Changes in Plan Years (Short Plan Years) Robert M. Kaplan, APA, CFP, CPC, QPA 1
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. 2
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 3
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 4
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 5
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 6
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) 7
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 8
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 9
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 10
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 11
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 12
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 13
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 14
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 15
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 16
Permitted Disparity Taxable Wage Base at beginning of Short Plan Year is pro-rated 17
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 18
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 19
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 20
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 21
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 22
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 23
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) 24
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 25
Questions Thank you for attending 26