New Section 404 Rules

[Guest BCoffey]

My question regards the new Section 404 rules that will go into effect 2002 and their application for a company with a taxable year-end other than December 31.

Under the old law, employee deferrals + employer contributions could not exceed 15% of gross pay, gross pay for this purpose being gross pay after the employee deferral. In 2002, the limit is increased to 25% and will no longer include employee deferrals.

Our company's taxable year end is June 30 and I have always applied the 404 test to this fiscal year. When will my company be able to take advantage of the 2002 change?

(1) Do I have to wait until July 1, 2002 for the beginning of the company's new tax year? (2) Can I use the beginning of the new Plan year, which is January 1, 2002? (3) Do I do some type of weighted average between the taxable year of the company and the Plan year?

[Tom Poje]

the law applies for plan years beginning 1/1/2002, so you are under the old rules. sorry.

[Guest BCoffey]

Originally posted by Tom Poje

the law applies for plan years beginning 1/1/2002, so you are under the old rules. sorry.

Our 401K Plan year does begin 1/1/2002. It is our corporation's tax year that begins 7/1/2002. Will this make any difference?

[Tom Poje]

I dont think fiscal year makes a difference. everything is based on plan year. so in that case it sounds like you are under the hew rules.

I think (well, some would disagree as to whether I ever think, but that is another story...)

I think where fiscal year comes into play is in determining how much comp you can consider for deductibility purposes. You are deducting things based on fiscal, so I think you can only consider comp for the fiscal period 7/1 - 6/30. It can result in some screwy results. But I would have to look that up.

[Guest BCoffey]

I appreciate your help, Tom. Thanks.