Compensation and Limits for Initial Short-Plan Year

[Danny CPA]

Hello,

I am hoping all of you would be able to give me some guidance.

Facts:

- New plan, effective date 10/1/2018

- "Compensation" means a Participant's Basic Compensation, (which are W-2 wages), actually paid during the Compensation Computation Period (defined in the document as the Plan Year.

-  Compensation excludes pre-participation compensation

- Plan Year is the 12 month period beginning January 1, ending December 31st.

- Limitation year in the document says: " In the case of an initial Limitation Year, the Limitation Year will be the twelve (12) consecutive month period ending on the last day of the initial Plan Year."

- Eligibility is normally age 21, 1-year of service, monthly entry. However, all entry requirements were waived 10/1/2018.

- 4 Employees - 2 hired 5/30/2017, 1 hired 6/26/2017, and one hired 10/15/2017.

 

Questions:

1) Is the 415 or compensation limit pro rated for 2018? I do not believe so based on my reading of the above.

2) For the employees, do I take compensation from 10/1/2018 - 12/31/2018, or from what their individual entry dates would have been (6/1/2018 for the first two, 7/1/2018 for the third, etc.)

3) This plan will be top heavy, so my understanding is I need to give non-key employees 3% of their annual compensation (1/1 - 12/31) - correct?

Thanks for your help and guidance.

 

[Lou S.]

Your plan is effective 10.1.18 and your first plan year is 10.1.18 0 12.31.18 correct?

If so my understanding is you have to have to pro-rate 401(a)(17) compensation limit and 415(c) limit for your 3/12th plan year.

If your plan year is 10.1 - 12.31 you would look at compensation paid in the plan year. so comp form 10/1 - 12/31.

[Danny CPA]

That is where I am getting confused - the document definitions for limitation and plan year are both the 12 month period ending December 31st. They completely disregard the effective date of the plan.

[RatherBeGolfing]

53 minutes ago, Danny CPA said:

That is where I am getting confused - the document definitions for limitation and plan year are both the 12 month period ending December 31st. They completely disregard the effective date of the plan.

The document has to define the plan and limitation year as a 12 month period.  A short plan year would be an exception so the document would have additional language to indicate a specific short plan year.  If the plan is effective 10/1/2018, I would expect the document to also state a short plan year of 10/1/2018-12/31/2018.

[Lou S.]

I'm with golfing in that you have a short plan year and somewhere in your document this is probably addressed.

[Tom Poje]

At the 1996 ASPPA annual fall conference (Q and A #84), the IRS representative indicated that in the case of an initial plan year in which the employer has also only been in existence for that time period there is still no short plan year—it is a 12 month period working backward from the end of the plan year—unless, of course, the document has defined it otherwise.

1997 Conference (Q and A #30) it was indicated the effective date could predate the existence of the company.

(Of course comments made at Conferences might not reflect an actual Treasury position, but...)

so, thinking out loud, since we haven't reached the end of the year, can you amend the effective date of the plan?????

[justanotheradmin]

I'm assuming the company  has been around and participants would have compensation from 1/1/18 - 12/31/2018 to consider if possible. 

The basic plan document we use addresses the limits and short year issue. It also makes clear that the adoption agreement has a spot where compensation can be clarified. In ours it is titled "Period for Determining Compensation". If a sponsor wants to use 12 months of full compensation (subject to the limits, pro-rated as necessary) the document would say something like "the 12-month period ending on 12/31 which ending during the Plan Year" 

So even if the plan has a short plan year, the full 12 months of compensation is used. 

Hopefully your document has similarly clarifying language. 

 

[Doc Ument]

I have seen preapproved documents that state that there is no pro-rating of the 415 limit for the initial limitation year, i.e., that the employer can use the 12-month period ending on the last day of the first plan year (assuming that the first plan year and first limitation year are intended to end on the same date), in which case you have reliance on such language.  I <believe> that is because the 415 regulations require a short limitation year only for (1) an amendment that creates a short limitation year or (2) a mid-year plan termination.  In contrast, the 401(a)(17) limit has nothing to do with the 415 limit, and must be pro-rated based on any short plan year.

