FAQ 114: 401a4--Use actual mos. option


Under Compensation Options on the 401(a)(4) test setup screen, there is a box titled "Use actual mos.". I don't see any information on the Help screen regarding this. Could you give me some information on what this field affects?


Our 401(a)(4) test uses monthly compensation to calculate the participants' accrual rates. The monthly compensation is calculated based on the annual compensation that is stored in the employee's record. For the majority of participants, their annual compensation is just divided by 12 to arrive at their monthly compensation figure. In the case of current year terminees and new entrants, though, the system determines the number of months to use as the denominator based on their date of termination or their date of entry.

Since our clients seem to want to handle terminees and new entrants in different ways, based on their interpretation of the regs, we decided to add an option to allow them to choose which way the monthly compensation should be calculated. When the "Use actual mos." box is left checked, the system will use the actual number of months that the person was employed during the year as the denominator when determining the monthly compensation to use. When the "Use actual mos." box is unchecked, the system will use 12 as the denominator when determining the monthly compensation to use.

So, for example, given a 3/31/2008 plan year end, and an employee that entered on 10/1/2007, but terminated on 3/15/2008, his monthly compensation would be calculated as follows:

Employee's annual compensation is $77,000.00

1) "Use actual mos." checked:

Employed for 11 months during the plan year (April through February, March doesn't count since the date of termination is 3/15/2008)

77,000.00 / 11 months = 7,000.00 monthly comp

2) "Use actual mos." unchecked:

Always uses 12 months as the denominator

77,000.00 / 12 = 6,416.67 monthly comp