Definition of Calendar Year Plan

[Guest mrnardoz]

If a new 401(k) plan defines its first plan year as 6/1/04 to 12/31/04, with following plan years ending each 12/31 thereafter, is it a calendar year plan in 2004? In other words, would you say it's a calendar year plan with a short plan year?

Reason for the question: determining the proper 12-month look back period for identifying HCEs.

[rcline46]

I love this question. It comes up so often!

If you look to the document for the definintion of a short plan year, it only happens when the plan year is changed. The same in the regulations. Now some documents are actually written that the first year MAY be a 'short year' or may be an election in the document. So you must first determine if the DOCUMENT creates a short first year.

By the way, if you DO have a short first year you had better make sure you do all of your prorations of limits, comps and so forth!!! Otherwise you just disqualified your plan.

Now your problem is what period to check for compensations for the HCEs. Well, that is based on the 'limitation year' that precedes the current plan year. You have to go back to your document and see what it says for the limitation year, and go with that for HCE determination. Oh, and by the way, watch out for such quirks as calendar year elections. And don't forget that a 'limitation year' is ALWAYS 12 months, a 'limitation period' may be less, so if you have a short year - watch out for the NEXT year, because the look-back will be for 12 months, NOT the short year!

Oh yes, did I mention that reading the document is recommended here? I'm sorry, reading the document is mandatory because they are full of surprises!