[Danny CPA]

Our document language on both the Limitation Year and Plan Year (this is an FIS Relius IDP document if that makes any difference):

Limitation Year: "Limitation Year" means the Plan Year. All qualified plans maintained by the Employer must use the same Limitation Year. Furthermore, unless there is a change to a new Limitation Year, the Limitation Year will be a twelve (12) consecutive month period. In the case of an initial Limitation Year, the Limitation Year will be the twelve (12) consecutive month period ending on the last day of the initial Plan Year. If the Limitation Year is amended to a different twelve (12) consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. The Limitation Year may only be changed by a Plan amendment. Furthermore, if the Plan is terminated effective as of a date other than the last day of the Plan's Limitation Year, then the Plan is treated as if the Plan had been amended to change its Limitation Year (to end on the date of plan termination).

Plan Year: "Plan Year" means the Plan's accounting year of twelve (12) months commencing on January 1 of each year and ending the following December 31.

The annual additions section of the document is based on the Limitation Year, which, according to the definitions section above, is the full 12 month period ending on the last day of the initial plan year.

There is nothing in the document (and I have been going up and down it) that references the initial effective date or initial plan year other than what I have listed above.

So, the way I read that, I don't have to pro rate the annual additions limitation, but I would have to pro rate compensation (I assume there is no way around that).

 

[RatherBeGolfing]

Is it actually an individually designed plan or is it a volume submitter in IDP format?

Is there any reference to a short plan year? 

[Danny CPA]

It is volume submitter in IDP format.

No references in the document at all to a short plan year (other than the basic, in the case of a short limitation year, or short plan year, etc.). However, this is an initial limitation year, which is stated above.

[RatherBeGolfing]

22 minutes ago, Danny CPA said:

It is volume submitter in IDP format.

No references in the document at all to a short plan year (other than the basic, in the case of a short limitation year, or short plan year, etc.). However, this is an initial limitation year, which is stated above.

I havent used relius in the last 5-6 years, but if it is a VS document I can almost guarantee that there is a place where the short plan year is supposed to be indicated while drafting the document.  If there really is no reference to a short plan year, I wonder if that part was simply missed while drafting the document.  You cant have a calendar year plan effective 10/1/18 without a short plan year. 

Maybe someone who uses relius FIS now can weigh in on the document?

Also, best bet is to log an incident (or whatever the process is now) and ask relius FIS

[Doc Ument]

22 hours ago, RatherBeGolfing said:

I havent used relius in the last 5-6 years, but if it is a VS document I can almost guarantee that there is a place where the short plan year is supposed to be indicated while drafting the document.  If there really is no reference to a short plan year, I wonder if that part was simply missed while drafting the document.  You cant have a calendar year plan effective 10/1/18 without a short plan year. 

Maybe someone who uses relius FIS now can weigh in on the document?

Also, best bet is to log an incident (or whatever the process is now) and ask relius FIS

 

[Doc Ument]

I am looking at such a document, and the "Dollar Limitation" paragraph in the definition of "Compensation" refers to the steps to take for when there is a "determination period of less than 12 months."  I infer that a determination period is the 12-month period defined in the plan's definition of "Compensation Computation Period, " a term which is referred to earlier in that same "Dollar Limitation" paragraph. The switch from "Compensation Computation Period" to "determination period" within the same paragraph appears to be idiomatic but harmless.  Questions about a particular plan's provisions are best addressed to the document provider/drafter.

[ACK]

My own research on this is in line with Doc Ument's comments.  No pro-ration for 415 limit; compensation limit is pro-rated for the short plan year.  We use the ASC document.  I will usually try to make the plan effective back to 1/1 to avoid this issue, (with a later effective date just for the deferral/Safe Harbor contributions) unless the employer just wasn't in existence then.