Application of 401(a)(17) for Short Plan Year

[Bruddah Kimo]

I have a calendar year 401k plan that terminated effective 9-4-2009 due to a takeover. I am preparing the final val and I have a question regarding how to determine the correct 401(a)(17) limit to use. Since the plan did not terminate at the end of a month, I'm not quite sure which is the correct way to prorate the $245K limit. The language reads "If a Compensation Determination Period is less than 12 consecutive months, then the Code §401(a)(17) Compensation Limit will be multiplied by a fraction, the numerator of which is the number of months in the Compensation Determination Period, and the denominator of which is 12. If Compensation for any prior Compensation Determination Period is used in determining a Participant's Plan benefits for the current Plan Year, then the annual Compensation for such prior Compensation Determination Period is subject to the applicable Code §401(a)(17) Compensation Limit as in effect for that prior Compensation Determination Period." What is the correct method of pro-ration? Do I take 8/12ths, 9/12ths or would I actually proprate by the number of days? I'm not quite sure how to proceed on this and would appreciate any feedback. Thank you!

[J Simmons]

8/12's

[Blinky the 3-eyed Fish]

While I too would use 8/12, I don't think there is one right answer. Look at the language of §1.401(a)(17)-1(b)(3)(iii), particularly the part I bolded.

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.

As you can see, it doesn't state that the proration is on whole months, so you could certainly use a fractional month in the numerator. Keep in mind too that if the last payroll was sometime before the termination date, the allocation is based on that date, not the termination date and a precise proration is through that earlier date.

[Tom Poje]

1.415(j)-1 (d)(2) application to short limitation year

...a fraction, the numerator of which is the number of months (including any fractional parts of the month)....

that's good enough for me to apply same logic elsewhere. I can't see using fractional logical for 415 limitation but whole months for other limitations.

but dang it, you made me look something again. How the heck am I going to make sure I get all my safe harbor notices out the door if you keep doing that.

maybe see you at ASPPA Conference if you go, whoever you are.

[Bruddah Kimo]

Thanks guys! I read the same cites and pretty much had the same conclusion, but since it wasn't spelled out I thought I would ask in case someone had had a similar experience. I did what Blinky had suggested and used 8 months (I always take the conservative approach in these matters).

Alas, I won't be attending the conference this year - but my Boss just arrived in DC a few moments ago. Maybe next year Tom!

Mahalo nui for all of the assistance!!!!

[Blinky the 3-eyed Fish]

I did what Blinky had suggested and used 8 months (I always take the conservative approach in these matters).

Ah, but it might not be conservative. If the last payroll before 9/4/09 was also before 8/31/09, then you are being a hyper-aggressive maniac.

[david rigby]

If you have some flexibility (and I'm not sure you do), perhaps consider prorating on the number of actual pay dates vs. hypothetical pay dates in 12 months.

[Guest Sieve]

I can see an argument for being even more aggressive than Tom on this issue. I see Tom's cite to Section 415 as prohibiting the rounding up of months, and therefore the 401(a)(17) regs would permit, in my mind, a rounding of months up, or down, or use of fractional months (since the 401(a)(17) reg doesn't talk in terms of "whole" months). In that case, rounding up under 401(a)(17) would only be a problem if you were coming close to the 415 limit. The counter argument is that rounding up under 401(a)(17) would be disriminatory in favor of the super-HCEs when the plan performed its allocation for the short year.

[J Simmons]

Larry,

I'm following your logic and agreeing with it generally. Just one question. Can you help me understand why it follows that 401a17 allows rounding up because 415 does not?

[Guest Sieve]

John --

It doesn't necessarily follow--I was just comparing language. The 415 regs specify to use fractional months, and therefore rounding up is never allowed. The 401(a)(17) regs, on the other hand, don't talk in terms of fractional months (as in 415)--which would seem to permit 401(a)(17) rounding up (if .5 or over)--and they don't indicate that only whole months are counted (therefore downward rounding is not required). So, lack of rounding limitation in the regs or Code ought to permit any consistent rounding process.

I know there's some Treas. pension reg. somewhere (but I have no idea where--maybe 410(b)?) that says that rounding is permitted, if consistently applied. I always generalized that and therefore can see an argument that rounding is not limited unless the reg requires imposing a limitation (such as in 415's "fractional months" or ADP/ACP's rounding to hundredths of a percent).

That being said, I think rounding is treated differently where the language of the Code speaks in terms of "at least" or "exceeds" or "more than" (rather than not being mentioned at all, such as in the case of compensation). So, 60.1% is top heavy ("exceeds" 60%), and rounding to 60% is not permitted. In the bro-sis 2nd controlled group test, "more than 50%" includes 50.1%, and rounding to 50% is not permitted. 5% owner for HCE & key employee means "more than" 5%, so 5.1% is a 5% owner (& no rounding should be permitted). But, there's no comparable Code language like that in Secton 415 or Section 401(a)(17) (or, e.g., in Section 416 for employees in the "top-paid group"), so in those instances rounding ought simply to be consistently applied by the plan for each test.

[J Simmons]

Thanks, Larry, for that insight.