Average Annual Comp. - Change in Plan Year

[smm]

Plan defines average annual compensation as the average over 5 consecutive plan years..... The plan year was changed - now we have a short plan year. Do we annualize the compensation for that period/ignore the short plan year/use overlapping years (like vesting)???

[david rigby]

I'm not sure there is one correct answer. My preference would be to specify the answer to this question in the amendment that changed the plan year. Perhaps it is only "style", but I steer away from annualizing any comp because someone will complain no matter what method you choose. Also, how do you annualize bonus, commissions, overtime, etc.?

A reasonable choice would be to use the comp for the applicable 12-month period as if the plan year had not changed. This might also mean that your averaging period could have some overlapping time periods. (I'm not sure if this causes problems under 401(l) or other safe harbor regs.)