Compensation - Pro rating or pre-effective date

[PMC]

Company just came into existence in June 2001. Want to establish a plan this year (7-1-01). Highly paid employees and don't want to be limited by the pro-ration of compensation for a short plan year (7-1 to 12-31-01)for allocation purposes.

Can the effective date of a plan pre-date the existence of a company? Establish the plan effective 1-1-01 with a full 12 month plan year to avoid pro-rating comp.?

If not, can the plan be effective 7-1-01 but define the compensation period be as the entire calendar year to avoid pro-rating?

Anyone have anything from the IRS re- this?

[Guest Richard Scheer]

The salary limits must be prorated in a short plan year.

I don't see how you can have the Plan effective on January 1 if the Company didn't exist then.

The only alternative would be to make the Plan year 12 months - 7/1 - 6/30.

[wmyer]

Philip, the 401(a)(17) limit is based on the "limitation year," not the plan year. So it depends on how your plan document defines limitation year. Generally, a plan doc will define limitation year as the twelve-month period ending on the last day of the plan year. So for an initial short plan year, the compensation limit would not be prorated. This topic came up before. If you type "initial short plan year" in the search engine, you should be able to see the comments on this, or try

http://benefitslink.com/boards/index.php?showtopic=323

[PMC]

I understand comp. for 415 purposes is based on the limitation year, but I thought the annual comp. limit (401(a)(17) is applied to the comp. for the plan year- 1.401(a)(17)(B)(3).

The sponsor's main concern is to include as much comp. as possible to maximize their deduction for their 12-31-01 FYE.

[Medusa]

I recently had to deal with an identical issue (attorney incorporated 10/15/01 but wants full 401(a)(17) limit for calendar plan year 2001). I checked out the famous ERISA Outline Book where it is definitely reported as a gray area. If you have access look at Chapter III, Section IV, Part A.4.d. He says that informal guidance from IRS is that you can have an effective date prior to the date the business was established.