Funding for a short plan year

[Blinky the 3-eyed Fish]

Do the normal cost and amortization bases need to be prorated for a short plan year of an ongoing plan similar to the provisions of Rev. Rul 79-237 for terminated plans? Would your answer change for a participant with compensation at the 401(a)(17) limit, whose compensation is already being prorated (in effect a double proration)?

[Mike Preston]

The answer to the first question is yes. I don't understand the context of the second one. Care to craft an example?

[Blinky the 3-eyed Fish]

An example would be in a one-person plan, career average formula, the participant makes $500,000, and the plan year is 6 months long. The 401(a)(17) limit would be $200,000 prorated 6/12 = $100,000. Then I am asking if the normal cost would be prorated as well for the short plan year. And I am pointing out that in this example if both the compensation limit is prorated and the normal cost is prorated, the end result is a normal cost of 1/4 of what a full plan year's normal cost would be.

[Mike Preston]

I think there are a number of issues going on here. The benefit accrual in the short plan year can only take into account pro-rated compensation per the 401a17 regs. That will certainly impact current liability. However, the normal cost pursuant to a valuation is almost always based on a 12 month year, and if so, uses the full a17 compensation limit. That normal cost must then be pro-rated. If, however, your valuation uses a valuation period of less than 12 months (and I've never seen a valuation system do that, although I guess anything is possible if the calculations are done by hand) I don't think you further pro-rate the result.

Now, if you have a hybrid, where you are limiting comp to the pro-rated a17 limit but still developing a 12 month cost, which must then again be pro-rated, I would say that there is something wrong with the hybrid.

My problem in visualizing the issue is my prejudice towards valuation systems that always first develop a 12 month cost and then pro-rate the result. Hence, the a17 comp limit is not pro-rated.

This would all be so simple if it weren't for current liability. ;-)