Short Initial Plan Year

[Lori Foresz]

Having a tough time trying to figure out if my thinking is correct.

If a cross-tested PS plan is established 9/1/04 with a short first plan year ending 12/31/2204, I realize I will need to prorate the compensation limit to $68,333.

If the plan will be top heavy for the first plan year, can I give Non-Key EES 3% of compensation from 9/1/04-12/31/04 or do I have to use full year pay to meet the top heavy reqs. HCEs will only get 9% of $68,333 or $6,150 so I think this will meet the gateway minimum as long as the top heavy contribution based on short year pay is correct.

Any guidance would be greatly appreciated.

Thanks

[g8r]

Actually, it's not clear that you have to pro-rate the comp limit. You have to pro-rate it if there is a determination period of less than 12 months. And, only counting compensation while a participant is not a short determination period. So, if compensation is defined as compensation paid for the calendar year, you don't have a short determination period. And, arguably, if you exclude compensation while not a participant, then no one has compensation prior to the effective date of the plan, but you don't have to pro-rate the dollar limit.

As for top-heavy purposes, compensation is 415 compensation. Compensation is based on the limitation year and an initial short plan year doesn't create a short limitiation year. Rather, the regulations only address a short limitation year when there is a change in limitation years. You don't have a change here. So, I think the full year counts (and for 415 comp, you can't exclude compensation prior to date of entry).

The minimum gateway can be based on compensation while a participant.

[rlb64]

If the plan's compensation definition is comp as of effective date, then you would have to prorate the limit for contribution and top heavy minimum.

However, can someone prove to me the limit has increased to $205,000 for top heavy minimums? The reg seems to specify $200k with no reference to 401(a)(17).