Catch-up Rechartization after Failed ADP

[Guest A_Dude]

Does someone know if this is allowed or not? In my ASPPA books it only addresses the fact that deferrals can be recharacterized after failing the ADP Test. Not whether the individual is the HCE getting the refund.

Here is the scenario:

2 HCEs:

The top paid/ highest deferring HCE is not eligible for catch-up (under 50). He is the only HCE required to do a refund under the failed ADP test correction.

The other HCE is elegible for catch-up. He only deferred $7,500, so by using catch-up on him we could make his deferral rate go way down.

All in all, even by doing this they would still fail the ADP test. They would fail by a much lesser amount, which would significantly decrease the refund needed for the top HCE.

Does the HCE have to need a refund for the catch-up recharacterization after failing the ADP Test, or does the ADP test just need to fail and all HCEs' who are catch-up eligible can have their deferrals recharacterized if possible?

Thanks in advance!

[BG5150]

In the two-step process of correcting an ADP test, you first determine the total dollar amount that needs to be removed from the plan by leveling down the HCE %'s starting with the higher %'s.

The second step is to determine the excess contributions by leveling down the HCE's contributions, starting with the highest.

It is then you know what each person's excess contribution is and then you can apply any left-over catchup in order to offset any refund.

In your case, only the highest-deferring HCE has an excess contribution. And since he is not yet 50, there is nothing to re characterize.

[ETA Consulting LLC]

Not whether the individual is the HCE getting the refund.

You may want to read that one again. If he is not the one that would be otherwise required to take the refund of deferrals, then he would not be the one considered to have exceeded the "Plan Limit". I say plan limit because it's the plan's ADP test. You must be the one who has exceeded a Plan or Statutory limit in order to be considered for catchup. Hence, if you're not otherwise required to take a distribution for a failed test, then you have exceeded that limit.

Good Luck!

[Tom Poje]

if I understand your comments, it sounds like you want to do the following:

because I have an 'oldie', I run the ADP test treating old HCE as having 2000 deferral and 5500 in catch up beacuse that will help the test.

But that is impermissible.

You first run your test using all deferrals (except those amount over the 17,000 limit)

then if the test fails, you can treat any additional amounts as catch, but only on a top-down basis (he who deferred the most)

[Guest A_Dude]

Gotcha, the book wasn't clear on the specific individual failing or wether you could expand that to the HCEs as a group.

On a side note, do you guys find yourselves arguing with ADP and the like that there is no election needed for catch-up. The document must allow it, but there is no individual election needed. And, there is no catch-up "bucket" until you hit the Deferral limit, or other "plan limit."

[ETA Consulting LLC]

Arguing with ADP? Are you referring to the test or the company; major differences.

You are correct that there is no "separate bucket". All the concept of catch-up does is to increase the limit on what an individual who is age 50 or older may defer. It's still a deferral. You must exceed "a plan or statutory" limit in order to utilize.

Good Luck!

[Guest A_Dude]

the company, we deal with some payroll companies that insist a particpant must make a seperate election to have catch-up.

[ETA Consulting LLC]

I would challenge them to show me that language in the plan document. When we say a plan is "Qualified", we are saying that they are established and operated pursuant to section 401(a) of the Internal Revenue Code. The FIRST rule in 401(a)(1) is that the plan must be operated pursuant to the terms of a written plan. These are the basics. In many instances, the first argument you would make is "show me that language in the plan". You'd even see that written on this board many times; "what does the written plan say?".

If the individual refuses to reference the plan, they are proving to be an unreliable reference.

Good Luck!

[GMK]

the company, we deal with some payroll companies that insist a particpant must make a seperate election to have catch-up.

I've seen this in deferral election forms that ask for separate elections for deferral and catch-up.

I guess this might be appropriate where people specify dollar amounts ... maybe,

but for percentage elections, how do you figure out what percentages to list?

And in either case, what's the point? It ain't catch-up until you defer the applicable limit, and then it is (subject to plan rules).

[Tom Poje]

well, there is an exception to the rule, so perhaps that is what or why the payroll 'requires' what they have.

from the preamble:

These final regulations retain the rule in the proposed regulations that a plan that changes an employer-provided limit during the plan year is permitted to use a time-weighted average of these limits as the employer-provided limit. For example, under this alternative method, a plan that provides for an employer-provided limit of 8% for the first 6 months of the plan year and 10% for the second 6 months is permitted to use 9% as the employer-provided limit for the plan year. These final regulations also provide that the plan is permitted to use the definition of compensation used for ADP testing purposes for this weighted-average simplification, and can use this alternative method without regard to whether the employer-provided limit is changed during the plan year.

so if the plan has a cap (e.g. 8%, the person might designate 8% deferral and the rest catch up) but that is about the only scenario I can think of. even then, if the person stopped deferring during the year it would wipe out any earlier 'catch-up', so its kind of silly to have some type of requirement.

[K2retire]

I know that the rules that apply to qualified plans don't apply to government plans, but I was always amused that my husband's Federal Thrift Savings contributions were separately classified as deferrals and catch up, even though his deferrals were usually less than any other limit.