Sole prop terminating safe harbor 401(k) plan

[Belgarath]

Sole prop (with employees) wants to terminate a safe harbor (3% nonelective) plan.

The part that's bugging me is, how do you handle this for determining the compensation on which to base the 3% for the sole prop himself? Let's say the plan term date is 6-30-07. Since a sole prop doesn't technically "earn" income until 12-31-2007, how does this work? Do you:

1. Give the sole prop a zero contribution?

2. Give the sole prop a contribution based upon 50% of the 2007 income?

3. Give the sole prop a contribution based upon 100% of income?

4. Other

I think I could argue for either 1 or 2, but I incline toward 1 as more technically accurate, IMHO. Any thoughts?

[Bird]

I agree with #1 being most technically accurate.

[austin3515]

I think you'll find that ERISA Outline Book would say it's reasonable to pro-rate. I recall that the IRS position on 401(k) contributions during the year is that 401(k) can be made during the year because income really is earned throughout the year - the fact that it's deemed earned on the last day doesn't change this.

Based on this, I would be comfortable pro-rating, but definitely check out the outline book.