Effective Date of new Plan

[Hokielady]

If the Employer began in March of 2016

1- can their new plan have an effective date of 01/01/2016 for a calendar year?

2-does it matter what type of entity they are- ie corporation; sole prop etc

I know IRS said at 1997 ASPPA it's ok- but I am getting push back from my company's doc dept

[jpod]

Please explain what you think is the relevance of an effective date prior to the date the employer commenced business/came into existence.

[Hokielady]

Doesn't require a short plan year of 03/01/2016 -12/31/2016 which means pro rating limits. Would prefer the plan year be 01/01/2016-12/31/2016

[jpod]

I don't see how, in this situation, there is any proration for purposes of 401(a)(17) or 415. What else did you have in mind?

[RatherBeGolfing]

Personally, I would be aggressive and use a plan year of 1/1/16. As far as I know, there is nothing that expressly prohibits the practice, and there are at least informal comments made by the IRS to indicate that it would be ok (the aforementioned 1997 comments) .

Draft your plan document to use a limitation year of 12 months ending on the last day of the plan year rather than using the plan year as the limitation year if the initial plan year is short. This way you have a 1/1/16-12/31/16 limitation year, and no proration is needed.

From Sal's ERISA Outline Book:

Company not in existence before the effective date of the plan. What if the first plan year of a new plan is a short period because, prior to the effective date, the company did not exist. Must the limitation year also be a short period in this case, resulting in a prorated dollar limit for the defined contribution plan? The IRS has not formally addressed this issue. At the 1997 Annual Conference of the American Society of Pension Actuaries, the IRS responded in a general session (see Q&A-30 of that session's materials) that the effective date of a plan could predate the existence of a company. Using this reasoning, the plan year, or at least the limitation year, could start before the existence of the company so that the initial year would be 12 months long. In that case, proration of the dollar limit would not be necessary. It is recommended that if a new plan has an effective date, or has an initial limitation year that predates the existence of the company, that such provision be expressly noted in the determination letter request. This way the determination letter issued on the plan should provide reliance on this issue. It also should be noted that, in light of the position taken in the 2007 regulations with respect to the limitation year in which the plan terminates (see 3.c. below), this position may be viewed under these regulations are more aggressive.

[Mike Preston]

There is something formal (a court case? a PLR?) that holds it is allowable to have an effective date that pre-dates the existence of the plan sponsor, at least back to a date that is 364 days earlier than the end of the short first fiscal year.

I just can't remember what it is! Something like Plastics Engineering. Don't quote me.