401k deferrals and Comp limit

[alexa]

This question must have come up a zillion times before but I believe a recent reg has changed it

Can someone defer a % of their total compensation, even if over the Comp limit?

[PensionPro]

This was discussed only a few months ago: http://benefitslink.com/boards/index.php?showtopic=37535.

[alexa]

This was discussed only a few months ago: http://benefitslink.com/boards/index.php?showtopic=37535.

I'm sorry but I can't seem to deciher a clear answer

Please short circuit the responses and give me somethibg practicable<gr>

Thx

alexa

[masteff]

If your real question is "do you have to stop contributions because the person's cummulative pay goes over the limit mid-year?", then the answer is no because you don't have to apply the comp limit mid-year.

perhaps one should look at the preamble to the final 415 regs.

for a copy:

http://benefitslink.com/taxregs/td9319.pdf

its so long, and it goes on and on...but wait...look there, at the bottom of page 47...

is is there in print....throw that in front of anyone who says otherwise!

bottom of page 47, last paragraph

"As noted above, the final regulations provide that a plan cannot take into account

compensation in excess of the section 401(a)(17) limit. In addition, the final regulations

provide that elective deferrals can only be made from compensation as defined in

section 415©(3). However, in applying these two rules, a plan is not required to

determine a participant’s compensation on the basis of the earliest payments of

compensation during a year."

[david rigby]

If your real question is "do you have to stop contributions because the person's cummulative pay goes over the limit mid-year?", then the answer is no because you don't have to apply the comp limit mid-year.

... but you still have to look at the plan document to make sure it does not say otherwise.

[alexa]

Let's use a numerical example, just so I understand. I have someone earning 600K annually who is over age 50.

He is earning 300K by 7/1 and is deferring 6% each pay so by 7/1 his 401k deferral is 18K

Is this ok?

[Guest Sieve]

Yes, that's ok because his limit for 2008 is $20,500--his deferrals can continue until they reach $20,500 for the year, even though some of those deferrals are made with respect to earnings above the $230,000 compensation limit for 2008. Deferrals don't have to stop when the compensation limit is reached, only when the 402(g) limit is reached.

[GBurns]

But, How does the payroll system AND the Plan know when the limit is reached during the year ?

[Guest Sieve]

GBurns -- Which limit? I'm not a TPA so I don't know exactly how it actually works, but . . .

As to deferrals, the comp. limit doesn't matter (it does matter, of course, for ADP & ACP testing)--and I assume payroll will keep track of the 402(g) limit as per usual. As to the match if done on a payroll basis, when the comp. limit is actually reached also doesn't matter--there simply ought to be a calculated maximum (such as 4% X $230,000, or $9,200) entered in the system, and the match should then cease as soon as it has reached that maximum. In the example given ($300,000 earned by 7/1), if the deferral was 6% and the match was 100% up to 4% of comp, then the $9,200 match limit would have been met probably during a May payroll period and should then cease. If the match is a true-up, then there's no problem calculating it at year-end.

Remember, there's no required proration of compensation for purposes of matches or deferrals which are calculated on a payroll basis: " . . . no proration is required merely because the amount of elective contributions . . . matching contributions . . . or employee contributions . . . that is contributed for each pay period during the plan year is determined separately using compensation for that pay period." (Treas. Reg. Section 1.401(a)(17)-1(b)(3)(iii)(B).)

Of course, the plan could prorate on a per payroll basis if that's what its provisions provided, in which case compensation per pay (if there are 24 pays a year) would be limited to $9,583.33--a 6% deferral for the entire year would never reach the maximum (since it would be 6% X $230,000, or $13,800), but a 4% match would.

[K2retire]

As to deferrals, the comp. limit doesn't matter--and I assume payroll will keep track of the 402(g) limit as per usual.

Should -- but often don't. I found it most ironic when the national payroll company used by my TPA employer stopped my deferrals at the prior year's 402(g) limit the first year the limit was raised by EGTRRA. Fortunately, I reached the limit before the end of the year and was able to get the rest taken from a subsequent check. Had that not been the case, I would not have been amused.

