Prorate 415 Limit for Terminating ESOP?

[Guest amboyd]

Employer intends to terminate leveraged ESOP on June 30 and make final distributions upon receipt of IRS determination letter. Employer would like to make a principal prepayment prior to terminating the Plan. Is it necessary to prorate both the Section 401(a)(17) comp limit and the 415 limit when testing for excess annual additions? My research indicates that it is necessary to prorate comp under 401(a)(17) but not the 415 limit, but I would appreciate some further guidance. Thank you.

[Guest DMZ]

Is it necessary to prorate both the Section 401(a)(17) comp limit and the 415 limit when testing for excess annual additions?

I don't see how the 401(a)(17) limit affects the annual additions test as the limit is the lesser of 100% of compensation or $41K. (year 2004) Even if the $200K is prorated to $100K the $41K will still be the limit for 415. If you are asking if the 401(a)(17) limit must be prorated for an allocation period of less than 12 months for contribution allocation purposes, then yes I agree. Some take a more aggressive stance on this and do not think that a short allocation period requires a proration of the 401(a)(17) limit. See Treas. Reg. §1.401(a)(17)-1(b)(3)(iii)(B).

On whether the 415 dollar limit has to be prorated - what matters here is what is the plan's limitation year? A short "plan" year will not necessarily create a short "limitation" year, but that depends on how limitation year is defined in your document. It should be defined something similar to "... the 12 month period ending every 12/31...". Then you have no problem that you may have a short plan year because changing the plan year does not change the limitation year.

Also, I do not think that the resolution to terminate the plan effective June 30 really even creates a short plan year. The June 30 date is really just an allocation date. The plan is in effect frozen as of this date for future allocations. The plan year itself remains the same. The only time you will have a short plan year is as of the date all assets are distributed under the plan. Until that time the plan year remains as it always was and 5500 are still filed on that basis.