401(a)(17) limit

[fiona1]

I am running an ADP test for a short plan year (4-1-10 to 12-31-10) and there is someone who has ADP compensation of $233,000 during these 9 months. I'm trying to determine what compensation to use on the test. Do I need to prorate the 401(a)(17) and limit the compensation to $183,745 ((9/12)*245,000)? Or is the 401(a)(17) limit not prorated on a short plan year?

[ETA Consulting LLC]

This is something that you would prorate.

Good Luck!

[fiona1]

Awesome. Thank you. Does anyone know if there are any rules regarding this in terms of how to prorate. I know in my example it's pretty clear that you take (9/12)*245,000. But what if the short year was 4-10-2010 to 12-31-2010? Does the IRS provide guidance on exactly how to prorate? Do you count a partial month as a full month?

[ETA Consulting LLC]

Typically, any reasonable method would do. You can count the days in the year and divide by 365. 72.87% of $245K would be $178,547.95. Any calculation will fall within a range that is very close.

Good Luck!

[Guest Sieve]

Treas. Reg. Section 1.401(a)(17)-1(b)(3)(iii)(A) = DC proration based on months if the plan eyar is a short plan year. Full months only, months + days for partial month, months including partial months? I'd agree with toolkit.

I'll defer to the TPAs on this one, but, I think that if the 401(k)/PSP effective date was at the start of the year (i.e., no short plan year), you might have been able to use full year comp. even though 401(k) participation was not available until mid-year. (See Treas. Reg. Section 1.401(k)-2(a)(3)(i) & definition of Compensation in Treas. Reg. Section 1.401(k)-6.)

[BG5150]

For what it's worth, Relius prorates around the 15th of a month. I did a proration for August just recently, and it seemed that with a compensation year ending Aug 15, it used 142,917. But with a date of August 16 it was 163,333.