401(k) SH, short plan year, 415 limit

[wvbeachgirl]

We're having a difference of opinion on how to handle this situation:

New 401(k) safe harbor with short initial plan year of 10/1/08 - 12/31/08. Pro-rated 415 limit is $11,500. Safe Harbor Match is 100% on first 4% deferred per payroll. An employee deferred a total of $13,000 on compensation of $130,000, or 10% of comp. The match on this should be $5,200, which would make the total contributions/annual addition $18,200 which exceeds the pro-rated 415 limit. One opinion is that the full match should be allocated in accordance with the plan's provisions, and the 415 excess returned from salary deferrals per EPCRS (since after refund of $6700 deferrals the remaining deferrals would exceed 4% of compensation and are entitled to the match) (this seems to agree with the provisions of the document). The other opinion is that all of the deferrals should be allocated, and only the portion of the match that would not exceed 415, with the remainder of the match being credited to forfeitures.

The plan document provides that " . . . if as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's annual 415 Compensation, a reasonable error in determing the amount of elective deferrals . . . that may be made with respect to any Participant under the limits of Section 4.4, or other facts and circumstances to which Regulation Section 1.415-6(b)(6) shall be applicable, the "annual additions" under this Plan would cause the maximum provided in Section 4.4 to be exceeded, the "excess amount" will be disposed of in one of the following manners . . . © to the extent necessary, matched Elective Deferrals and "employer" matching contributions will be proportionately reduced from the Participant's Account. The Elective Deferrals, and any gains attributable to such Elective Deferrals, will be distributed to the Participant and the "employer" matching contributions, and any gains attributable to such matching contributions, will be used to reduce the "employer's" contributions in the next Limitation Year; . . . "

Thoughts and opinions appreciated. If the match was a quarterly rather than per payroll match, would your opinion change? Thanks!

J

[Kevin C]

How does the plan document define the "limitation year"?

What provisions are in the final section 415 regulations amendment? It's likely you will find that the correction method you quoted is no longer applicable.

[Tom Poje]

as Kevin C noted, the language you quoted is no longer applicable. in fact, someone sent me something they received from the IRS. they were trying to terminate a plan, and their request for a determination letter resulted in the following response:

The plan document provided contains methods of correction for eliminating 415 excess limitations. The methods may not be used for limitation years beginning after July 1,2007. Please remove the methods for the limitation years beginning after July 1, 2007.

(This same language for 415 failures is now in EPCRS, so it is more a matter of correct documentation)

You should have a 415 amendment which says such language is no longer applicable.

If your document says something to the effect "The limitation year is the 12 month period ending on the last day of the plan year" I believe all the new Corbel documents contain that language for the initial plan year, so you wouldn't pro rate the comp limit. (But of course your document might contain other language)

[wvbeachgirl]

We are using the Corbel EGTRRA document (prototype formatted volume submitter). The limitation year is defined as " . . . In the case of an initial Limitation Year, the Limitation Year will be the twelve (12) consecutive month period ending on the last day of the period specified in the Adoption Agreement. . . . " So, now even when you have a short initial plan year (i.e., less than 12 months) you do not pro-rate the 415 limit??? I must admit, this change to NOT pro-rating the 415 limit evidently did not sink into my brain whenever the change occurred . . . (I did look at the definition of short plan year, and it doesn't mention pro-rating this limit, only hours of service or months of service and integration level). I guess I'm a little confused also how the compensation limit can be required to be pro-rated for a short plan year, but the annual additions are not? Maybe I'm just being a little dense after all the holidays . . .

The language I quoted is in the EGTRRA basic document, although you are correct and I neglected to look at the 415 amendment that goes along with that. The 415 amendment does state that the excess can only be corrected in accordance with EPCRS. I had looked at the provisions for correcting an excess 415 under EPCRS, and what I gathered from that was essentially the same as the first opinion expressed (. . . 415 excess returned from salary deferrals per EPCRs (since after the refund of $6700 deferrals the remaining deferrals would exceed 4% of compensation and are entilted to the match) . . . ) - there would be no employer contributions to be forfeited and used in 2009 as per EPCRS. Specifically, I was looking at Appendix A, Section .08 and Appendix B, Section .04(2).

J

[wvbeachgirl]

One other thing - although my example was not exactly correct (compensation), my real issue is with regard to the annual additions limit - the $46,000 limit that I believe needs to be reduced to 1/4 or $11,500. I realize the comp used in my example should have been $57,500, but that was not the main thrust. Sorry for any confusion!

J

[Kevin C]

The compensation limit is prorated if there is a short plan year. The 415 dollar limit is prorated if there is a short limitation year. But note that it is not clear if the initial limitation year can start before the establishment of the company.

1.401(a)(17)-1(b)(3)(iii) Compensation for a period of less than 12-months

(A) Proration required. --If compensation for a period of less than 12 months is used for a plan year, then the otherwise applicable annual compensation limit is reduced in the same proportion as the reduction in the 12-month period. For example, if a defined benefit plan provides that the accrual for each month in a plan year is separately determined based on the compensation for that month and the plan year accrual is the sum of the accruals for all months, then the annual compensation limit for each month is 1/12th of the annual compensation limit for the plan year. In addition, if the period for determining compensation used in calculating an employee's allocation or accrual for a plan year is a short plan year (i.e., shorter than 12 months), the annual compensation limit is an amount equal to the otherwise applicable annual compensation limit multiplied by a fraction, the numerator of which is the number of months in the short plan year, and the denominator of which is 12.

1.415(j)-1(d)(2) Application to short limitation period. --Where there is a change of limitation year, the limitations of section 415 are to be separately applied to a limitation period which begins with the first day of the current limitation year and which ends on the day before the first day of the first limitation year for which the change is effective. In the case of a defined contribution plan, the dollar limitation with respect to this limitation period is determined by multiplying the applicable dollar limitation for the calendar year in which the limitation period ends by a fraction, the numerator of which is the number of months (including any fractional parts of a month) in the limitation period, and the denominator of which is 12. In the case of a defined benefit plan, no adjustment is made to the section 415(b) limitations to reflect a short limitation period.