Definition of Compensation / Fiscal Year

[BFree]

An Employer with a 9/30 Fiscal Year End establishes a 401k plan on 1/1/02 with a short first plan year of 1/1 to 9/30. There was a SIMPLE plan in effect the prior calendar year.

For the initial 401k plan year, what pay period is used if the 401k plan specifies Fiscal Year Pay? Is it 1/1 to 9/30/02? Is it possible (or required) to use 10/1/01 to 9/30/02 pay?

Thanks for any input.

[Mike Preston]

For what purpose? ADP testing? If so, you use what the document says. If is says fiscal year pay, you use fiscal year pay. Further, does it say that you use compensation before date of participation? If so, you do, if not, you don't. Of course, I question the way this whole thing was designed, but that is a separate matter. Further, the adoption of the K within a fiscal for which a simple was maintained may either invalidate the simple for that period (which is the most likely result) or cause major problems for the k. Somebody should look at that issue.

[BFree]

The question about Pay is for Contribution purposes.

I am aware that the document often gives clues as to how to proceed - let us assume that the 9/30 PYE has not arrived and the document may still be modified.

Perhaps I wasn't clear in noting that the SIMPLE and 401k plan years do not coincide at any time (one ends 12/31/01 and one begins 1/1/02). Does that mollify your fears re: problems for the 401k or invalidation of the SIMPLE?

[Mike Preston]

Oh, you were clear. It is my understanding that the simple deductions are taken in the fiscal year that the simple year ends. Further, that an entity that attempts a simple deduction in such a fiscal year is precluded from having a deduction for another qualfied plan. I think someone should look into this before you spend too much time dealing with the compensation issue, as it may not be relevant. Of course, this is just from memory, so I might be all wet.