Does Freezing a Profit Sharing plan create short plan year

[jkharvey]

Employer sponsors a Profit Sharing plan with comp/comp allocation formula. No last day or 1000 hour rule for contribution allocation. The employer has been funding the plan each month, but now cannot continue to fund due to financial issues. The HCEs have already earned more than $250K each, so if they don't freeze compensation as of June, they will not have money to fund the additional contribution needed to true up the NHCEs at end of year. If we freeze, however, is the 401(a)(17) limit prorated as it would be in a terminated plan?

[david rigby]

PS is usually discretionary. You don't need to freeze the plan to stop a discretionary contribution.

Are you sure the original post has used correct terminology?

[jkharvey]

I failed to mention an important fact in my original question. The employer has already funded (deposited into segregated accounts) an amount equal to 20% of participant compensation. Due to financial reasons, they do not want to fund any more into the plan, but the HCEs have already as of June maxed compensation at over 250K, so if they can't freeze compensation as of June, they will have to true up an additional contribution at the end of the year for the NHCEs and this is the amount they do not want to have to fund. I hope this helps clarify my original question. Thank you.

[BG5150]

Silly question, maybe, but is the Profit Sharing discretionary or is it a stated formula in the document?

This is a great example as to why it is not a great idea to "pre-fund" profit sharing. If you feel the need to amortize the PS cost over the year, put the money in a separate account and then move it all to the PSP trust after the year is out.

[Tom Poje]

if you follow the guidelines for stopping safe harbor contributions, the proposed regs read

In addition, a plan that is amended during the plan year to reduce or

suspend safe harbor contributions (whether nonelective contributions or

matching contributions) must prorate the otherwise applicable compensation

limit under section 401(a)(17) in accordance with the requirements of

§ 1.401(a)(17)–1(b)(3)(iii)(A).

on the other hand if you wait until the end of the year to 'true-up' the NHCEs then I think you fail BRF because you have given the HCE an 'investment advantage' - they were provided a chance to invest through JUne and the NHCEs have to wait until the end of the year.

[ETA Consulting LLC]

This is a great example as to why it is not a great idea to "pre-fund" profit sharing. If you feel the need to amortize the PS cost over the year, put the money in a separate account and then move it all to the PSP trust after the year is out.

I think I just broke my "LIKE" button from hitting it so hard

I wanted to say this, or something to this extent, but the damage is already done.

Good Luck!