I hate short plan years

When drafting new 401(k) plans for clients during the middle of the year, I like drafting them with an effective date of the first of the year and with deferrals effective as of when they can run the plan with payroll. Like with Apple, I think simplicity is the ultimate sophistication. A short plan year requires a proration of the annual compensation limit. This could be an issue if Highly Compensated Employees want to maximize their deferrals in a non-Safe Harbor plan and with the short plan year, are the only ones that could do that.

Of course, what I like is irrelevant to the plan sponsor who may have to fund contributions. By pro-rating the Plan year and the compensation, they pro-rate their contributions and could save some serious money, especially if the plan is a safe harbor. I like what I like, but I let plan sponsors figure out how to spend their money.

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