An employer is looking to get rid of his SEP and start a PS plan. PS plan will be adopted in 2004. The employer would like to keep out anyone who has terminated employment in 2004. So, I will propose a 7/1 effective date, but can the employer still use full year compensation from 1/1/2004 - 12/31/2004, even though the initial plan year will be from 7/1/04 - 12/31/04?

Yes. You just need to have your document worded correctly. Also, if you don't want the 415 limit prorated, be wary your limitation year is not the plan year.