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PS effect of not maxing deferral in non-calendar yr plan


AlbanyConsultant

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I'm looking at a PYE 9/30 401k/PS plan, and for the first time, the deferrals for the owner (who is 50+) are substantially lower then they have been in the past:

10/1/19 - 12/31/19: $2,200
1/1/20 - 9/30/20: $16,800
10/1/20 - 12/31/20: not received from client yet

He wants to max his profit sharing for the 9/30/20 PYE in his cross-tested plan.

What is his DC allocation limit for the plan year?  I know, without that last bit of information there's no exact answer yet, but this is why I hate off-calendar 401k plans.  Does he have to actually have deferrals over $19,500 in calendar 2020 to take advantage of the catch-up provision?  Meaning if he deferred $4,000 in the last quarter of 2020 for a total of $20,800, would his limit be $58,300?

Thanks, and happy holidays!

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Just got updated info from client - owner had stopped deferring at $19,500, but will take a bonus today and defer $6,500 from it to get to $26,000 (it's almost like they don't read our newsletters!).  So I presume this is a moot point and that I can go ahead and max him at $63,500.  But if anyone still wants to weigh in on the ramifications of what would have happened if that bonus hadn't been made, that'd be appreciated.

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Assuming the plan document states that the limitation year is the plan year, the 415(c) dollar contribution limit for PYE 9/30/2020 would be the 415(c) dollar contribution limit for 2020, which is $58,000 (I believe).  For 415(c) purposes for PYE 9/30/2020, the 401(k) contributions from 10/1/19 to 9/30/2020 are counted. He only contributed $19,000 during that time period. What we do not know is his 401(k) deferrals from 1/1/19 to 10/1/19. That would determine how much of his deferral for 2019 calendar year would be regular and how much would be catch-up (which would not count towards the 415(c) limit for the PYE 9/30/2020.) 

1 hour ago, AlbanyConsultant said:

Does he have to actually have deferrals over $19,500 in calendar 2020 to take advantage of the catch-up provision?  Meaning if he deferred $4,000 in the last quarter of 2020 for a total of $20,800, would his limit be $58,300?

Yes, he will have to defer above the 402(g) limit for calendar year 2020 to take advantage of the catch-up provision for the 2020 calendar year.  But, under your facts above, that will not have an impact on his 415(c) limitation for PYE 9/20. His deferral in the last quarter of 2020 will not be counted towards his 415(c) limit for PYE 9/20.

 

 

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22 minutes ago, AlbanyConsultant said:

Just got updated info from client - owner had stopped deferring at $19,500, but will take a bonus today and defer $6,500 from it to get to $26,000 (it's almost like they don't read our newsletters!).  So I presume this is a moot point and that I can go ahead and max him at $63,500.  But if anyone still wants to weigh in on the ramifications of what would have happened if that bonus hadn't been made, that'd be appreciated.

The 415(c) limit for PYE 2020 is $58,000. You are calculating it as $57,000. The fundamental issue I see in your analysis is that you are calculating the 415(c) dollar limit based on PY beginning, not PY ending in 2020

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He does not need to defer over 402g.  He just needs to have deferred at least $6,500 in 2020.  When you allocate a PS to get him to the 63,500 limit, the entire 401k deferral could be considered a catch up.  To be a catch up it needs to be a salary deferral (i.e you could not allocate a 63,500 PS) and exceed some legal or plan imposed limit (e.g. 402, 415, plan imposed limit) 

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