When can the plan year begin for a new company? Please help ASAP.

[Guest chris4013]

Company started in July of 2004. Plan year end is 12/31. I would like to avoid prorating comp for ADP. I heard somewhere that I could make my plan year begin 1/1 even though the organization did not begin until July. Is this correct?

Thank you

[chris]

Doesn't directly answer the ADP question, but you cannot have a plan without a sponsor. Thus, if the sponsor not in existence until July 2004, then plan cannot be effective prior to that same date......

[Guest chris4013]

Thank you for your reply. Reading Sal's book, after you gave me the answer I didn't want, Sal says that it's been suggested by IRS personnel at several ee conferences that the plan could predate the existence of the employer, thereby creating a 12 month plan year.

The IRS also informally noted that the compensation period can be defined as a 12 month period even thoufh the company did not exist.

Anyone care to comment, anyone use a full 12 months before?

I'd be interested in your thoughts. Thank you.

[Blinky the 3-eyed Fish]

I don't agree with Chris' response. Sal says it all.

[WDIK]

Prior Discussion

[chris]

I read the prior discussion referenced by WDIK; however, why is there any discussion of a short plan year due to an employer not being in existence in IRS Notice 98-52:

"X. Plan Years of Fewer than 12 Months

A plan will fail to satisfy the ADP test safe harbor or the ACP test safe harbor for a plan year unless:

(1) the plan year is 12 months long; or

(2) in the case of the first plan year of a newly established plan (other than a successor plan), the plan year is at least 3 months long (or, any shorter period in the case of a newly established employer that establishes the plan as soon as administratively feasible after the employer comes into existence). "

if it could always be handled by having an effective date of 1/1/?? prior to the date of existence of the employer? Maybe the underlined language is for all of the attorneys who don't know the "special effective date rule"......???

Effective date issue aside I believe the Regs. under 401(k) (don't recall the exact cite at the moment) allow for compensation to be the compensation for the cal yr. ending within the plan year, thus, no pro-ration of compensation has to take place....

I'm assuming the plan has yet to be put in place, otherwise, the plan document would define the plan year. And, as Sal referenced, the full twelve month plan year for the initial year could get the blessing of the IRS if submitted (or of the automatic reliance assuming the document provider's product allowed for such an effective date). If so, go for it.

[WDIK]

It appears several different things are being mixed together.

The first post talks about prorating compensation for the ADP test.

The prior post gives a cite that pertains to safe harbor plans where the ADP test is deemed satisfied.

[chris]

If prorating compensation is the issue, wouldn't Reg. §1.401(k)-1(g)(2)(i) which allows for compensation used to be the compensation for "either the plan year OR the calendar year ending within the plan year" make it such that you don't have to pro-rate? That being said how will you have additional compensation if the employer paying the compensation was not in existence?

[WDIK]

While I certainly am not capable of rendering a legal opinion on 1.401(k)-1(g)(i), I would have read the section as implying that you can use either the twelve month period that corresponds to the plan year, or the twelve month period that corresponds to the calendar year ending within the plan year. The section itself does not address a short plan year scenario.

That being said how will you have additional compensation if the employer paying the compensation was not in existence?

Good point. I'm not sure what chris4013 is looking for.

[Guest chris4013]

So I can have a short plan year, and define comp as the calendar year then I don't have to prorate? I never knew that. Thank you so much.

[WDIK]

chris4013:

Are you talking about pro-rating the limits?

[austin3515]

I think he just wants to use $205K of comp and not some lesser amount for the ADP testing.

As for the safe harbor plan and 98-52's requirement for a 3 month plan year, the point is that people need to have the opportunity to defer for at least three months.

[chris]

See the underlined language in the 98-52 reference above. The emphasis was on the fact that the plan year didn't predate the employer's existence not the arbitrary 3 months time period. Thus, if the employer is newly formed as of Dec. 1, 2004, 98-52 allows for a one month plan year (assuming it's a cal. yr. plan year). My point was that the newly formed employer short plan year language in 98-52 implied that you cannot have a plan year that predates the employer's existence.

[Blinky the 3-eyed Fish]

As Austin said, the point and the context of this notice relates to safe harbor plans and the need for people to be able to defer. You need to have a plan in order to be able to defer. However, this cite is unrelated to the ability to have plan year effective before the employer's existence.

[chris]

You need to have a plan in order to be able to defer.

....and you need to have an employer/plan sponsor in order to be able to have a plan....

You're correct in that Notice 98-52 is not about effective dates of plan years, however, that portion of Notice 98-52 does speak directly to the required length of a plan year for a safe harbor 401(k) plan. The issue deals with the length of the plan year since it would appear that the effective date would determine when the first plan year began.

Seems to me that he's wanting to use full comp. numbers, but I still don't see how there could be any compensation prior to the date of existence of the employer. ...unless the problem is that a participant received 205K of comp. in the short period and he's concerned that he'll have to pro-rate that amount.....????

[WDIK]

Apples - Effective date of the plan.

Oranges - First date deferrals can be made.

Peaches - Compensation allowed.

Pears - Pro-ration of limits.

Let's either address one issue at a time or have some fruit cocktail.

[chris]

As long as chris4013 found his/her answer, I don't care what we have for dessert....

[Blinky the 3-eyed Fish]

Chris4013 was caught off the shores of the Bahamas by Quint the Shark Hunter. He is dead!

WDIK, nice additional use of fruit.

....and you need to have an employer/plan sponsor in order to be able to have a plan....

Not quite the same as with the deferrals. You physically have to have a plan set up to be able to deposit money into the trust, no ifs ands or buts. I equate a plan effective date before the employer to the retroactive effective date of plan documents, i.e. the plan was in effect before the document was in existence. To further the use of analogies, maybe the document is the egg and the effective date is the chicken. Which came first?