Off Calendar PY - Catchup and ADP Refunds

[Gilmore]

Plan has a 4/30 year end.

For the plan year ending 4/30/2019 the ADP test fails, and a catchup eligible participant has a $3000 refund recharacterized as catch (for the 2019 plan year).

The participant had deferred $8600 from 1/1/2019 to 4/30/2019.

The participant then defers the full $16400 from 5/1/2019 to 12/31/2019.  Thus they have deferred the full catchup, and also had ADP refunds recharacterized as catchup.

Am I correct that the $3000 ADP recharacterization is now an excess deferral for 2019?

If so, is the correction to distribute the excess with gain/loss adjustment?  The participant does have an inservice distribution option available under the terms of plan.

Are there any further ramifications since the excess was not distributed by April 15, 2020?

Thank you.

 

[Kevin C]

17 hours ago, Gilmore said:

Am I correct that the $3000 ADP recharacterization is now an excess deferral for 2019?

 

No.   The ADP failure at 4/30/2019 causes $3,000 of his 2019 deferrals from 1/1 - 4/30/19 to be classified as catch-up as of 4/30/19.  So, as of 4/30/19, the participant has $5,600 of regular deferrals and $3,000 of catch-up.  The next $ deferred in calendar year 2019 are regular deferrals until another $13,400 has been deferred. At that point, the participant has $19,000 of regular deferrals and $3,000 of catch-up.  The next $3,000 deferred for 2019 is catch-up. At the end of the calendar year, the participant has $19,000 of regular deferrals and $6,000 of catch-up. For the deferrals from 5/1/19-12/31/19, $13,400 is regular deferrals (and counts in the PYE 4/30/20 ADP test) and $3,000 is catch-up.

The timing rules in 1.414(v)-1(c)(3) will tell you when certain amounts become catch-up. 

Examples 5 & 6 in 1.414(v)-1(h) deal with fiscal year plans. 

[Gilmore]

Hi Kevin,

I did not ready those examples specifically, but I did see the extrapolation of those examples in the EOB.

First, I see an error in my original post.  I meant to say that the $3000 recharacterized catch up from the failed 4/30/2019 ADP is catch up for the 2019 calendar year, not the plan year, but I'm sure you already knew that.

The part that I'm struggling with, is if the $3000 was recharacterized in lieu of being distributed, doesn't that take that $3,000 off the table as far as being able to defer the additional $16,400?  It seems that I would be double dipping the catch up.  I recharacterized the $3,000 deferral for 2019, but then deferred a full $25,000 for the 2019 calendar year anyway?

If this was a calendar year plan and I deferred the full $25,000, but had $3,000 recharacterized as ADP catch up, the $3,000 would have to be distributed since I had no more catch up available.

BTW, the plan year ending 4/30/2020 also fails and the admin system is rechararcterizing $6500 of that refund as catch up for 2020. 

[Lou S.]

I agree with Kevin and the math in his post.

You get 1 catch-up limit per calendar year but in off-calander year plays you might be deemed to use some of it before you hit the 402(g) limit. Which will usually mean having to count more of the deferral in the 2nd potion of the calendar year in the next year's ADP test just like you're doing now.

[Kevin C]

On ‎6‎/‎11‎/‎2020 at 10:42 AM, Gilmore said:

The part that I'm struggling with, is if the $3000 was recharacterized in lieu of being distributed, doesn't that take that $3,000 off the table as far as being able to defer the additional $16,400?  It seems that I would be double dipping the catch up.  I recharacterized the $3,000 deferral for 2019, but then deferred a full $25,000 for the 2019 calendar year anyway?

If this was a calendar year plan and I deferred the full $25,000, but had $3,000 recharacterized as ADP catch up, the $3,000 would have to be distributed since I had no more catch up available.

BTW, the plan year ending 4/30/2020 also fails and the admin system is rechararcterizing $6500 of that refund as catch up for 2020. 

When $3,000 of deferrals are recharacterized as catch-up at 4/30/19 due to the failed ADP test, that also reduces the regular deferrals from 1/1/19 - 4/30/19  that count towards the 402(g) limit by $3,000. The end result is that the participant still gets to defer the full 402(g) limit plus the catch-up limit for the calendar year. To me, that result makes sense because the individual's maximum deferral is not affected by the plan's determination of the catch-up [see 402(g)(1)(C)]. 

A calendar year plan is a little different because a participant who defers $25,000 in 2019 has used up all of the 2019 catch-up limit before the end of the year.  402(g) triggered catch-ups are not used in the ADP test.  Also, if there is a refund due, the full catch-up limit has already been used, so none of the refund can be recharacterized.

With the participant having $6,500 recharacterized as catch-up at 4/30/20 from a failed ADP test, that means all of the participant's deferrals from 5/1/20-12/31/20 are included in the PYE 4/30/21 ADP test.  The participant still gets to defer up to $26,000 for calendar year 2020.

[Gilmore]

Thanks Kevin and Lou.

So Kevin, in effect what I think you are saying is that, with an off calendar year plan, as long as the ADP correction amount is less than or equal to the catchup limit for the calendar year in which the plan year ends, the HCE will never have to take an actual ADP refund distribution even if they have deferred the full 402(g) and catchup for the calendar year?

Or did I just oversimplify that?

[Kevin C]

I would change that slightly.  To recharacterize the entire ADP correction amount  as catch-up, it must be less than or equal to the unused portion of the catch-up limit for the calendar year in which the plan year ends, as of the last day of the plan year.   For example, if the catch-up eligible participant defers $26,000 in January 2020, you can't recharacterize any of the 4/30/2020 ADP correction as catch-up because the participant has already used up the entire 2020 catch-up limit before 4/30/20.  While that kind of situation may be rare, I have seen it happen.

[Gilmore]

The light bulb finally went off.  Thanks very much for your time and patience.

[david rigby]

1 hour ago, Gilmore said:

The light bulb finally went off. 

On?  ?

[Gilmore]

Another good point.