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Off Calendar Year Catch-Up Contributions


buckaroo
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3/31/07 Plan Year:

Participant defers $20,000 in September 2006, and nothing else in the Plan Year.

ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups.

Participant defers another $20,500 in September 2007, and so has deferred the max under 402(g) for 06 and 07.

3/31/08 Plan Year:

Participant defers $20,500 in September 2007 (as mentioned above).

3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups.

Participant defers another $20,500 in September 2008.

So now (unless I screwed up) the participant defers the 402(g) max in 06, 07 and 08, despite failing the ADP test miserably in each year. Same circumstances with a calendar year plan, the HCE gets cash refunds of $5,000 in each year. I'd be doing a disservice NOT to switch to a 1/31 year end.

PLEASE tell me I'm missing something!!!

Austin Powers, CPA, QPA, ERPA

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I just ran your last scenario through my spreadsheet and it seems to require a refund for the 3/31/2008 plan year because the dollar amount of deferrals that is taken into account as of 3/31/2008 in the ADP test is the full $20,500, not the $15,500. Yes, there is a $5,000 catch up available, but it is taken into account by the amount in excess of the 402(g) limit and hence there is nothing left to allow the exceess ADP deferrals of $5,000.

Is your scenario the same as Buckaroo's? Should we just start this whole thing over again? I'm willing if you are.

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the dollar amount of deferrals that is taken into account as of 3/31/2008 in the ADP test is the full $20,500, not the $15,500.

Why do you say that? The 402g was exceeded by $5,000, so I should only take the $15,500???

But regardless, the refund could still be the $5,000 even if you take the full $20,500 into account.

Austin Powers, CPA, QPA, ERPA

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I guess the cryptic nature of the posts has me confused. Care to lay out the numbers? When you say that:

3/31/07 Plan Year:

Participant defers $20,000 in September 2006, and nothing else in the Plan Year.

ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups.

Does this mean that you took into account the entire $20,000 and then determined the refund should reduce his deferrals from $20,000 to $15,000 and then because that was $5,000 treated it all as 2007 catchups? Or are you saying that you treated $5,000 as catchups for 2006 since the $20,000 was made in 2006 and therefore you took into account only the net of $15,000 and then determined the refund should reduce his deferrals from $15,000 to $10,000 and then because that was $5,000 treated it all as 2007 catchups? Which is it?

Participant defers another $20,500 in September 2007, and so has deferred the max under 402(g) for 06 and 07.

3/31/08 Plan Year:

Participant defers $20,500 in September 2007 (as mentioned above).

3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups.

Participant defers another $20,500 in September 2008

Sem question.

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REWRITTEN

3/31/07 Plan Year

Participant defers $20,000 in September 2006, and nothing else in the Plan Year.

Only $15,000 of deferrals are taken into account because $5,000 exceeded the 2006 statutory 402g limit.

ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups.

3/31/08 Plan Year:

Participant defers $20,500 in September 2007 (as mentioned above).

Only $15,500 of deferrals are taken into account because $5,000 exceeded the 2007 statutory 402g limit.

3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups.

Participant defers another $20,500 in September 2008

Austin Powers, CPA, QPA, ERPA

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3/31/07 Plan Year

Participant defers $20,000 in September 2006, and nothing else in the Plan Year.

Only $15,000 of deferrals are taken into account because $5,000 exceeded the 2006 statutory 402g limit.

That $5k is a 2006 catchup because, as of 12/31, the 402g limit had been exceeded

ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups.

This $5k is a 2007 catchup because it is available.

3/31/08 Plan Year:

Participant defers $20,500 in September 2007 (as mentioned above).

Only $15,500 of deferrals are taken into account because $5,000 exceeded the 2007 statutory 402g limit.

But at this point, the 2007 catchup is all gone, so the plan sponsor must send $5,000 out of the plan due to it being a 402g violation.

3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups.

That's ok, the 2008 catchup limit wasn't invaded above, so it is available.

Participant defers another $20,500 in September 2008

As with the point above, $5k must be refunded because the 2008 catchup has already been used.

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"But at this point, the 2007 catchup is all gone, so the plan sponsor must send $5,000 out of the plan due to it being a 402g violation"

But that's the whole point of my frustration: the regs indicate that it is NOT gone.

See example 5, paragraph (v), which indicates that when determining available contributions for the remainder of the calendar year, the following formula applies (I pulled this from lengthier text):

401k-Max Less (YTD-401k Less "YTD Catch-Ups Used"**) PLUS Catch-Up-Max Less "YTD Catch-Ups Used"**.

First and foremost, please tell me if you don't think the example says this. If you agree, then you should also agree that the expression above simplifies to:

401k-Max Less YTD 401(k) Plus Catch-Up-MAX

which further simplifies to the participant can always contriubte the max in any calendar year without regard to failing the ADP test.

Why do I say this? If you look at the first "YTD Catch-ups Used" you'll notice that it is subtracting a negative, and you are therefore ADDING it to the contributions available for the rest of the year. Note further that at the end of the expression you are "really" subtracting catch-ups used, and so the two terms cancel out, leaving behind what I indicated above.

And so you see my conclusion is that there is a simple and basic math error in the final regulations. Again, PLEASE tell me I'm missing something...

Austin Powers, CPA, QPA, ERPA

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I say the gov't makes a rule dis-allowing catchups for non-calendar year plans. Maybe this way, they will all amend to be calendar year plans and make life a lot easier for me.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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  • 2 months later...

ok - I need HELP (probably much more than this !? but that's another story)...

