Short Plan Year?

[PFranckowiak]

Company was sold.  All employees except the owner are terminated at the end of February.  The owner is keeping corporation active until the end of the year.  New company did not take over plan, nor corporation, but in hiring some of the employees to work for them.

Plan is cross tested.  3% SH 2% Gateway.

Owner wants to max out for 2017.  He has some income from shutting down the business and will continue to pay himself. 

Any problem with giving the employees their 5% on their 2 month salary and the owner getting maxed out at year end.

He wants to deposit  the 5% so that participants can get paid out.

So if he continues until the end of the year, we avoid the Short Plan Year reduction in the limits?

 

Am I missing something here?

 

[Belgarath]

Well, just because you pass gateway doesn't mean you necessarily pass nondiscrimination. Gateway is just the price of admission.

I agree that you don't have to do prorated limits if you use the full plan year.

[Lou S.]

I agree with Belgarath.

5% may or may not pass 401(a)(4) testing but I'll assume you've done the math on it and it likely works.

Don't forget probably no vesting schedule on the extra 2% as you most certainly have a partial plan termination.

Lastly you'll want to confirm your plan document allows for the contributions to the terminated participants under one or more of the plan's provisions. If you have a last day requirement for example you don't have a basis to allocate the 2% just yet as it isn't yet required to pass gateway even if you plan on making a larger contribution later on that might require it.