Top-heavy questions relating to short plan years (short initial plan y

[John A]

Company A: Been in existence for many years, never had a plan in its history. Puts in a 401(k) plan effective 8/1/01 with an initial short plan year of 8/1/01-12/31/01.

Company B: Brand new company - first day company is in existence is 8/1/01 and puts in a 401(k) plan effective 8/1/01-12/31/01 with an initial short plan year of 8/1/01-12/31/01.

Questions for each of the plans above (Company A and Company b):

For determining key employees, are any of the compensation amounts (officer, 1% owner) prorated?

For determining the 1/2% owners in the top ten, what compensation is used (compensation for what period)?

If the plan is determined to be top-heavy for the 8/1/01-12/31/01 plan year, what compensation must be used for the 3% top-heavy contribution? Is the contribution 3% of compensation from 8/1/01-12/31/01, or 3% of compensation from 1/1/01-12/31/01, or something else?

Also, my understanding is that the top-heavy determinaiton for the 8/1/01-12/31/01 plan year is based on pre-EGTRRA rules with a determination date of 12/31/01, and the top-heavy determination for the 1/1/02-12/31/02 plan year is based on EGTRRA rules with a determination date of 12/31/01.

I have tried to review previous threads on these questions, and I have been left uncertain of the answers.

Thanks for any answers and especially any cites. Have these questions been discussed at ASPA or other meetings?

[Belgarath]

I'm not aware of anything in either the statute, or the regulations, which specifically addresses the short plan year question. With regard to the testing period, the statute and regulations refer to plan years. For your plan years beginning prior to 1-1-02, your 5 year testing period would include any short plan year that includes the determination date or any of the 4 preceding plan years.

As to the key employee tests that you mention that require a minimum compensation amount, I tend to think you could interpret either way (prorate or not). Logic would indicate that it should be prorated, and this would be a more conservative position. However, since there doesn't appear to be specific guidance on this that I know of, it seems reasonable to me that you could use the 1.416-1 regulations. These refer to "annual plan year compensation." See T-12, T-14, etc., and particularly

T-19, which refers you to the definition of Compensation in T-21. T-21 says to use 1.415-2(d) compensation, which refers to limitation year, then includes the following: "Alternatively, compensation that would be stated on an employee's Form W-2 for the calendar year that ends with or within the plan year may be used." So again, I suspect you could make an argument for both, subject, of course, to the plan document language.

Don't know if this helps or confuses the issue further!