Off calendar plan year 07/01/2006 through 06/30/2007. ADP fails - HCE who contributed $7800 for the plan year is due a refund of $4,012.80. He is over 50 so $4,012.80 is reclassified as catchup; no refund necessary; so far so good.

Plan year is switching to a calendar year for 2008. I am completing a short plan year val from 07/01 - 12/31/2007. HCE mentioned above contributed $3,750 from July - December '07. Short Plan year ADP fails - software reports refund required to said HCE of $2,003.30 and then recharacterizes the $2,003.30 as catchup and reports there is no refund due.

Is this accurate?? OR is $987.20 of the 2nd test refund allowable for catchup reclassification and the HCE must take an actual refund of $1,016.10 plus G/L?

Thanks in advance.

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Austin,

I think your formula for remaining deferrals is slightly off. The formula should be:

401(k) Max – Deferrals counted towards the 401(k) Max + Remaining catch-up limit.

Or:

401(k) Max - (YTD 401(k) – YTD 401(k) treated as catch-up) + Catch-up Max – YTD catch-ups used.

In your post 31 example, the 2008 catch-up limit is used up by the ADP test failure at 3/31/2008, even though he didn’t defer anything for 2008 until September 2008. I don’t see how any of his deferrals in September 2008 can be excluded from counting towards the 402(g) limit when he had used up the entire catch-up limit for 2008 before the deferrals were made.

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You say:

401(k) Max - (YTD 401(k) – **YTD 401(k) treated as catch-up**) + Catch-up Max – **YTD catch-ups used**

But I say what you say could also be said as this:

401(k) Max - (YTD 401(k)) + Catch-up Max

Why do I say this? Because (and I've said this before), the two terms enclosed in asterisks are certainly one and the same. Further, because the first parenthetical statement is begins SUBTRACTED, that means that the first **ed term is being added to the 401k max. Because you are later subtracting the exact same amount, the two terms cancel. I'm pretty sure I went through an example before, but who can keep track. You'll need to tell me where my math is flawed before I'll concede defeat.

Austin Powers, CPA, QPA, ERPA

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Austin - for your formula, before I start thinking about this, is the "YTD" that you refer to the plan year, (since we are looking at off-calendar year) or the calendar year 402(g) limit? Just in case it makes any difference when I attempt to go through this exercise.

I'm not mathematically inclined, so I have to go through the steps very S L O W L Y.

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Austin,

The two items in asterisks are NOT the same. The first item is the portion of the 2008 deferrals that is treated as a catch-up. The second is the portion of the 2008 catch-up limit that has already been used. Your example shows they are not always the same amount.

For your example, the portion of 2008 deferrals treated as catch-up is $0. The previously used portion of the 2008 catch-up limit is $5,000. The full 2008 catch-up limit was used up by the ADP test failure at 3/31/2008, but he had not deferred anything for 2008 at that point. Once his 2008 deferrals started, he had no 2008 catch-up available, so none of his 2008 deferral was a catch-up.

Belgarath,

In my version, the YTD is calendar year to date.

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Austin,

Sal’s example is the same as example 5 from the regulations. But, that is a different situation than your example. In Sal’s example, the participant made deferrals in the 2006 calendar year before the 10/31/06 plan year end. In your example, there are no deferrals in the calendar year before the end of the plan year. I think that is an important difference.

The real question from your example is if you don’t defer at all from 1/1/07 – 3/31/07 and have $5,000 of ADP refund reclassified as 2007 catch-up on 3/31/07, is there an unused catch-up amount available for deferrals made from 4/1/07 through 12/31/2007? I think that no further catch-up is available for deferrals from 4/1/07-12/31/07 because the full 2007 catch-up limit was previously used on 3/31/07.

Look at 1.414(v)-1(3)©(1). The first sentence says:

“(1) General rule. --Elective deferrals with respect to a catch-up eligible participant in excess of an applicable limit under paragraph (b) of this section are treated as catch-up contributions under this section as of a date within a taxable year only to the extent that such elective deferrals do not exceed the catch-up contribution limit described in paragraphs ©(1) and (2) of this section, reduced by elective deferrals previously treated as catch-up contributions for the taxable year, determined in accordance with paragraph ©(3) of this section. “

What you seem to be saying is that if you defer $0 from 1/1 – 3/31 and have $5,000 reclassified as catch-up on 3/31 from the ADP test failure, then you count $0-$5,000, or negative $5,000 in deferrals towards the 402(g) limit. It would be nice if the IRS thought it worked that way, but I don’t see how you get there from the regs. Now if, like in Sal’s example, there were more than $5,000 in deferrals from 1/1- 3/31, I do see how $5,000 of those deferrals would be treated as catch-up and not count towards the 402(g) limit.

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Forget my example. Everyone (but me) seems to think that if you fail the ADP test for the 9/30/06 plan year, and reclass all of your refunds as catch-ups (to the tune of $5,000), that you should be limited to $15,000 of 401(k) for all of 2006 (i.e., $10,000 of regular 401(k), plus the $5,000 of catch-ups that were used up during the ADP test.

But in Sal's example, the failing HCE still gets to contribute the full $20,000, which in my opinion is based on the math error in the regs that I set forth above. This is despite his failing the test and consuming catch-ups to avoid refunds. In what way is this particular HCE adversely affected? Unless my calculator is broken, he is completely indifferent to failing the test.

Austin Powers, CPA, QPA, ERPA

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