Change of compensation definition for terminating ESOP

[OKC73134]

Non-publicly traded ESOP large plan is terminating.     Plan is a 12/31 year end.     Plan terminating amendment was prepared by ERISA attorney who provides the document and executed by the client (6/17/18) to terminate the plan as of 6/30/18.     Included in the amendment was a change in definition of compensation.   It defines compensation as the 12 months immediately prior to 6/30/18 (7/1/17 - 6/30/18), therefore, using full year compensation for the allocation.     Removed the hours requirement and stated the contribution would be allocated to all eligible employees who were employed on 6/30/18 based on full year compensation.      Anyone else have experience with this type of change?     The 7/1/17-12/31/17 compensation was already the basis of allocation for the 2017 plan year.    Can this same compensation be used as part of the basis of allocation for the 2018 plan year?

[JamesK]

Interesting question.  And my answer is "I don't know" with respect to the general qualification requirements, but reusing the compensation from the end of the 2017 plan year may violate the consistency requirement under Code section 414(s).  Treas. Reg. 1.401(a)(4)-12 (definition of "determination period") provides that "Whether an underlying definition of compensation satisfies section 414(s) is determined on a year-by-year basis." 

I read that to limit compensation for purposes of 401(a)(4) and 414(s) to the six-month period ending 6/30/18.