Prorate $200,000 compensation limit for mid-year plan freeze

[mariemonroe]

I have a profit-sharing plan which was amended last year to provide that benefit accurals would cease effective August 31, 2004.

Compensation earned up to August 31, 2004 will be considered in determining the amount of each participant's contribution.

COntributions are allocated pro rata according to participants' compensation.

The 2004 contribution is in the process of being allocated and I have been asked whether the $205,000 401(a)(17) compensation limit should be pro rated in determining the allocation. (This is a calendar year plan year so the pro-rated limit would be 8/12 or 2/3 of the $205,000 or $136,666).

Does anyone have any thoughts?

[Belgarath]

I'd vote for prorating. 1.401(a)(17)-1(b)(3)(iii) says that if a compensation period of less than 12 months is used for a plan year, then the otherwise applicable annual compensation limit is prorated.

[mbozek]

When is the plan being terminated? If the plan will be terminated at the end of the plan year the full 205k limit can be used for allocations made for that year.