Start-up 401(k)

[rlb64]

Employer adopted 401(k) and safe harbor on Corbel adoption agreement with a special effective date of 7/1/09. Plan itself has a 1/1/08 retroactive plan effective date, is there a short plan year from 7/1/09 through 12/31/09. IN other words, are we prorating the 401a17 compensation limit (in half) for the half year the participants are eligible to calculate the safe harbor contributions?

[Jim Chad]

Did you mean Plan effective date of 1-1-09?

FWIW I think since the Plan is full year you do not prorate anything.

[Tom Poje]

lets suppose the plan had been in existence for a number of years and someone enters 7/1.

you would not pro-rate the compensation limit for that individual simply because his compensation is limited to 1/2 a year.

the only time you pro-rate comp (as far as I understand it) would be if the compensation period itself is less than 12 months. This can happen if an existing plan is amended creating a short plan year.

However, you have an inital plan year (and if you look up 'limitation year' in the document the wording should be such that for an initial plan year you still use a 12 month period ending on the last day of the plan year)

now that still doesn't answer the question as to how much comp to use for an individual - if the document says from date of participation, then that is what you use - but no pro ration of the 401(a)(17) limit.

[rlb64]

Ok, let's assume this document excludes compensation prior to entry. If we had chosen a 7/1 plan effective date, clearly there is no pre-participation compensation and we would cut the comp limit in half. However, what you're saying is that simply by choosing a 1/1 plan effective date, the calculation of the safe harbor is exactly the same for everyone except we double the comp limit. This seems to get around the spirit of the law.

Why doesn't the 401k special effective date establish a short plan year on the 401(k) components of the plan including safe harbor?

[Tom Poje]

and you have hit the nail on the head. if the interpretation of 'special effective date of 7/1' for the 401(k) implies that only comp from 7/1 is to be used then I would agree for the 401k portion, because you are limiting the comp to that period (not just from date of participation) you would therefore prorate the comp. (The IRS has also implied this in cases where you have decided to stop the safe harbor midyear as well)

my comments were meant in general - that just because a plan is new does not mean that you necessarily prorate the comp.

of course, if the plan turns out to be top-heavy, then the non keys still have to end up with 3% on total comp anyway - whether all or part is top heavy.

[rlb64]

Well, this plan is a safe harbor plan only, so not top heavy. However, the top heavy rules do allow us to calculate top heavy min based on short plan year gross compensation. Say the plan added a discretionary match on 7/1 per payroll. Why would we need to use full 12 months comp or do we?

Tom, are you familiar with the Corbel prototype and how to interpret it?

[Tom Poje]

I thought you indicated the plan had an effective date of 1/1, which implies it does not have a short year.

for purposes of deferral, one can't defer on 'past' compensation, so it is entirely possible to have deferrals start effective 7/1.

and top heavy is 415 comp, so includes all comp even if bonuses, commissions etc are excluded.

now the gateway minimum is also 415 comp, but that can be limited to date of entry.

as for the match, if I was to add one, I would limit it to 6% deferred up to 4% comp and no allocation requirements. then i could use it as a safe harbor match.