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Changes in Plan Years (Short Plan Years)

Robert M. Kaplan, APA, CFP, CPC, QPA

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Robert M. Kaplan, APA, CFP, CPC, QPA

Bob Kaplan is the VP, National Training Consultant for Voya. His responsibilities

include web cast and live training for members of the TPA and Financial

Services community as well as Voya personnel.

He is currently a Co-Chair of the American Society of Pension Professionals

and Actuaries (ASPPA’s) Government Affairs Committee. Bob is a member of

ASPPA’s Leadership Counsel. He previously served as a member of the Board

of Managers of the American Institute of Retirement Education (AIRE) as well

as the Board of Directors of the National Institute of Pension Administrators

(NIPA). In 2009, Bob was presented with NIPA’s Lifetime Achievement Award

for his contributions to the retirement plan industry. Bob is a frequent speaker at

industry events. He has provided testimony before the Treasury department on

401(k) issues and other retirement plan issues. Bob has over 35 years of

experience in retirement plan services, including plan design, administration,

sales and consulting. Bob is also a former high school basketball coach. He is a

graduate of the State University at Albany, NY and has a graduate degree from

William Paterson University in New Jersey.

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Short Plan Year – when do they arise

• First plan year

• Less than 12 months – usually to align with tax year or

calendar year

• Must amend plan

• Most of ours do not have to file Form 5308 with IRS – but some

subject to §412 minimum funding – check instructions

• Final or termination year

• Note: Check Plan document as many contain provisions

that identify Short PY counting and methodologies

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First Plan Year

• May be a short year – but why would one do this?

• Make effective date retroactive so 12 months

• Check document language to ensure this is

accomplished

• Adoption cannot be after last day of first plan year

• Example – cannot adopt now for 2015

• Remember 401(k) deferrals cannot occur until that

provision is adopted

• Addition of deferral feature to an existing PS plan does not create

Short PY

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HCE Determination

• 5% owner in current or preceding year, or

• Compensation above is the defined amount in preceding

year

• Current Year for 5% test can be the Short PY

• In both cases – the preceding year is a full 12 month

period

• Example – Short PY – 7/1/15 – 12/31/15

• Ownership for current year is the Short PY

• Both compensation test and ownership test must look back to

period 7/1/14 – 6/30/15

• Then for 2016 year look back to 12 months in 2015

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Key Employee

• 5% owner

• 1% owner who made more than $150,000

• Officers making more than defined compensation

(currently $170,000)

• No mention in regulations of how to handle short PYs

• Annualize compensation, or

• Pro-rate $ limit

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Top Heavy Short PYs

• Look-back for distributions – count short year as a whole

year

• 3% contribution in short PY is based on short plan year

compensation

• Termination year – calculate 3% on compensation until

termination date (even if all assets are not paid out)

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Eligibility

• The first eligibility computation period is measurement of

12 months from date of hire

• Subsequent periods may retain DOH period (anniversary) or

switch to PY

• Eligibility periods may not be less than 12 months…but

• Hours may be pro-rated in a short plan year BUT ONLY if there is

a provision to credit a year if 1,000 hours is worked within 12

months

• 7/1/15 – 12/31/15 – can use a prorated approach

• But if participant works less than 500 hours in Short PY must also

measure if over 1000 in 7/1/15 – 6/30/16

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Coverage Testing

• No special rules

• Annual testing method – based on workforce in short plan year

• Quarterly testing method – not clear from regulations but seems

like you would divide short PY into quarters

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Deferrals and Catch Ups

• Based on participant’s tax year so Short PY does not

impact

• Usually a calendar year

• Example

• PY – 7/1/14 – 6/30/15

• Short PY – 7/1/15 – 12/31/15

• PY – 1/1/16 – 12/31/16

• 2014 §402(g) = $17,500 + $5,500

• 2015 §402(g) = $18,000 + $6,000

• 2016 §402(g) = $18,000 + $6,000

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Benefits

• 1,000 hour (other equivalency) for benefits – regulations

do not address. This would be addressed by the

amendment that creates the Short PY.

