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Fiscal Year Catch-Up


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#1 Kevin C

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Posted 22 March 2011 - 12:40 PM

I'm reviewing an ADP test for a fiscal year plan and have concerns about the amount of deferrals counted in the ADP test and for 402(g).

3/1 - 2/28 plan year.
Owner age 50+, compensation well over $245,000.
$22,000 of deferrals from bonus in July 2009, no other deferrals for calendar year 2009.
$22,000 of deferrals from bonus in July 2010, no other deferrals for calendar year 2010.
ADP test failed at 2/28/2010 and owner had $1,600 re-classified as catch-up.

The valuation system is showing $3,900 of catch-ups for plan year ending 2/28/2011 and counting $18,100 of deferrals in the ADP test. The system also shows the participant did not exceed 402(g).

I agree with the system's catch-up determination. It's the other two pieces that don't look consistent. If the participant did not exceed 402(g) for 2010, then any deferrals in excess of $16,500 are catch-up and are not included in the ADP test. If you take the approach that he used up $1,600 of his catch-up limit before making his deferral in July 2010, his maximum allowable deferrals would be $16,500 + the remaining $3,900 of catch-up for a total of $20,400. So, the $22,000 deferral would have exceeded 402(g). I don't see how you can count part of his July 2010 deferrals as the 2/28/2010 ADP triggered catch-up when determining 402(g), but not when you do the 2/28/2011 ADP test.

Any opinions on how much of the deferrals count in the ADP test and whether or not he exceeded 402(g) for 2010?


Here is a prior discussion on fiscal year catch-ups where Mike Preston mentions a difference of opinon on how to treat the ADP triggered catch-up in this situation.

http://benefitslink....showtopic=38597

#2 Lou S.

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Posted 22 March 2011 - 01:21 PM

His July 2009 should be $16,500 + $5,000 catchup. So the $16,500 woul go in the 2/28/10 test. Which it looks like you failed and you recharateize $1,600 as ctachup.

He is still allowed to put in the $22,00 in 2010 but you have already used up $1,600 of the catchup for the 2/28/10 test so $18,100 (since $3,900 is charaterized as catchup 7/2011) so you have a $5,500 catchup for calendar year and you are OK.

But you didn't have to make a refund for 2/28/10 becuase of recharaterization - esentially you sort of got a $7,100 "catchup" for the FYE ending 2/28 due to timing of how you hit the 402(g) limits between CYE and FYE.

What you are doing is pushing the problem into future years as more and more of the $22,000 is going to go into the test if deferral patterns of HCEs and NHCs don't change.

It looks like your system is working fine.

#3 justatester

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Posted 22 March 2011 - 02:21 PM

Wouldn't the participant be limited in calendar year 2010....as of 2/28/2010, he has $1600 in catchup up which leaves $20,400 for availabe 402(g) between March 1 and 12/31/2010 ($16,500 in reg def and $3900 in catchup). So he is not able to put in the full $22,000?

#4 Kevin C

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Posted 22 March 2011 - 02:23 PM

He is still allowed to put in the $22,00 in 2010 but you have already used up $1,600 of the catchup for the 2/28/10 test so $18,100 (since $3,900 is charaterized as catchup 7/2011) so you have a $5,500 catchup for calendar year and you are OK.



The only way he could defer $22,000 in July 2010 is if $5,500 of that is treated as catch-up. If he had deferred $2,000 in January and $20,000 in July, the catch-up Regs get you there. Basically, you treat the January 2010 deferral as part of the 2010 catch-up. But, if $5,500 of his 2010 deferrals are catch-up, why would you count part of the catch-up in the ADP test?

#5 Lou S.

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Posted 22 March 2011 - 02:53 PM

Wouldn't the participant be limited in calendar year 2010....as of 2/28/2010, he has $1600 in catchup up which leaves $20,400 for availabe 402(g) between March 1 and 12/31/2010 ($16,500 in reg def and $3900 in catchup). So he is not able to put in the full $22,000?

The way I read the regs (and I could be wrong on this) is that you get a $16,500 402(g) limit and $5,500 414(v) limit on a calendar year basis.

The fact that Non-CYE plan testing gets screwy shouldn't effect the ability to put in $22,000 from 1/1 - 12/31 if you are catchup eligible but what gets recharatized, how, and when, along with what may or may not need to be refunded is why I hate Non-CYE 401(k) plans.

#6 Kevin C

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Posted 23 March 2011 - 09:09 AM

justatester, I think a literal reading of the regulations gets the result you describe. The interesting part is that if he had spread his deferrals out so that he deferred at least $1,600 in the early part of 2010, the regs are clear that he could still defer $22,000 for the 2010 calendar year.

So, do the regs intend for someone who defers once a year in a fiscal year plan to not be able to defer the full $22,000 in this situation? Or, should he still be able to defer $22,000 despite the timing issues?

Either way, I don't see how the software we use is correct in counting $18,100 in the ADP test. Either he could defer $22,000 and $16,500 counts in the ADP test or he could only defer $20,400 and $16,500 counts in the ADP test. Am I missing something?

#7 justatester

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Posted 24 March 2011 - 07:17 AM

I am not sure if that what the reg intended participants to be limited, but that is how we handle the situation. I would agree in either case only $16,500 should be tested.

