Short Plan Year

[Guest Mike Schwing]

I have a safe harbor 401(k) plan which is effective 01-01-2002. The first year is a short plan year ending September 30, 2002.

My document dictates the limitation year is the plan year.

For the initial short plan year I have to prorate the 401(a)(17) compensation, but do I prorate $170,000 or $200,000? Do I prorate $35000 or $40,000 for the 415 limit?

When I file the 5500 do I file a 2001 5500 or will I end up filing 2 2002 form 5500's?

[kocak]

This is a new 401(k) plan right? Since a safe harbor plan must be 12 months long unless it is a new plan.

mck

[Guest Bud]

You have to prorate $200,000, but not 415 limit. You would file 2 2002 5500s. One for the short year ending 09/30/02 and the other for the year ending 09/30/03.

[Tom Poje]

Kevin Donavan's (frequent speaker at ASPA conferences) notes on short plan years says:

"When there is a short year, pro ration of compensation limit may or may not be required, depending on the period used for determining allocations. Under 1.401(a)(17)-1(B)(3)(i) the annual compensation limit is applied to the compensation for the plan year on which allocations are based."

"If the period used for allocation ia a 12 month period ending with or within a plan year, such that a short plan year (resulting from an initial short year or plan year change) would not cause the period on which allocations are to be based to be a period of less than 12 months, it appears, based on the language [in 1.401(a)(17)-1(B)(3)(iii)(A)] that the 401(a)(17) limit is NOT prorated."

Thus, there is no reason you could not allocate a profit sharing contribution based on a full 12 month of comp, and therefore not have to prorate the comp- e.g. use the full 170,000.

so, what does the document say? I pulled a couple off the shelve here - one simply says the plan year will be 'the 12 month period..."

the other says "The 12 month period except for the first plan year which shall begin on 8/1 and end on 12/31"

you raise an interesting scenario.

If the first year was 11 months long, begining 1/1/2002 (ending 11/30/2002) you would use

11/12 of 200,000 or 183,333 or if the document said use the 12 month period you would use the comp limit begining in 2001 which would be 170,000 - a 12 month period produces a max comp less than an 11 month period. Fascinating!

or at least that is how I understand it.

[Guest Mike Schwing]

My adoption agreement defines

Plan Year means the 12 conseccutive month period:

- beginning on October 1

- and ending on Sepember 30.

Except that there will be a short plan year:

- beginning on January 1, 2002

- and and ending on September 30, 2002.

The adoption agreement further dictates that compensation shall be based on the plan year and that the limitation year for Code Sectin 415 purposes shall be the same as the determination peiod for Compensation.

In the ERISA Outline book Chapter 5 they pose the question:

"Sometimes the initial plan year in a new plan is less than 12 months long. Must the defined docntribuiton limit be prorated for he initial plan year? Apparently so, if the plan defines limitation year to conincide with the plan year.

They further state their is some disagreement in the pension community on this issue. Some feel that since the regulation refers only to short years created by plan amendment that the initial short limintation year, to conincide with an initial short plan year, is not subject to this proration rule. "

If I choose to prorate or not is up to my interpretation, but what plan year would this plan be - a 2001 or a 2002 plan year. Does it have to be considered a 2002 becuase it became effective 01-01-02? Does the plan year always have to coincide with the calendar year in which it began? If I do it this way I will have 2 2002 plan years.