415(c) limitation for terminating DC plan

Suppose a calendar year plan  terminates 7/7/2025. A question has arisen as to the proper 415(c) reduced limit. According to treasury regulation 1.415(j)-1(d)(3) (emphasis is mine) fractional parts of a month are included. So the proper fraction is 7/12, not 7.226/12, correct?

(d) Change of limitation year -

If the turn date is July 7, 2025 (and the relevant plan-accounting and limitation years have been the calendar year), might the fraction be six-twelfths, or perhaps a little more?

Before getting into how to treat the 6 days/31 days [0.193548387] or 7 days/31 days [0.225806451] of July, one might consider how the plan’s administration counts compensation.

For example, if the plan’s administrator has, for § 401(a)(17), § 401(k), § 402(g), § 415(c), and other provisions counted compensation by looking to compensation paid, rather than accrued, one might consider the pay periods and pay dates. See, for example, 26 C.F.R. § 1.415(c)-2(e)(1)(i) https://www.ecfr.gov/current/title-26/part-1/section-1.415(c)-2#p-1.415(c)-2(e)(1)(i).

For example, if the employer has used a 24 pay cycle with two pay dates in each month—on the 15th and the last day of the month, there might be no July pay to count in the compensation measured for a § 415(c) limit. If so, might six months/12 months be a sensible fit?

Or, if there was an early July pay date before the plan’s discontinuance, one might form a reasoned fraction that catches the general sense of § 1.415(j)-1(d)(3).

This is not advice to anyone.

First, pardon my typo on the fraction - I meant to say 6/12 or 6.226/12. When counting months on my fingers, I think I counted my extra thumbs twice...And thank you for the valid points you raised!

In this particular case, all compensation ceased in April of 2025. So the 401(a)(17) limit wouldn't have to consider paid vs. accrued for the 1 week in July, right?

But upon further reflection, I'm thinking that for a reasonable and consistent approach, perhaps it would actually be more correct to just use 7/12 for both 401(a)(17) and 415? It seems like there is some room for interpretation here?

This one is messy for many reasons, not least because unbeknownst to us, the owner (but not employees) took a full distribution of his/her account, which included deferrals, match, and safe harbor, which they contributed for 2025 based on unreduced compensation which resulted in an excess allocation and 415 violation. Sheesh...

Google AI overview provides this:

Example 2 - Termination

Plan B is a profit-sharing plan with a calendar limitation year. The plan is terminated effective September 15, 2018. The plan termination is treated as if an amendment has been adopted to change the limitation year to a year beginning September 16, 2018. A short limitation year is created from January 1 to September 15, 2018 (8.5 months). Because the plan terminated in 2018, the prorated short year limitation is calculated based on the 2018 limit of $55,000 under IRC Section 415(c).

The prorated short year IRC Section 415(c) limit is: $55,000 x (8.5/12) = $38,958.

Thanks Cuse. Interesting, because upon further digging, I found an unofficial opinion from a big name that opined that the regulation permits counting the fractional month as a whole month, for 415 purposes.

This is one of those issues where I have a hard time getting worked up over it...but maybe I should.