415 limits and off plan years

[Guest ppapdx]

401(k) plan - 7/1/2011 to 6/30/2012 plan year. The plan defines the Limitation Year as 1/1 through 12/31.

Employer funds a profit sharing contribution for the 2011 plan year on 6/25/2012. How do you determine which limitation year this contribution should be included in? Does the employer choose whether it should be 1/1/2011 to 12/31/2011 or 1/1/2012 to 12/31/2012?

The 415 regs say that "an annual addition is credited to the account of a participant for a particular limitation year if it is allocated to the participant's account under the terms of the plan as of any date within that limitation year" - so from that perspective it's included in the 2012 LY test.

However, the regs also state that "employer contributions are not treated as credited to a participant's account for a particular limitation year unless the contributions are actually made to the plan no later than 30 days after the end of the period described in section 404(a)(6) applicable to the taxable year with or within which the particular limitation year ends." The 6/29/2012 contribution was credited prior to 30 days after the 404(a)(6) date - so from that perspective it can be included in the 2011 LY test I believe.

I believe the employer's preferance would be to include it in the 2011 LY test. There are some participants who terminated in December 2011 - and so they don't have any 2012 compensation. So if this contribution was deemed a 2012 annual addition, they would exceed the 415 limit.

Thoughts?

[ETA Consulting LLC]

Keep in mind that 415 Compensation isn't necessarily Compensation during the limitation year; there is a separate computation of Compensation being used for Limitation purposes. The plan's language will guide you. Personally, I hate when the "limitation year" is separate from the "plan year", but it challenges you to go beyond the norm (where 'everything' is based on the same 12 months).

Start here and then reevaluate.

Good Luck!

[Guest ppapdx]

Thanks for the reply. Take compensation out of the equation though. How do you determine what Limitation Year to include this contribution as an annual addition?

It needs to either be applied to the 1/1/2011 to 12/31/2011 LY - or the 1/1/2012 to 12/31/2012 LY. I can see an argument for either one.

Can the employer choose (as long as it meets the timing rules in §1.415©-1(b)(6))? Or is their guidance that directs which LY to apply it to?

[Mike Preston]

I can't. How can it be anything other than LY 1/1/2012 through 12/31/2012? The contribution was made on 6/25/2012 and presumably was allocated on 6/30/2012? Or are you saying that the 6/25/2012 contribution was somehow allocable on some date that falls within the 7/1/2010 through 6/30/2011 year?

Note that this answer is predicated on a single allocation date in the plan. If the plan has monthly allocation dates then the regulation allows the contribution to be split over limitation years.