Mid-year 401(k)-Proration of Testing Compensation?

[BTH]

An existing Profit Sharing Plan adds 401(k) deferral provisions effective 7/1/2010. Since the 401(k) portion of the Plan is only effective for part of the year, I believe that you may do the ADP test based on the full Plan Year or just the part of the year (7/1/2010-12/31/2010) when the 401(k) portion was effective.

Assuming that the ADP test is done based on the partial year, does the maximum compensation taken into account need to be prorated? So if someone earns $150,000 during the 2nd half of the year, can you use that figure or must it be reduced to $122,500 ($245,000 x 50%)?

I know that if this was a short plan year, you would be required to pro-rate, but techncially it's not a short plan year.

Also, in a situation where participant enters a Plan mid-year, their compensation is not required to be pro-rated.

I'm hoping that this would be considered more like when a participant enters mid-year and therefore the compensation adjustment is not required. But I want to make sure!

Thanks.

BTH

[Tom Poje]

my understanding (?) is that if you limit comp (as in this case because the 401k portion only existed part of the year) then you would prorate the comp limit for testing as you indicated.

there is a provision in the definitions (1.401(k)-6) of compensation that says you can use the calendar year comp that ends within the plan year. in that case, you would not prorate (despite of course the fact you could not defer on the comp before the entry date).