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100% Deferral


BTG

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I am aware that there are similar threads already started (e.g., benefitslink.com/boards/index.php/topic/58007-100-deferral), but they all seem to gloss over the particular issue I'm focused on.

My question is: Where a plan permits a participant to defer up to the maximum amount that will not cause a 402(g) or 415 violation, and a participant elects to defer 100% of his compensation, can the plan administrator administratively apply the deferral election to compensation after payroll taxes and other similar deductions, absent something in the plan document to this effect? That approach seems a little aggressive to me, but I'm guessing it happens frequently when someone defers 100%.

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Of course. That's what you're doing, in effect. You're deferring 100% of the cash that the participant would've otherwise received had they not elected to defer it to the plan. FICA is coming out anyway.

When you defer pretax, this will reduce your Federal Income Tax withholding and [state Income Tax withholding (in most instances)]. So, that is a non-issue (you're overthinking it :)).

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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ETA, I generally agree with you with respect to the income tax withholding, but I'm not sure I can quite get there on the payroll tax side.

If the plan says that the participant can defer 100% of "Compensation," and Compensation does not exclude amounts withheld for FICA, etc., doesn't this practice fail to square with the plan document?

Moreover, aren't the amounts withheld for FICA still includible in income for purposes of income tax withholding? And wouldn't that income tax withholding further reduce the amount available for deferral? (See explanation in previous thread here: http://benefitslink.com/boards/index.php/topic/58007-100-deferral-limited-to-90-by-payroll-provider/?p=255467)

Again, on a practical level, I can appreciate your approach of just deferring whatever's left. I'm just failing to see where that approach is authorized by the language of the plan document (which, by the way, is a widely-used volume submitter doc). Am I missing something? Because I would really like to be missing something. :)

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I think you first carve out FICA/Medicare taxes, state and local income taxes (if applicable) and other authorized payroll deductions (e.g., deductions for voluntary life insurance, United Way contributions, etc.), and THEN you apply the 100% salary reduction. No IRS agent is going to blink at that.

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My question is: Where a plan permits a participant to defer up to the maximum amount that will not cause a 402(g) or 415 violation, and a participant elects to defer 100% of his compensation, can the plan administrator administratively apply the deferral election to compensation after payroll taxes and other similar deductions, absent something in the plan document to this effect?

I'll put the question back to you - what are you (or anyone else) gonna do to enforce an election of 100%? You can't. So I think it's ok to interpret that with a caveat of "to the extent administratively feasible."

I get it - we can all obsess over details. But this isn't an issue.

Ed Snyder

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