Prorate Compensation - SH Termination

[12AX7]

A SHMAC Plan is terminated on 6/30/2012 for business reasons. In fact, the employees were also terminated on the same day!

When I read through the IRS guidance it says "In addition, a plan that is amended during the plan year to reduce or suspend safe harbor contributions...must prorate the otherwise applicable compensation limit..."

Is the termination of the plan considered an amendment during the plan year to suspend contributions? I'm trying to determine if I need to reduce a participant's compensation for allocation of the SHMAC.

Thanks.

[cpc0506]

A SHMAC Plan is terminated on 6/30/2012 for business reasons. In fact, the employees were also terminated on the same day!

When I read through the IRS guidance it says "In addition, a plan that is amended during the plan year to reduce or suspend safe harbor contributions...must prorate the otherwise applicable compensation limit..."

Is the termination of the plan considered an amendment during the plan year to suspend contributions? I'm trying to determine if I need to reduce a participant's compensation for allocation of the SHMAC.

Thanks.

What compensation would there be to prorate since the employees had no compensation beyond 6/30/12?

[rcline46]

The compensation LIMIT must be prorated for the SHMAC as well as for 415 testing.

[12AX7]

You are saying that the comp limit is prorated because of the termination of the plan is considered an "amendment during the year" or because I might have a short plan year caused by the termination...or both!

[BG5150]

From the EOB: Chap 5, Sec II, A.3c

However, the 2007 regulations adopt a new rule with respect to terminated defined

contribution plans. If a defined contribution plan is terminated effective as of a date other than the

last day of the plan’s limitation year, the plan is treated as if an amendment has been adopted to

change the limitation year to a period ending on the termination date. This results in proration of the

applicable dollar limit with respect to the allocation of annual additions for the final year in which

the plan is an active plan.

[MWeddell]

I don't think we've answered the original poster's question yet. Must the compensation limit be prorated? Is that because a plan that terminates on a date other than the last day of the plan year necessarily has a short plan year? Any citations to support one's answers?

[Tom Poje]

from 2010 ASPPA Conference Q and A (1st page) (if it helps)

DC plan is top heavy and has a plan year ending 12/31. The plan terminates

on September 15, 2010. Normally, TH minimums are provided only if the

employee is employed on the last day of the plan year. (Assume that there

are salary deferrals during the year so that, if a top heavy minimum is

required, it needs to be made.)

Questions:

(1) For the 2010 plan year, is 9/15/2010 treated as if it were the last day of

the plan year, so that only non-key employees who are employed on that

date are entitled to a TH minimum?

(2) If (1) is Yes, is the 3% minimum calculated for compensation from

1/1/2010-9/15/2010?

(3) If (1) is No, is there NO top heavy minimum for the 2010 plan year

because the plan terminates before the end of the year (similar to the

concept that there is no money purchase plan funding if the plan terminates

before the end of the year and there is a last day employment requirement),

or does the plan have to wait to see who is employed on 12/31/2010 to

determine who is entitled to the TH minimum, even though the plan has

terminated before that date?

(4) Is the answer to any of the above affected by whether the employer

continues in existence through the end of 2010?

response

(1) Of course, if there is no employer contribution, there would not be an obligation to provide top

heavy minimum contribution. But, if there were contributions to keys during the year, including

elective deferrals, there is a top heavy minimum based on compensation and employment

through 9/15/10. Plan must liquidate within a reasonable time under Rev. Rul. 89-87 or else

9/15 date may not be reasonable. There is effectively a short plan year for top heavy purposes.

(2) yes

(3) n/a

(4) no change

[12AX7]

I'm not sure if my question was directly answered. BG's and TP's cites do not address directly the comp issue of a SH plan term on a day other than the last day of the plan year. RC46 says it does, but I'm looking for a direct cite.

I can surmise from the proposed regs that termination during the plan year does amend to reduce or suspend the SH and therefore the (a)(17) comp limit is prorated based on the plan termination date. This seems reasonable and is not necessarily a conservative approach if you believe that this might prevent "frontloading" by higher paid participants.