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Short Plan Year?


Logan401

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Greetings everyone. If a newly formed business started March 16, 2021 and adopted the plan effective March 16, 2021, are they subject to the short plan year proration rules? Or are they exempt from the rule because their business was formed later in the year?

The plan is a Volume Submitter MEP, and the client adoption agreement states: "The initial plan year begins on the Effective Date of this plan and ends on the following December 31. If the initial plan year does not begin on January 1, the initial plan year shall be a short plan year."

I thought there may be an exception for newly formed businesses.

Thank you!

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The MEP is 12 months long, the client adoption agreement is effective 3/16/2021 as mentioned. if there are no new business exceptions, is it too late to amend to have the effective date 01/01/2021, as long as it is done prior to the due date of their tax return?

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There are only 4 eligible participants which happen to be all owners. They would like to max out their benefits to the $58k limit for 2021. 

Plan Document: Definition of Plan Year: The plan year is determined to be a 12-month calendar year or a prorated calendar year (short year) if adopting during a calendar year.

Adoption Agreement: The initial plan year begins on the Effective Date of this plan and ends on the following December 31. If the initial
plan year does not begin on January 1, the initial plan year shall be a short plan year.

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Yes.  https://benefitslink.com/boards/index.php?/topic/21009-new-business-first-plan-year/

First, we have to recognize that we are only talking about ER allocations, obviously the deferral portion cannot be any earlier than the adoption date.  Next, SECURE added the ability to adopt a new plan after 12/31.  The IRS has already commented that a new entity may establish a Plan that uses a full 12 month period for both 415 & 401(a)(17) purposes.  Therefore if the Sponsor could setup a new plan to accomplish the same goal, why could they not amend the existing Plan to do the same?

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