Tax Year and Plan Year Off - Switching (Short year contributions?)

[Guest Michael Anderson]

Company's tax year and plan year ran from May 1, 2003 - April 30, 2004 They are changing both to a calendar year. So they will have a short Plan year for 2004.

1. The $13,000 (+$3,000 Catch up) Runs on the Calendar year regardless of Plan year or short plan year - correct?

2. But...the $43,000 maximum limit - is that Pro rata from May - Dec? Using a Pro rata comp? Or can they defer the entire $43,000 for the short plan year?

Thanks!

[jaemmons]

Michael,

You are correct that the 402(g) limit is a calendar year limit, so there is no proration during a short plan year.

What does the plan document define as the "limitation year"? If it is the calendar year, you do not have a prorated 415 $ limit ($41,000) for the short year. Generally, if the limitation year is the calendar year, a change in the plan year does not result in a change in the limitation year, which would result in a prorata reduction in the applicable IRC plan limits.

Unfortunately, the compensation limit (IRC 401(a)(17)) is prorated, regardless of what the plan defines as the limitation year, because you are using a period which is less than 12 months for compensation purposes.