Short first year; in determining maximum compensation for the match calculation, how many months do I prorate the $200K limit? 1 or 2?

[alexa]

I have a new 401k plan where plan year effective date is date of new entity or 11/26/2003.

In determining maximum Compensation for the match calculation, how many months do I prorate the 200K limit? 1 or 2?

Employees will defer on Compensation form 12/8 thru 12/19 for the 12/26 pay check. We were not abel to get up & running for the pay from 11/26 thru 12/7.

The match is doone each payperiod (biweekly, i.e. every 2 weeks)

I am looking to plan doc to see if Compensation is based on participation. I don't beleive this is the case though.

[Blinky the 3-eyed Fish]

For a DC plan the 401(a)(17) limit depends on the compensation being considered for the short year. But is this a short year? You mention the effective date of the entity sponsoring the plan as 11/26/03, but is this the effective date of the plan too? Anyway, look to how the plan defines compensation. Proration of the 401(a)(17) limit is required if the plan uses a compensation period of less than 12 months. Chances are the plan's compensation period is the plan year. The fact that deferrals did not start until 12/8 should not affect this unless there is some strange document language there.

[alexa]

yes, plan is effective 11/26/03 as well

So a short plan year

Treasury reg 1.401(a)(17) says no proration of Comp limit if Compensation is based on participation Comp. and not entire plan year Comp

I need to check to see if participation Comp is used in our doc

[Blinky the 3-eyed Fish]

Treasury reg 1.401(a)(17) says no proration of Comp limit if Compensation is based on participation Comp. and not entire plan year Comp

You are misapplying this rule. This applies for example when you have a full plan year, but a person enters the plan mid-year.

As I mentioned the rule for pro rating the 401(a)(17) limit applies when the compensation period used is less than 12 months (1.401(a)(17)-1(b)(3)(iii)). Since you have a new entity and plan that began 11/26/03, how can you not have a short compensation period?

[alexa]

I agree

How many months do you use 1 or 2? I assume 2?

[g8r]

If you define compensation as compensation paid for the calendar year ending within the plan year, I'm not sure you need to prorate the limit. I realize the employer wasn't in existence for the full year, but technically you are using a 12 month computation period.

[Tom Poje]

according to the ERISA Outline Book (2003 edition, see chapter 15, there is a whole section of short plan issues

A short plan year is created when....2) a new plan is established with an EFFECTIVE date other than the first day of the normal plan year cycle.

so it looks like the effective date that is the killer.

.........

1.401(a)(17)-1(b)(3)(iii)(A)

....the...compensation limit is reduced in the same proportion as the reduction in the 12 month period......numerator equals number of months in the short plan year

there is no guidlines to say how to round the months. in your case it sounds like you could use 2 months. I suppose there is nothing to stop one from using 1.25 as well.

[g8r]

Proration is required if there is a determination period (not a plan year) of less than 12 months. If the determination period is the plan year, then I agree it's the killer if there is a short plan year (which there would here based on the effective date of the plan).

But, if the determination period for calculating compensation is the calendar year ending within the plan year, it's not clear (to me) whether there is a short determination period where the employer wasn't in existence for the entire 12 month period.