Pro-rating comp in a short plan year

[Craig Schiller]

Hi Benefits Link contributors -

Hoping someone can help by lending their opinion.

Plan terminates on March 31, 2016. Salary deferrals stopped on March 31, 2016. Distributions will not get completed until September so technically the plan year will end on 9/30/2016, not 3/31/2016.

Note that 1.401(a)(17) -1 (b)(3)(iii) on "Compensation for a period of less than 12 moths states...(iii) ......"In addition, if the period for determining compensation used in calculating an employee's allocation or accrual for a plan year is a short plan year (i.e., shorter than 12 months), the annual compensation limit is an amount equal to the otherwise applicable annual compensation limit multiplied by a fraction, the numerator of which is the number of months in the short plan year, and the denominator of which is 12.

Does logic trump or the literal reading? Another words, can I use $198,750 in the ADP test for 2016 based on the plan year ending 9/30/2016, or is the plan year deemed ended when the plan terminated so $66,250?

Thanks,

Craig Schiller

[Tom Poje]

at the 2010 ASPPA Conference, Q and A #3 the following was asked:

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?
IRS 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

............

of course, the response provided do not necessarily reflect an actual Treasury position, but I would hold this makes sense. it is the plan's term date and not the payout date that counts (unless as noted by the IRS , the payout does not take place within a reasonable time, my understanding 'a year' is deemed reasonable.

[Belgarath]

Also, consistent with the above interpretation, for 415 purposes, the plan termination date is March 31. See 1.415(j)-1(d)(3).

[Craig Schiller]

Hi Tom and Belgarath -

Thanks for your opinions. The reference to 1,415(j) is especially determinative.

We did the refund rather than try a different approach. I think that if a plan stopped its salary deferrals on March 31st, but terminated the plan in June, for the ADP test one could count comp through June and thereby use $265,000 x 50%. If I had thought of it, I would have done it that way. This plan had prior year testing, making that a much better result.

[Tom Poje]

I don't think about it often, but there is the last few sentences of [Treas. Reg. § 1.401(k)-2(b)(2)(v)] If I read it correctly it seems to say in the case of termination of a plan you can 'get out' of actually making a corrective distribution. seems strange, but just why the heck is this even in the regs otherwise.

In the event of a complete termination of the plan during the plan year in which an excess contribution arose, the corrective distribution must be made as soon as administratively feasible after the date of termination of the plan, but in no event later than 12 months after the date of termination. If the entire account balance of an HCE is distributed prior to when the plan makes a distribution of excess contributions in accordance with this paragraph (b)(2), the distribution is deemed to have been a corrective distribution of excess contributions (and income) to the extent that a corrective distribution would otherwise have been required.

[Treas. Reg. § 1.401(k)-2(b)(2)(v)]

[Mike Preston]

This isn't new. You report the excess as not being rollable and tell the HCE to fix it him/her self.

[Tom Poje]

then why does it say 'deemed' to have been made and 'to the extent a distribution would otherwise be required'?

this appears to be different than in the case of an on going plan in which a terminated HCE was paid out. there is no special language for that situation.