Plan Termination

[30Rock]

When a 401k plan terminates mid year, I know this creates a short limitation year and the 415 limit is pro-rated. However what happens to the compensation limit for allocation purposes and ADP and ACP testing? Do you use partial year compensation, full year or compensation up to the date the 5500 is filed?

Thanks!

[My 2 cents]

I don't work on 401(k) plans, but would the date the 5500 is filed ever matter for this? Answer would probably fall among (a) comp up to termination date, (b) prorated comp based on fraction of year to termination date, or © full year comp.

[30Rock]

I should have said use the date that all plan assets are distributed and if this is less than 12 months, then does the compensation limit get pro-rated?

[My 2 cents]

I should have said use the date that all plan assets are distributed and if this is less than 12 months, then does the compensation limit get pro-rated?

It would be my expectation that if there is a cut-off for 415 purposes during the plan year of termination, it would be the effective date of plan termination. I would not see either the filing date for the final 5500 or the date on which plan assets are distributed as relevant for that purpose.

[Lou S.]

I should have said use the date that all plan assets are distributed and if this is less than 12 months, then does the compensation limit get pro-rated?

A good document or termination amendment should address what happens.

That said if you have a a plan year that is short, then you have to prorate 415 and 401(a)(17) limits. So if the final distribution of the plan is May 31, 2105 you would have base testing, allocations and 415 limit on 5/12s of the limit unless you limited it to the date of termination which would could be earlier and smaller.

[30Rock]

Technically it is not a short plan year. The 415 regulations state I have a short limitation year when the plan terminates so I know I have to pro-rate the 415 limit. But since I am not amending the plan to a short plan year I do not have to pro-rate the 401(a)(17) compensation limit. So I was wondering what TPA's do in terms of testing compensation.

[Lou S.]

Our termination amendment addresses it it that we prorate through date of termination for both 401(a)(17) and 415.

Though if your plan year runs from 1/1/15 - date of distribution (5/31/15 in my example) I really don't see how you don't have a short plan year regardless or what your amendment says or doesn't on the issue. It is a different issue if you say terminate 6/30/14 but don't distribute until the say 1/31/15 of the following year (maybe you are waiting on a DL or having trouble tracking a few folks down) in that case I think you can get away with a full 12 month 401(a) (17) limit if your amendment is silent on the issue.