• Usually pro-rated but make sure the amendment states

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Vesting

• Elapsed time method – count actual elapsed time without

regard to PY so Short Plan Year issues do not arise

• Hours Method – Based on 12 consecutive months

• Overlap of time periods may occur

• Example:

• Plan changes from 6/30 PYE to 12/31 for 2015

• 7/1/14 – 6/30/15 = 1 year

• 7/1/15 – 6/30/16 = 1 year (must be 12 months vesting computation)

• 1/1/16 – 12/31/16 = 1 year

• Double count 1/1/16 – 6/30/16 hours

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Vesting – A Twist

• Hours may be prorated in short plan year BUT ONLY if

work more than 1,000 hours in 12 month period – gets

credit

• Short PY – 7/1/15 – 12/31/15 – prorate to 500 hours

• If work 450 hours in that period – no credit

• If work 1,000 hours in 7/1/15 – 6/30/16 – then credit

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Vesting – Another Twist

• First Plan Year

• Some plans credit prior service

• If so, then use 12 month periods that are the same as the first

plan year

• Example

• First plan year is 7/1/16 – 12/31/16

• Count 1/1/16 – 12/31/16

• Prior years (if counted) would be 1/1 – 12/31

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Compensation – §401(a)(17)

• Pro-rated by months in the short plan year

• Remember in initial plan year may include compensation

before the plan is effective so pro-ration may not need to

occur

• Note: If compensation definition is based on 12 months

that end on last day…….then no proration is required in

short PY

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Annual Additions – §415 Limit

• Check Limitation Year in plan document

• If Plan Year (and not Calendar Year) pro-rate by months

in Short Plan Year

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Permitted Disparity

• Taxable Wage Base at beginning of Short Plan Year is

pro-rated

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401(k) Testing

• Short PY counts as a “year” for testing

• Current year testing – short plan year for both HCEs and NHCEs

• Example 7/1/15 – 12/31/15 is Short PY

• 7/1/15 – 12/31/15 date for both HCEs and NHCEs

• Counting 5 years of current before being allowed to switch to

prior – short PY counts as a “year”

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401(k) Testing

• Short PY counts as a “year” for testing

• Prior year testing – use data in Short Year

• Example 7/1/15 – 12/31/15 is Short PY

• 12/31/15 testing

• 7/1/15 – 12/31/15 for HCEs

• 7/1/14 – 6/30/15 for NHCEs

• 12/31/16 testing

• 1/1/16 – 12/31/16 for HCEs

• 7/1/15 – 12/31/15 for NHCEs

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401(k) Safe Harbor

• New Safe Harbor Plan– must be at least 3 months

• This includes both brand new plans and conversions from an

existing Profit Sharing Plan

• Converting an existing 401(k) plan must be 12 months

• Note: If the plan is part of a newly established business the 3

month rule does not apply

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401(k) Safe Harbor

• For an existing SH plan you may amend to a short Plan

Year IF the years both before and after are full 12 month

Safe Harbor Plans

• Example:

• 7/1/14 – 6/30/15

• 7/1/15 – 12/31/15

• 1/1/16 – 12/31/16

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401(k) Safe Harbor

• In the year the SH provision terminates:

• ADP/ACP testing on full year

• Current year testing

• Lose TH exemption

• Owe SH through date of termination of the provision

• If termination is due to business hardship or

merger/acquisition then none of the above apply

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Tax Deductions

• Tax deduction is based on employer’s tax year and not

plan year

• Plan’s or company’s CPA needs to know which tax year

each contribution relates to

• If there is a short tax year; deduction limit (25% for DC

plan) is based on compensation in that short tax year

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5500 Filing

• Due for short year (same timing – 7 months plus

extension)

• After termination – must file until all assets are distributed

• Do not show assets as “zero” due to a “payable”

• Accountant’s Audit

• If short year is 7 months or less you can defer (not forget) filing

• Filing based on # of participants on first day of plan year

(including short year)

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Final Plan Year

• For 5500 purposes plan is still a short year only in year

all assets paid out

• But final contribution will be based on selected

termination date (even if assets not paid out)

• Plan that terminates 9/30/16 – will use compensation from 1/1/16

– 9/30/16

• Annual additions limit would be pro-rated by months in

short PY

• Example – 1/1/16 – 6/30/16 = $53,000/2 = $26,500

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Questions

• Thank you for attending