relate ancient experience...

In a prior life some 20-odd years ago, wen I worked for a company that had an Enrolled Actuary and the EA always attended the EA annual convention, this issue came up. At the time, the IRS representative opined (of course, this was unofficial) that it was ok establish the plan on, say, 1/1 even though the employer didn't exist until later.

Back then, all plans other than standardized were submitted for determination letters, and we had plans like this approved with nary a question.

Haven't done this for a long time, and wouldn't do it now without some sort of clear guidance.

I agree. I also believe this was answered by IRS at ASPPA Annual many moons ago.  You might be able to find it in the transcripts of the Q&As on ASPPAs website,  pre-2000 years.  

Its not a "here is the citation" answer, its more along the lines of it is not prohibited.  

I think @Larry Starr was closely involved with these Q&As, so Larry if you are available to chime in ?...

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On 11/26/2020 at 10:22 AM, Jakyasar said:

If my memory serves me right, I can start the plan from 1/1/2020 i/o short year as well as the limitation year, correct? If this the case, do I need to prorate anything?

If my memory serves, you can use "calendar year" for the limitation year and compensation computation period. You can then use the 3/1/2020 effective date (or whatever date you'd like) and still have no need to prorate limits or compensation.

 

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