Short plan year

[Moe Howard]

I'm surprised that there is very little in Benefitslink.com regarding anything about short plan years.

My Question:

A PSP & MPPP are going to terminate at 12/31/02. Benefit accruals will cease at 10/31/02. The plans have only one participant. The administrator is trying to determine the max that can be contributed to the PSP for 2002. What effect will the fact that eligible compensation will be comprised of only 10 months, have on the max $amount that can be contributed to the PSP ?

[E as in ERISA]

Is it a discretionary profit sharing contribution? Is the plan generally on the calendar year? If so, are you sure that you have a "short plan year"? Although you indicate that benefit accruals will cease 10/30, you state that the plan won't actually terminate until 12/31. Doesn't that just mean that compensation will be limited for allocation purposes? But does it necessarily mean that any of the legal limits will be reduced?

[Tom Poje]

there are only 'three' ways you can have a short plan year.

I say 'three' because the first is one of those 'food for thought'

1. initial plan year. It may appear to be 'short', but the allocation can be based on 12 months of comp, and unless you do some special wording in the document, you still end up without having to prorate limits, etc. (Obviously deferrals can't be retroactive, but that is a different issue)

2. switch plan years (Plan is switched from fiscal to calendar or whatever. in that case, you have a short year, and you prorate things.

3. last plan year (final 5500). this only occurs when all assets are paid from the plan. even if a plan is 'terminated', it is still 12 months along. remember it this way. when you fill out the 5500, do you code it as 12 months, or through the 'term' date. well, it will be 12 months unless you actuall paid the $ out. No proration until that actually occurs.

Hope that helps describing that way.

[Guest ElKH]

Many months later, but my question is along the same vein:

We have four plans whose assets were transferred to a new custodian in May of 2002. They were merged into a single plan at that time, and it is now trusteed by the new custodian.

We (the old recordkeepers) thought the new custodian would file the 5500(s) for the 2002 plan year. We were mistaken. The new custodian would only take responsibility for the filing for the short plan year which began the date the assets were transferred.

We were not too concerned. We had the conversion data, and filed extensions for the four, pre-merger plans. And then it dawned on us . . . uh oh . . . Did the plan years officially end on 12/31/2002 (as we are hoping), or did they officially end the date the assets were moved (VFC bait)?

Thanks!

[Blinky the 3-eyed Fish]

You had 4 plans merged into 1. What was the date of the merger in the documents allowing the merger? Was it the date the assets actually transferred?

Depending on those answers you may have 3 plans that have a short plan year that ended on the date of the merger and 1 plan that will not have a short plan year.

[Guest ElKH]

The new custodian drafted a plan document with an effective date of 4/1/2002. The assets didn't actually get moved until the end of May 2002. No merger resolutions were done, and no official plan terminations took place, so I'm just thinking maybe we're okay? These plans were more or less out of commission as of the close of the 2002 plan year?

[rcline46]

Uh-oh - if no merger resolutions, then the plans did not merge. No resolution to terminate, the plans have not terminated.

The only thing that happened is the assets were comingled with the assets of other plans, which is perfectly legal. You either have 3 plans which are in a controlled group (probably because everyone is in one plan) or you still have 3 separate plans.

I think you now need some competent ERISA attorney type advise here.

[david rigby]

The only thing that happened is the assets were comingled with the assets of other plans, which is perfectly legal.

Not sure about the comment RE commingled assets. Could be a possible violation of the trust document?

I second the comment RE competent legal advice.

[Blinky the 3-eyed Fish]

there are only 'three' ways you can have a short plan year.

I say 'three' because the first is one of those 'food for thought'

1. initial plan year. It may appear to be 'short', but the allocation can be based on 12 months of comp, and unless you do some special wording in the document, you still end up without having to prorate limits, etc. (Obviously deferrals can't be retroactive, but that is a different issue)

2. switch plan years (Plan is switched from fiscal to calendar or whatever. in that case, you have a short year, and you prorate things.

3. last plan year (final 5500). this only occurs when all assets are paid from the plan. even if a plan is 'terminated', it is still 12 months along. remember it this way. when you fill out the 5500, do you code it as 12 months, or through the 'term' date. well, it will be 12 months unless you actuall paid the $ out.  No proration until that actually occurs.

Hope that helps describing that way.

Tom, I know you are correct, but do you have a cite? I need to convince someone that the 401(a)(17) and 415 limits are not prorated in a DC plan because of the plan termination date and that you can only have a short plan year for the reasons you cite.

One note to add. Yes I have read 1.401(a)(17)-1(b)(3)(iii) and would factor that in.