Short Initial Plan Year for PS plan

[dmb]

I searched for this topic and am still a little confused. corp formed April 1, 2004, fiscal year is calendar. Plan year will be calendar, first plan year is 4/1/04 - 12/31/04. If limitation year is set to calendar year and compensation defined as "compensation while a participant" is it correct that niether 415 or 401(a)(17) need to be pro-rated for initial plan year?? If not, please advise. Thanks.

[Blinky the 3-eyed Fish]

Defining compensation to be while a participant would defined the intial computation period as no longer than 4/1 - 12/31. This would require prorating the 401(a)(17) limit. Instead also defined the compensation period as the calendar year to avoid the requirement to prorate it.

[dmb]

Thanks. Could it be deemed discriminatory if i used calendar year comp for 2004 and then amended to "participation comp" effective 1/1/2005???

[Blinky the 3-eyed Fish]

Could it be discriminatory? Yes.

Is it discriminatory? I don't have enough information.

Read 1.401(a)(4)-5 and make the call. I don't have any real-life experience with how the IRS would view it.

[chris]

Agree that it could be discriminatory, but......practically where's the problem? Everyone in the plan for the initial year had 12 months compensation used. Thereafter, everyone entering the plan will have compensation while a participant used. Unless factually only all highly compensated e/ee's are entering plan in initial year and all nonhighly compensated e/ee's are entering in the next year (the year in which compensation is only counted from entry date), I don't see a problem. I don't see how you could have those facts anyway......

[Blinky the 3-eyed Fish]

Chris, read the first post. The corp started on 4/1, so everyone can only have compensation used for 9 months. By not having to prorate the compensation limit, the HCE's have the potential to utilize the full 401(a)(17) limit, which is the most they could have used in 12 months. The others are still using 9 months of compensation. Advantage HCE's. Now if this is changed next year and those who enter the plan are all NHCE's, well therein lies a potential problem.

[chris]

Re-read it. Should've re-read it before I replied the first time.... However, for the initial year you're going to be using full limits for everyone albeit only the HCE's benefit by virtue of their compensation amounts. And by doing so they will get a bigger piece of the allocation of the contribution. If comp. is then switched to "comp. while a participant" next year, I still wouldn't think you'd have much of a problem. Theoretically, you might have discrimintaion based on who enters, but practically I don't think there would be a problem since you're talking about two different plan years. After going through this it seems the better argument for discrimination would be in year 1 re pro-rating vs. not; however, you're only doing what is allowable to be done......??????

[Blinky the 3-eyed Fish]

Theoretically, you might have discrimintaion based on who enters, but practically I don't think there would be a problem since you're talking about two different plan years.

I think you should read 1.401(a)(4)-5. Just because it's in different plan years does not make it immune from being considered discriminatory.

After going through this it seems the better argument for discrimination would be in year 1 re pro-rating vs. not; however, you're only doing what is allowable to be done......??????

You are correct that you are doing what is allowed to be done and in this year the HCE's are reaping the benefits of this provision being in place. But so too will NHCE's in future years if this defintion remains. That will not be the case if the definition of comp is changed.

[No Name]

As a side note, don't forget that if the plan is top-heavy, full plan year comp has to be used.