Theoretical idea regarding the 402(g) limit in a short plan year. Jus

[Bri]

Here's a completely theoretical question but thought-provoking.... Let's say a plan year just ended on 6-30-2000, and now the company is changing to a 12-31 year end, so there's a short plan year for the rest of 2000.

We have an HCE who already deferred $10,500 in the first half of 2000. I would like to at least suggest that the participant is not eligible to participate in the 401(k) arrangement in the plan year, or the 401(m) match arrangement (assume no post-tax allowed.) I mean, it could be lousy not having a zero in your ADP test (not eligible to defer), but it may improve your coverage ratio for the 401(m) part of the plan.

I doubt there's any code to back me up, but what do the experts say?

--bri

[rcline46]

Since the 402(g) limit is a personal, not a plan, limit said employee is done for 2000. They are still eligible for the plan and therefore are -0- in all testing, with a short year pay, 170000 prorated of course. Watch your other limits for short limitation year!

[MWeddell]

I'm pretty aggressive at using testing strategies, but even I don't think your idea will fly. Just to clarify, your plan passes ADP and ACP tests so you're not worried about hurting those tests but it might help the 410(B) test if this employee were considered ineligible for 401(k) and 401(m) tests.

Whether an employee is considered benefitting under 401(k) and 401(m) plans, i.e. must be included in the numerator of your HCE percentage, depends on the 401(k) and 401(m) regulations. 1.410(B)-3(a)(2)(i). However, look at the last two sentences of 1.401(k)-1(g)(4)(i). It doesn't expressly list inability to contribute because of reaching 402(g) limit but it does list several analogous situations that lead me to say you've got to include the employee as eligible for 401(k) and 401(m) contributions.

[Bri]

I did just think of this....What if a guy took a hardship withdrawal on 12-31-99....He wouldn't be eligible to defer in all of 2000 (unless he's got a 12-31-00 paycheck). Yet I know that he's still included in the ADP test for the year in that case.

So I guess you would have to keep them in.

oh well, just thinking out loud...

--bri