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$40,000 P-S Contribution and $1,000 401(k) Catch-up permitted?


billfgrady

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In a 401(k) profit sharing plan where all plan participants make maximum compensation under 401(a)(17) and all participants want to "max-out" with $40,000 pension contributions, the plan contributions can be structured in one of two ways in 2002: (1) $40,000 PS contributions and $0 401(k) elective deferrals or (2) $29,000 PS contributions and $11,000 401(k) elective deferrals. Taking into account catch-up contributions, 414(v) does not seem to prohibit a catch-up contribution to participants in the first plan setting described above (i.e., $40,000 PS and $0 401(k)). In other words, can a catch-up contribution of $1,000 be made to the 401(k) account of a participant in a 401(k) PS Plan where the participants are not otherwise deferring compensation at all because they've reached their respective 415 limitations with PS contributions?

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Guest yukon

Take a look at the "end of the plan year" language in Prop Reg 1.414(v)-1(B)(2). The timing rule for statutory limits seems to imply an ordering methodology for making the catch-up determination. First you check for 402(g) excesses (not applicable here). Then you check for statutory excesses (415 included). Then you apply ADP/Plan limits to determine excesses. The excesses in these cases are counted toward the catch-up contribution....up to the catch-up limit.

In short...I think you can do this. The $1000 is considered a standard deferral until the end-of-year determination is made. It's then recharactarized as a catch-up contribution.

Anyone think I'm nuts?

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What if this is a fiscal year plan (06/30/03)?

My client will make $300,000 for the 02/03 year, but only $60,000 for the 03/04 year (he is 50+).

I want him to fund $40,000 PS and $2,000 catch-up pre-6/30/03 (since he hit 415, the first deferral turns into a catch-up on 6/30/03). Then from 07/01/03 - 12/31/03 he contributes $12,000 as the regular deferral, so he does $14,000 in 2003 but the catch-up is the first money in (pre 6/30).

Then 1/1/04 - 6/30/04 he does another $16,000 ($13,000 + $3,000). Plus the PS of $15,000.

Is it possible that the catch-up could be the first deferral of the calendar year in a fiscal year plan?

CBW

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I agree that this scenario will work. Do you see any problems if only select employees defer 0% and then make a catch-up contribution? I have a client that uses new comparability- the owners receive an employer contribution up to the 415 limit- they do not defer. Other HCEs do defer. It seems that if they just choose to defer 1k, they will not be prevented from getting the 40k, as the 1k can be classified as a catch-up. It seems this will work, but it strikes my as not in the spirit of the law- thoughts?

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I have a problem with your statement

"employees defer 0% and then make a catch-up contribution"

I don't think someone really 'makes' a catch-up contribution.

It is just that the deferral is treated as such due to a limit being hit.

In the example being discussed, it sounds more like

ee defers $1000 and receives a $40,000 profit sharing contribution. EE has gone over the annual addition limit. Hopefully the document allows for the return of deferrals in case of an annual addition violation. Otherwise, I think you would have to limit the profit sharing contribution. Maybe I am too conservative on that approach. (And if there is a match involved, then you have another possible issue to consider)

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In other words, then, Tom you did not believe that a catch-up contribution of $1,000 can be made to the 401(k) account of a participant in a 401(k) PS Plan where the participants are not otherwise deferring compensation at all because they've reached their respective 415 limitations with PS contributions (40k)? (there is not a match involved).

The catch up is not included in the 415 limitation. If the plan is designed to give a participant age 50 a 40,000 PS contribution and the person defers 1,000- why could we not classify the 1,000 as a catch-up and allow the 40,000 PS? Has the person not reached a limit and therefore any deferrals up to 1,000 over that limit are considered a catch-up?

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sort of, if that makes any sense, and depending on how things are worded in the document.

under the 'explanation of provision' to the proposed regs on catch-ups is the following

A. Explanation for Catch-Up Contributions

Under these proposed regulations a participant is a catch up eligible particiapnt, and thus is permitted to make catch-up contributions, if the participant is otherwise eligible to make elective contributions under the plan and is age 50 or older.

(Federal Register vol 66, no 205/tuesday Oct 23, 2001)

Now, if the ee was capped at 0% for deferrals, is he eligible for catch up since he reached a limit?

I would say no, because such an ee was not otherwise eligible to defer.

In your case, you are saying the ee is not capped at 0, but rather deferred 1000 and because of 415 violation, the 1000 is treated as catch-up. My comment on that is simply, if the document says correction of annual addition is to reduce the profit sharing and hold in suspense, then I think you have no catch-up. My logic being, ee is treated as having 1000 deferral and 39000 profit sharing. If your document says that step 1 is to return deferrals first, then I would say that amount could be treated as a catch-up.

Interesting, which come first, the chicken or the egg.?

My understanding of catch-ups was that

1. a violation occurred. (Failed test, deferral limit hit, etc.)

2. Deferral Money should be distributed - at least in all cases I have seen it involved a possible distribution of deferrals.

3. Treat the deferral money as a catch-up instead.

in the case of 415 you have

1. a violation occurred

2. Money should be distributed. (Depending on the document it might be deferral, but it might not be.)

3. ??????????

As I said, maybe I am too conservative. I would hold, depending on the terms of the document, you might never have an annual addition violation, because the 415 violation is never 'reached' because of the deferrals, because the cap on the profit sharing contribution is reached first. Generally, deferrals are made first during the year then the profit sharing is made. I suppose the timing of contributions might even make a difference. First the 40,000 went in, then the ee deferred 1000 and hit the limit, but that would be an unusual order in most cases.

Fortunately, most documents allow for return of deferrals as step 1.

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Tom, I, for one, think you are indeed being too conservative. The whole purpose of the reg is to have you look at what the limits of the plan are and apply the $1,000 if the limits are exceeded. In the case of the 415 limit violation, there isn't a violation because the catchup is applied before the actual violation of 415. It just doesn't make any sense to me any other way.

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Catch-ups can be made after the ee hits one of three limits: 402g, plan's deferral limit or adp test. In this case, the ee has not hit any of those limits. It's the ee's choice wheter or not to make elective deferrals and get the maximum amount of PS. Since he/she could have made deferrals and did not hit any of the limits, I would think that a catch-up contrib is not applicable.

Remember: two wrongs don't make a right, but three rights make a left.

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I disagree. The preamble to the regulations makes it clear:

"catch-up contributions would be determined by reference to three types of limits: statutory limits, employer-provided limits and the ADP limit. A statutory limit is a limit contained in the Code on elective deferrals or annual additions permitted to be made under the plan...."

That clearly encompasses the annual additions limitations of 415.

If you change your "402(g)" to "any statutory limit, such as 402(g) or 415©" then I will agree.

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