401(k) limits for a short plan year

[Guest TracyAndrews]

We are finally getting an existing 401(k)Plan on track and changing from a 5/31 year end to a 12/31 year end. Question: I realize all the pro-rated limits in effect for the short plan year, but is the 402(g) limit also prorated??? (i.e. 10,500 to 6,125)...I understand the 402(g) limit to be a calendar year limit only. Part 2 of the question is if the 401(k) limit must be pro-rated, than how do I categorize the excess contribution/deferral the participant has already done for 2000??? He has not exceeded 10,500 for the 2000 year, but he has exceeded the 6,125 for the short plan year.

[Richard Anderson]

The plan year (short or otherwise) is irrelevant for 402(g) limit purposes. The 402(g) limit is for the individual's tax year (almost always a calendar year). In your case if someone deferred 10,500 in 2001 before 5/31 that is OK, but he or she could not defer any more in 2001. It is possible to defer 21,000 in a plan year and not violate 402(g) in an off calendar year plan. If the plan year ends 6/30 for example, the participant could defer 10,500 in December (the only deferral for that calendar year) and 10,500 in January (the only deferral in that year). He has not violated 402(g), but has deferred 21,000 in the plan year.

[Earl]

In fact there is the opportunity to play a Safe Harbor every other year game with a fiscal year end 401(k) Plan.