Profit Sharing Contribution Allocated for 12-month Period other than t

[Guest T-BONE]

An employer wants to amend the document to provide that the profit sharing contribution can be made as of any date in the plan year for the 12-month period immediately preceeding that date.

For example, the employer wants to make an allocation as of 9/30/02 using the pro-rata method, and using compensation for the 12-month period immediately prior to 9/30/02 (compensation from 10/1/01 through 9/30/02). The plan year is the calendar year.

Which 401(a)(17) limit would apply? Would it be $170,000 (since the allocation is based on a period beginning in calendar year 2001) or $200,000 (since it's being allocated for the plan year beginning in 2002)?

What other issues are involved here??

[E as in ERISA]

Start with the assumption that the only purpose for which you will use the 10/1/01 through 9/30/02 period is for the compensation that will be used for is the allocation. Except where the plan might be allowed to choose a different period, you will be using standard time frames for virtually every other purpose. E.g., You will be discrimination testing using plan year compensation! You will probably be using $200,000 as the compensation limit, unless the plan terms would limit compensation to $170,000.

[Guest Therese]

It sounds like the employer wants to pick a date that may vary from year to year? I'm not an attorney, but it seems to me there could be a problem with the requirement that the allocation formula be specified in the plan, and the requirement that you can't change the criteria for sharing in an allocation after participants have met them for the year. (I may be lacking imagination, but I don't see how you could have a minimum hours or year end requirement to share in an allocation under this scenario - so all participants would always have met the requirements for each year. And I don't think you can have a requirement that people be employed on whatever date the employer chooses for the year - sounds too much like the employer consent & employer discretion provisions we were required to take out of plans years ago.) Just my opinions of course. As far as the comp limit - I didn't look this up, but aren't you supposed to use the limit in effect at the beginning of the determination period?

[Guest T-BONE]

Fortunately, the employer has decided to give up on this approach and will allocate as of the end of the plan year. You hit upon one of my major cocerns, that the employee would not know with sufficient certaintly when he or she would meet the eligibility requirements to share in the profit sharing allocation. Thank you!!