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Category |
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Chart 2 |
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Compensation Limit |
The limit is prorated based on number of months in short plan year. [$225,000 X (# of months in short plan year/12] |
Full $225,000 limit (not prorated) |
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HCEs |
The "look back" compensation is always
a 12 month period. This period ends at the beginning of the current plan
year. Thus, a 12 month period is always
used, even if the prior plan year was a short plan year.
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Actual gross compensation for full year. NOTE: Do not annualize compensation. |
| Key Employee | For key employees, the plan year must be used. So for key employee definitions involving compensation (such as officer or 1% owner) the compensation is to be pro-rated for the short year. (It may also be reasonable to annualize the actual short year compensation as there is no clear guidance in this area.) |
Actual gross compensation for full year. NOTE: Do not annualize compensation. |
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Elective Deferrals |
Elective deferrals are always based on a calendar year limit. No pro-rating |
Elective deferrals are on a calendar year limit, no pro-rating. |
| Catch-up Limit | Catch-up is a calendar year limit. No pro-rating. | Catch-up is a calendar year limit. No pro-rating. |
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Allocation of Employer Contributions §401(a)(4) |
Compensation earned during short plan year (up to $225,000, as prorated).
Any reasonable definition of compensation may be used.
If integrated with Social Security, integration level is prorated. |
NOTE: The Plan Document definition of compensation is used. Typical plan document choices for the definition of compensation include: If plan defines compensation as “plan year” compensation:, then use whole plan year. If plan defines compensation as limited to "while a participant" than only the compensation earned after eligibility for participation is considered. If plan defines Compensation as “calendar year”: compensation for calendar year ending with or within the plan year. If plan defines compensation as “employer’s fiscal year”: full compensation for fiscal year ending with or within the plan year. The integration level is not prorated. |
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Top-Heavy Minimum Contribution §416 |
Compensation earned during short plan year.
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If plan uses “plan year” compensation, the Top-Heavy minimum is based on full year compensation regardless of when during the year the participant became eligible to enter the plan. §415 definition of compensation is used. |
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ADP/ACP and Nondiscrimination Testing §401(a)(4) |
Compensation earned during short plan year. §414(s) definition of compensation is used. |
Compensation may be based on plan year or calendar year ending in the plan year. Note: See plan document for whether compensation is defined as while a participant or for whole plan year, §414(s) definition of compensation is used. |
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Annual Additions Limit §415 Based on gross §415 compensation. |
If plan year and limitation year are the same: 100% of gross compensation for short plan year; $45,000 limit prorated based on number of months in short plan year [$45,000 X (# of months in short plan year/12] If limitation year different from plan year: 415 limit based on limitation year. |
Not prorated. Limit is based on gross §415 compensation earned during Limitation Year. |
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Deduction §404(a) |
The deduction limit is based on the employer's tax year and not necessarily the plan year. If the plan year changes that does not effect the tax deduction other than apportioning the allocation to the respective plan years. If the tax year is a short period, then the limit must be pro-rated for the number of months in the tax year. |
Deductions based on the participant's §415 compensation earned during the respective fiscal years. Note: See plan document for whether compensation is defined as while a participant or for whole plan year, |
| Amendment Timing | For a plan to be amended to a short plan year, the amendment must occur no later then during the short plan year period. For example, for a plan with a July 1 to June 30 plan year to have a 6 month plan year from July 1, 2007 to December 31, 2007; the plan must be amended either shortly before July 1, 2007 or during the July 1, 2007 to December 31, 2007 time period. A plan may not be amended to a short plan year after the short plan year is past. Thus, in our example, as of January 1, 2008, the plan could not be amended to have a short plan year from July 1, 2007 to December 31, 2007. | Not Applicable |
| Eligibility |
There is no pro-ration of the 1,000 hours. Eligibility period that starts with the first day of the short plan yeatr must run 12 months. Thus, the plan will period will overlap with the next full plan year. In addition, the full plan year that begins after the short plan year will start on the first day of the full plan year and overlap the short plan year eligibility period. |
Not Applicable |
| Last day and/or 1,000 hours for an allocation/accrual of benefit | The last day of employment is measured as of the last day of the plan year. 1,000 hours requirement for an allocation may be prorated. 2530.204-2(e)(3). If the last day of the plan year is on a weekend, click here for our article. |
Last day would be required. 1,000 hour requirement not prorated. If the last day of the plan year is on a weekend, click here for our article. |
| Vesting | No pro-ration of the 1,000 hours. Vesting computation period must be 12 months long. To count vesting for the period which includes the short plan year, start on the last day of the short plan year period and count back twelve months from then to determine if the 1,000 hours of service for a vesting year-of-service has occurred. Thus, if the short period was from 7/1/06 to 12/31/06; start at 12/31/06 and go back 12 months and count the hours for the period from 1/1/06 to 12/31/06 to determine if a vesting year of service occurred for the period ending on the last day of the short plan year. (The hours between 1/1/06 and 6/30/06 are counted twice.) Bottomline, vesting period must be 12 months and thus, may not be the short plan year. |
1,000 hours required as well as 12 months. |