Deduction for short plan year

[Guest Sieve]

Can't find this directly addressed in a prior post (maybe because it's obvious) . . .

Calendar year corp. maintains a DC plan with a calendar year plan/limitation year. Plan is terminated in mid-year. In determining the maximum permissible deduction for the year of the plan's termination, does IRC Section 404(l) require pro-rating compensation for a short plan/limitation year due to plan termination? (I would think not, since the deduction limitation is based on the compensation paid during the sponsor's taxable year, rather than the plan year or limitation year.)

[J Simmons]

So you'd want to count compensation that was paid at a time when there was no plan for purposes of determining the deduction for contributions to the plan before it was term'd?

Seems strange but 404(a)(3) does say "25% of compensation otherwise paid or accrued during the taxable year" not limited to plan year."

[Guest Sieve]

Well, John, my question is slightly different (but I don't think the answer is different from yours)--whether you can count compensation, for deduction purposes ,which was paid while the plan was in place, even if that compensation exceeds a pro-rata portion of the 404(l) limitation. For example, an employee earns a total of $100,000 in Jan, Feb, March & Apr. PSP terminates 4/30. For deduction puposes, can we consider this participant's entire $100,000, or are we limited to only 4/12 of the 404(l) annual limitation? Same issue, but turn it around slightly--do you have to pro-rate an individual's compensation for deduction purposes if a plan is effective in mid-year (i.e., a PSP is adopted late in the year but is made effective as of October 1, 2008 rather than as of January 1, 2008)?