deferral % based on comp limit or total comp?

[austin3515]

The auditor is ignorant. If someone makes 2,400,000 a year and elects to defer 1% of pay that is NOT a problem. It just isn't. It's that simple. The amount you are contributing is NOT based on compensation. Employee's are permitted to contribute $24,000 (if they are 50). How they get their is an administrative/operational issue.

Can I close this topic?

[StevenM]

The auditor is ignorant. If someone makes 2,400,000 a year and elects to defer 1% of pay that is NOT a problem. It just isn't. It's that simple. The amount you are contributing is NOT based on compensation. Employee's are permitted to contribute $24,000 (if they are 50). How they get their is an administrative/operational issue.

Can I close this topic?

Yes you can! As soon as you point to something official in writing that we can show the Auditor or Plan Sponsor or anyone else that disagrees with us. At the moment I have no choice but to abide by the Plan Sponsor's interpretation of how the Annual Comp Limit should be applied because I'm unable to prove that she's incorrect in her assumptions.

[austin3515]

I guess my point is it is semantics. 1% of pay = $24,000, or $2,000 a month. So if instead of electing 1% of pay, the participant instead made the exact same election, by requesting $2,000 a month the plan avoids disqualification?? How is it possible that on the one hand an election disqualifies the plan, while the exact same election worded differently does not?

How is that not proof in and of itself? 2 + 3 = 5, 3 + 2 = 5. $2,400,000 x 1% = $24,000 / 12 = $2,000 per month. These are all different ways of saying the SAME THING.

This is proof.

[K2retire]

This is proof.

But only for the logical!

The attorney who told me that it could not be done referred to the plan document's definition of compensation, which clearly says it is limited by 401(a)17. A deferral election based on a percentage of compensation, defined as the 401(a)17 limit would stop once that limit was reached according to him.

[austin3515]

Attorneys. Love 'em and hate 'em. Mostly love of course, but sometimes...

[Bill Presson]

Look at this Employee Plan News. I think this addresses the situation specifically.

https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf

It's under the "We're Glad You Asked #2"

[austin3515]

Classic IRS. They knew what the big question was but avoided it by using a fixed dollar amount election.

[401king]

This still seems to be sufficient evidence, in that they are not excluding the paychecks after November from being 401k-deferral-eligible. It seems that the ill-informed would assume that any paychecks after someone hits $265k would be ineligible for 401k deductions, regardless of whether it were a percentage or fixed-dollar.

[Kevin C]

It's been mentioned a couple of times, but I did not see any responses addressing what the plan document says. Our VS documents (EGTRRA and PPA versions) have the following language in the definition of Compensation Limit that should remove all doubt:

In determining the amount of a Participant’s Salary Deferrals under the Profit Sharing/401(k) Plan, a Participant may defer with respect to Plan Compensation that exceeds the Compensation Limit, provided the total deferrals made by the Participant satisfy the Elective Deferral Dollar Limit and any other limitations under the Plan.

[ESOP Guy]

Look at this Employee Plan News. I think this addresses the situation specifically.

https://www.irs.gov/pub/irs-tege/epn_2012_1.pdf

It's under the "We're Glad You Asked #2"

Even though the example is on a fixed dollar amount the whole passage ends with this:

What does your plan say?

Although not common, a plan can specifically require that salary deferrals cease once a participant’s compensation reaches the annual limit. If your plan specifies that salary deferrals be based on a participant’s first $250,000 compensation, then you must stop allowing Mary to make salary deferrals when her year-to-date compensation reaches $250,000, even though she hasn’t reached the annual $17,000 limit on salary deferrals, and must base the employer match on her actual deferrals

To me that makes it clear that in their (IRS') mind your plan has to specify that deferrals be based on the participant's first $250,000 compensation to get the result the auditors are talking about.

I am with Austin at this point enough evidence has been given to support the belief of the people on this board. It might not be enough for the people who are asking the question but that says more about them then the evidence.

[My 2 cents]

One presumes that if the plan DOES say that deferrals are limited to the first $250,000 of compensation, the sponsor would be at liberty, without fear of disqualification, to amend it out effective immediately. Why would one want to have such a provision?

It's January 4th, and (presumably) the issue has not come up yet this year. Check your plans and, if you find that language, consider amending it out before anyone is restricted from making the salary reduction they want by a technicality.

[Bird]

As noted way back by someone else, the burden of proof should be on the one making the (erroneous) claim that deferrals can't be made on comp over the limit. (Assuming the document itself does not have such a limit, which is unlikely at best but easily checked.)

The question here is not one of law or regulations - the question is, who is in charge and who is being paid to do what? The original poster needs to nut up and say "you're wrong because I know more about this than you do and I say you're wrong." And if they (I'm not paying that much attention...auditor or plan sponsor or whomever "they" is) still insist, then put it in writing and note that they are violating the participant's rights to make contributions and potentially causing plan disqualification by creating some arbitrary limitation not existing in the plan document.

Enough already.