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415 vs catchup (again!)


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I know this topic has been address repeatedly, however this time of year I sometimes need a refresher.

For 2020 participant over age 50 contributes $22k in deferrals.  Compensation is $270,318.33.  Match contribution is $10,812.73.  Can this participant receive a profit share allocation of $30,687.27 in order to reach a total allocation amount of $63,500? 

Years ago I used to think the participant was limited in his total allocation amount under 415 because he only contributed $2,500 over the deferral limit of $19,500.  However I was later advised that you can recharacterize the full $6,500 in catchup to compute the 415 limit.  In other words, talking about two different tests and what gets recharaterized in that particular test (415 vs ADP for example).  

Do others agree that my participant can get $30,687.27 in profit share?

Thanks in advance! 

 

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No, this is a common mistake. They can only receive a $26,687.27 profit sharing contribution.

There is no $63,500 combined limit. There is a $57,000 annual addition limit. The catch-up contribution is not included in the annual addition limit and the catch-up contribution limit only applies to those contributions.

The employee deferral is capped at $19,500 and the catch-up contribution = $22,000 - $19,500 = $2,500. The remaining $6,500 - $2,500 = $4,000 is unavailable.

The maximum profit sharing contribution = $57,000 - $19,500 - $10,812.73 = $26,687.27.

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3 hours ago, spiritrider said:

There is no $63,500 combined limit. There is a $57,000 annual addition limit. The catch-up contribution is not included in the annual addition limit and the catch-up contribution limit only applies to those contributions.

That is fairly accurate, although I'm not sure what the last clause says...

3 hours ago, spiritrider said:

The employee deferral is capped at $19,500 and the catch-up contribution = $22,000 - $19,500 = $2,500.

...and that's where your argument breaks down.  Catchups are determined when exceeding any one of several limits (or testing failures), including 415 - not just 402(g).  A participant can make a $6500 contribution and have it all be catchup if employer contributions = $57,000.

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Oops, I was the one making the mistake.

I was not aware that excess annual additions could be reallocated as catch-up contributions.

I was under the mistaken impression that only employee deferrals and catch-up contributions could be reallocated between each other.

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and just so that you know - you are not alone 🙂!  The client plan in question is with a "large" national 401(k) vendor.  I was shocked because I compute the profit share and perform the cross-testing for the client (long story - vendor takes too long - I do it for the client in January every year).  Anyway - the vendor came back to the client and said the Plan failed 415 for one of the Doctors.  I thought for sure the vendor would have known so I started second guessing myself.  I have past research on this exact situation, which lead me to believe I was in the right...finding that on th IRS website was good backup!  The vendor did agree after I sent the information that the plan did not require the 415 correction.   

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  • 4 months later...

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