another fiscal year catch-up question

[R. Butler]

Plan year 03/01 - 02/28

Plan fails ADP testing at 02/28/13 & $1750 of HCE's deferrals are reclassified as catch-up.

HCE defers $23,000 during 2013 (evenly across all paychecks). It seems to me that we can classify $3,750 of that as catch-up at 12/31/2013. (The $5,500 less the amount used at 02/28/2013)

HCE defers $4,500 in January & February of 2014.

Plan fails testing @ 02/28/2014 and a large refund is required. The system is reclassifying an additional $5,500 as 2014 catch-up on top the $3,750 that we already reclassified for 2013. I think I can use $4,500 as 2014 catch-up, but I don't see that I can use more than the deferrals made during 2013.

Basically I'm think the ADP test should show $19,250. ($23,000 less $3,750 for 2013 catch-up). Up to an additional $4,500 could be called 2014 catch-up and used to reduce any refund

Am I missing something?

Thanks in advance for any guidance.

[Kevin C]

First, a nit-picky correction. The 2013 deferrals after 2/28/13 become catch-up when his year to date 2013 deferrals reach 19,250, not at 12/31/13. At that point, he has deferred 17,500 plus 1750 of catch-up (from 2/28/13). His remaining deferrals for the 2013 calendar year are catch-up.

As you note, $1750 of his deferrals are reclassified as catch-up at 2/28/13 and do not count towards the 17,500 limit for 2013. $23,000 evenly for the year is $1,916.67 per month. You didn't specify how often he is paid and I'm assuming monthly so I can work through some numbers. The $3,833.32 he defers from 1/1/13-2/28/13 ends up being $1,750 of catch-up and $2083.32 of regular deferrals. The next $15,416.68 (17,500 - 2083.32) he defers starting 3/1/13 is regular deferrals. The last $3,750 he defers for 2013 is reclassified as catch-up due to the 402(g) limit. So, for 3/1-12/31/13 he has $15,416.68 of regular deferrals and $3,750 of catch-up. He defers $4,500 from 1/1/14-2/28/14, which is regular deferrals for the ADP test. That makes $19,916.68 (15,416.68 + 4500) counted in the 2/28/14 ADP test. If your numbers are different, it will be his 3/1/13-12/31/13 deferrals - 3750 + 4500 counted in the 2/28/14 ADP test.

When you get to the refund for the 2/28/14 ADP test, the regs say the refund is reclassified as catch-up up to the extent of his unused 2014 plan catch-up limit. At 2/28/14 prior to the ADP test, he hasn't used any of his catch-up limit. The fiscal year examples in the regs all have the participant deferring more in the calendar year of the PYE (in your case 1/1-2/28) than the ADP triggered catch-up, but I don't see anything that says the reclassification of the refund works any different if they don't. If you go by the letter of the regs, the first $5,500 of his refund is reclassified as catch-up and he has used up his plan catch-up limit for 2014. So, everything he defers from 3/1/14-12/31/14 counts in the 2/28/15 ADP test.

The last question is can he still defer $23,000 for 2014? I think he can because his individual catch-up is determined without regard to the plan determined catch-up. Others may disagree.

[R. Butler]

Thank you.

I understand everything in your repsonse. You were very concise, but informative. I guess I'm still having trouble with the idea that we can reclassify something as catch-up for 2014 that hasn't actually been deferred yet in 2014.

I have no issues with the particiapnt deferring the full 23,000 in 2014 if he chooses.