I have designed a new 401(k) plan with an initial short plan year of 9/1/06 - 12/31/06. All current employees are considered to be eligible at 9/1/06 per document. Compensation for the initial plan year I chose as, "for the 12 month period ending in the initial year of participation" thinking that it would enable to owners to defer as much as they could up to the IRS limit which is also specified in the doc.

My question is, can the owners, and any other participants for that matter, defer to the $15,000 limit in the short plan year....(being limited to the ADP test of course)? I believe they can...just wanting to check.

Thank you!

The 402(g) limit is a personal tax-year limit. So they could defer that amount.

They will most likely be limited by the 5% first year, if prior-year ADP testing is elected. If NHCEs defer at sufficient rates, they could get to $15,000, but that could be tough.

Thanks, Dan.
I did select prior plan year ADP, but I chose the actual ADP for NHCEs because they all have high deferral percentages. Thank you for your help!

Does that run afoul of 415 testing? I thought for short plan years everything was prorated ('cept 402(g)).

Food for thought: Also, you may have to prorate the maximum 401(a)(17) comp limit for the short plan year if your limitation year is defined as the plan year (~$73,333 which is 1/3 of $220,000). Also, the 415 dollar amount of $44,000 would be prorated down to $14,666.66 which is less than $15k. Should the short limitation year rules apply, the only way an eligible participant could defer $15k would be if they were age 50+ and the plan allows for catchup contributions. Of course this may all be a moot point if your limitation year is defined as the calendar year.

Yes, to answer BG5150, if the plan year and limitation year are the same, then the $44,000 limit is prorated based on the number of months in the short plan year. So, my 415 limit would be $11,000.

Yea, gotta think of that prorating!


After they hit this limit, can they make a catch-up contribution? I would think they can.

Oops! jae3207 just answered my question!

Thanks!!!!