Short initial year limitations

[Flyboyjohn]

New company formed and first payroll period commenced 7/1/2012.

Company adopted 401k PS plan effective 7/1/2012.

Are these correct:

415 limit not-prorated (still $50,000 + catch up)?

401(a)(17) comp limit is prorated ($125,000)?

Thanks

[Lou S.]

415 limit is prorated for short plan year.

401(k) and catchup are not pro-rated but 401(k) can be limited by 415 for very short years.

[Flyboyjohn]

I'd like further discussion on the 415 issue.

Reg 1.415(j)-1 provides in essence that the limitation year is always 12 months except in 2 circumstances: a change in limitation year or a short final plan year. The Reg noticeably doesn't reference the possibility of a short initial limitation year.

So the question is can/must a new plan have a 12 month limitation year when the employer was not in existence for the entire 12 month period? Clearly if the employer is in existence for the entire year it can retroactively adopt a plan late in the year and benefit from a 12 month limitation year.

Thanks

[Lou S.]

I guess it depends how you inturpert the reg and I see where it could be vauge. I know we have pro-rated the 415© limit in short inital plan years in the past but I do see how you could argue if the limitiantion year is the calendar year you have a 12 month limitation year and thus no need to prorate.

I haven't seen a case on this but if I were a betting man I would bet the IRS would rule a short intial plan year the same way they rule a final short plan year.

As a side note, the final short plan year could be problematic if someone defered the 402(g) limit in January and the employer terminated the plan very early in the year.

[Tom Poje]

the answer is clear as mud.

The ERISA Outline Book 5.24 (2012 edition) talks about a comment made by the IRS back in 1997 at a Q and A session

the book says ''the plan year, or at least the limitation could be 12 months long" - this was in regards to the comment mad that plan could have an effective date of 1/1 rather than the date yhe company was formed. That seems to say the plan could have an effective date of 7/1, but the limitation year could still be 12 months.

and if the limitation year could be 12 months long then there would be no proration of the 415 limit.

but the book also says you would want to make things clear in your request for a determination letter.

(but then Tom says, by the time you find that out it could well be past any deadline..)

[Flyboyjohn]

Thanks Lou and Tom

I assume there's no wiggle room on having to use pro-rated comp limit ($125,000 in my example)