New company formed mid-year - effective date of January 1 for plan?

[Belgarath]

I'm not aware of any formal guidance on this issue - plans are often effective January 1 in such situations to avoid prorating limits, etc.

Curious as to how folks generally feel about this? The EOB refers to an old IRS Q&A response at an ASPPA meeting opining that it was allowable, but of course that's unofficial. (Naturally, no retroactive deferrals allowed!)

Thoughts?

[Paul I]

The new company's formation mid-year by itself will be a limiting factor since service and compensation will be earned during the less-than-full calendar year of the new company's existence.

This narrows down the question to whether the plan can use full applicable calendar year limits - by defining the first plan year as the calendar year - even though the company and the plan existed for less than the full calendar year.  There are other analogous situations that support the notion that this is acceptable.  For example, the relatively new rules that allow a company to create a new plan retroactive to the beginning of the prior year (and use the prior year limits for that year) seem to support it.  As you noted, adopting a new plan mid-year with a calendar year plan year effective as of January 1st of the year of adoption is common.  Similarly, 402(g) limits are always based on calendar years and are not pro-rated.

One nice feature about the first plan year for a new plan for a new company is, other than more-than 5% owners, there are no HCEs.  Unlike the rules for the first determination date for top-heavy testing, the IRS did not go out of its way to define a special rule to determine HCEs in a new plan based on compensation earned in the company's first year of existence.

I take this as an example where the IRS could have created a special rule if it wanted to, but they didn't.  Sometimes (or should I say often), when we see a situation where the IRS could have created a rule but didn't, we wonder "Did we miss something?!?"

 

[Belgarath]

Thanks Paul.

[CuseFan]

Agree with Paul and seem to remember a similar discussion on this topic not that long ago that came to the same consensus.