#8 Tom Poje

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Posted 24 March 2011 - 07:59 AM

the deferral limit of 16,500 is an individual limit, and a calendar year limit. Its not a plan limit. A plan is only required to limit someone to prevent them from deferring too much in a calendar year (and these totals show on the W-2)when you have an off calendar year plan then it certainly is possible to have more than 16,500 show up on the test, as far as I know.

bah. I must find a way to stop filing dead lines from coming


#9 Kevin C

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Posted 24 March 2011 - 08:46 AM

I realize that it's possible to have more than $16,500 in a fiscal year ADP test, I just don't think it happens in this particular case. This person deferred $22,000 from a single bonus check and did not defer anything else during the plan year. He can only defer that much if $5,500 of his deferrals are treated as catch-up and therefore excluded from the ADP test. The software is saying he did not exceed 402(g), but is counting $18,100 in the ADP test. To me, those two results are inconsistent.

I wanted to make sure I'm not missing something before I contact the software people.

#10 Lou S.

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Posted 24 March 2011 - 10:44 AM

I realize that it's possible to have more than $16,500 in a fiscal year ADP test, I just don't think it happens in this particular case. This person deferred $22,000 from a single bonus check and did not defer anything else during the plan year. He can only defer that much if $5,500 of his deferrals are treated as catch-up and therefore excluded from the ADP test. The software is saying he did not exceed 402(g), but is counting $18,100 in the ADP test. To me, those two results are inconsistent.

I wanted to make sure I'm not missing something before I contact the software people.

Aren't you missing that the software already treated $1,600 as cacthup in the prior FYE? Either you weren't allowed to recharaterize that and should have refunded it or you were allowed to recharaterize it and can't count it as catchup in the next FYE.

#11 Kevin C

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Posted 28 March 2011 - 10:07 AM

I don't think I'm missing that. At 2/28/2010 when the ADP test is done, he has not used any of his 2010 catch-up, so the $1,600 gets reclassified as catch-up. That makes his remaining catch-up limit $3,900. The issue is how you apply examples 5 & 6 of 1.414(v)-1(h) to his deferrals for the rest of the calendar year. Does the timing of his deferrals prevent him from deferring the full $22,000 for the calendar year? The answer depends on how you interpret the regulations. It appears to me that the system uses one interpretation when it checks the 402(g) limit and the opposite interpretation when it is doing the ADP test.

#12 Lou S.

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Posted 28 March 2011 - 11:47 AM

I don't think I'm missing that. At 2/28/2010 when the ADP test is done, he has not used any of his 2010 catch-up, so the $1,600 gets reclassified as catch-up. That makes his remaining catch-up limit $3,900. The issue is how you apply examples 5 & 6 of 1.414(v)-1(h) to his deferrals for the rest of the calendar year. Does the timing of his deferrals prevent him from deferring the full $22,000 for the calendar year? The answer depends on how you interpret the regulations. It appears to me that the system uses one interpretation when it checks the 402(g) limit and the opposite interpretation when it is doing the ADP test.

He is an HCE right? He did in fact have a deferral of $22,000 from 3/1/10 - 2/28/11 right? I mean it came out of his check and was depoisted in the plan in July in one lump sum. So even if your interpuration leads you to believe he is over the 402(g) limit you would still have to test the $16,500 + $1,600 = $18,100 in ADP because 402(g) excess deferrals are always tested in ADP for HCEs and never tested in ADP for NHCEs. I forget the exact cite but I'm sure that is true.

Now the question becomes is the $1,600 a 402(g) excess in 2010? Under both example 5 & 6 the participant is allowed to defer the full 402(g) + 414(v) limit for the calendar years. It just becomes a question of which plan year and how much is tested in both examples more than the then $15,000 is tested in at least one PYE.

I still believe under this set of facts and circumstances that $18,100 is the correct amount to be tested in the PYE 2/28/11 ADP and that the $1,600 that was recharaterize as catchup for PYE 2/28/10 does not now limit the participant to $20,400 ($22,000 less $1,600 recharaterized) calandar year limit in 2010.

Now the position might be that becuase actual deferrals were $0 for 1/1/10 - 2/28/10 that the $1,600 was not eligible for recharaterization on the 2/28/10 ADP test and as such you should have done a refund last year, but I don't see anything in black and white on point that would support that though if someone has an citation I'd be more than happy to rethink my position on it and admit that I'm wrong.

#13 Kevin C

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Posted 30 March 2011 - 09:31 AM

Yes, he's an HCE and he deferred the entire $22,000 in July 2010.

I think what was confusing me is how part of his July 2010 deferral could be reclassified as catch-up as of a date in the prior plan year, but be counted in the ADP test in the current plan year. But, since we are talking about IRS regulations, it doesn't have to make any sense. I think I'm finally getting what you are saying.

So, part of his July deferral counts as the $1,600 ADP triggered catch-up at 2/28/10. It ends up being counted in ADP testing for PYE 2/28/11 because it was actually deferred in PYE 2/28/11 and ADP triggered catch-ups are not excluded from the ADP test. The $1,600 is catch-up, so it doesn't count against his 2010 402(g) limit. His other $20,400 of deferrals from the same check are $16,500 of regular deferrals and the remaining $3,900 of catch-up is triggered by the 402(g) limit. The PYE 2/28/11 ADP test counts his $16,500 plus the $1,600 ADP triggered catch-up, or $18,100.

That result works better than having him limited to $20,400 of deferrals for 2010 because of the timing of his deferrals.

#14 Lou S.

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Posted 30 March 2011 - 11:21 AM

I think what was confusing me is how part of his July 2010 deferral could be reclassified as catch-up as of a date in the prior plan year, but be counted in the ADP test in the current plan year. But, since we are talking about IRS regulations, it doesn't have to make any sense. I think I'm finally getting what you are saying.

I think I agree with you 100% on the bold.