new comp. allocation in a terminating plan

[Santo Gold]

A small doctor's office was recently sold to a large hosptial. The office has a 401(k) plan with new comp. The plan termination date was set as 3/31/2010 (calendar year plan). No one is receiving any compensation after that date.

While the 3 employees all have W-2 comp. for 1/1 - 3/31, the doctor does not have a set salary. I believe he does take "draws" but normally it is later in the Spring when the claims/insurance goes through and he can be paid.

The Plan is a non-elective safe harbor plan. He would like to try to do new comp. for the 2010 short plan year. But what would he use for comp? Do we just add up his draws? Can we use a good estimate based on either 2009 compensation or estimated on 2010? Can he not do this at all?

Thanks for any help.

[Mike Preston]

Corp or unincorporated entity? If corp, C or S?

[Santo Gold]

Sole Prop.

[Mike Preston]

Well, there really isn't anything definitive out there that I've run across. The sole prop will file a tax return for 2010 and included in the sole prop's income will be an amount reflective of the company's operations through 3/31 and, most likely, receivables as of that date. I've seen two suggestions made by accountants in this circumstance: 1) determine the income reflective of the company's operations through 3/31 and use that in your allocation and new comp calculation. 2) use 1/4 of the income that is shown on the 2010 tax return as income attributable to the sole prop for the year.

Depending on receivables and how the sale was structured, the results can be all over the map, so there really is no one right answer here.

Maybe if you use the lesser of (1) or (2), above, you are safe from a charge of discrimination.

Keep in mind that if your plan terminated 3/31 and the only allocation date is something (like anniversary date) which translates to 12/31 you may not have the ability to do any allocation in the year of termination without modifying the document a bit.