[Bird]

QUOTE (Sieve @ Aug 24 2008, 01:09 PM) *

As to deferrals, the comp. limit doesn't matter--and I assume payroll will keep track of the 402(g) limit as per usual.

Should -- but often don't. I found it most ironic when the national payroll company used by my TPA employer stopped my deferrals at the prior year's 402(g) limit the first year the limit was raised by EGTRRA. Fortunately, I reached the limit before the end of the year and was able to get the rest taken from a subsequent check. Had that not been the case, I would not have been amused.

It's actually quite astonishing how often this gets messed up. p/r companies either limit people improperly (e.g stopping deferrals once someone hits the comp limit) or ignore the comp limit when calculating matches. And when they're doing both ends (i.e. calculating employer deposits as they go along, and also doing the plan "administration" - and I have to use that term loosely because it appears all they're doing is spitting out a tax return on a cash basis) it's a disaster.

QUOTE (masteff @ Aug 23 2008, 06:06 PM) *

If your real question is "do you have to stop contributions because the person's cummulative pay goes over the limit mid-year?", then the answer is no because you don't have to apply the comp limit mid-year.

... but you still have to look at the plan document to make sure it does not say otherwise.

I've heard and understand that argument but have never seen a document so poorly written that this was an actual issue, FWIW.

[Kevin C]

Sieve:

As to the match if done on a payroll basis, when the comp. limit is actually reached also doesn't matter--there simply ought to be a calculated maximum (such as 4% X $230,000, or $9,200) entered in the system, and the match should then cease as soon as it has reached that maximum.

If the match is payroll by payroll, with no true-up, this doesn't work in all cases. If the deferrals each pay period are enough to receive the maximum match for that pay period, like in your example, then it does work. If deferrals are such that less than maximum match is received for at least one pay period, then I don't think this method works.

For example, 100% match on deferrals up to 4% of pay on a payroll by payroll basis with NO true-up. Participant making $310,000 defers 3% of pay each pay period. When he reaches $230,000 in Comp for the year, he has deferred $6,900 and received a $6,900 match. What match does he get for the next pay period? The match for that pay period is based on comp only for that pay period. But, he already had $230,000 in comp previously counted for the year. How do you give him more match without basing his match on comp in excess of $230,000?

To me, the solution is to have the plan provisions true-up the match. Otherwise, the HCE's have to be careful with their deferral rates so they can maximize their match.

[Guest Sieve]

Kevin C -- That's the whole point. You are permitted to defer on compensation throughout the year, even if you have already reached the annual comp limit, and the match also can be contributed on deferrals beyond the annual limit until the maximum match for the year (based on the match percentage) has been met. When you do ADP/ACP, of course, the comp limit comes into play, but not during the year as regard deferrals or matches.

So, in your example--assuming proper cooperation from payroll provider software--the match should continue after the 2008 $230,000 comp limit is reached until the maximum match for the year (4% X $230,000 = $9,200) has been reached. At least that's how it should work in theory.

[Kevin C]

Sieve,

It only works the way you describe if the plan document says it works that way. The preamble to the regulations says you are not REQUIRED to treat the 401(a)(17) limit at the first $230,000 of compensation. It does not say that the plan can not be set up that way. You are applying a true-up to the match calculation. What if the plan doesn't say there is a true-up?

Lets change the situation around somewhat. The plan matches 100% of the first 4% of comp deferred. Match is determined separately for each payroll with NO true-up. Catch-ups are matched. A catchup eligible participant defers 2% of pay for 1/1 - 6/30 and earns $230,000 in those 6 months. He defers 6% of pay for the remainder of the year and earns another $230,000 in the last 6 months. Total deferrals for the year are $18,400 and his total unlimited comp is $460,000. What do you say his match will be for the year?

[masteff]

with NO true-up.

That's your catch.

This takes us back to my answer above which stated it depends on how the plan is written. There are ramifications to several different issues. And any scenario we can make up has a real life fact pattern that puts that scenario on its ear.

I'll go you all one better.... we had a running true up.... so every payperiod we took the lesser of year-to-date deferrals or 3% of year-to-date eligible comp up to the limit and matched it. You could even have no deferral on the current payperiod and still get match because we calc'd it year-to-date (and yes, it was horrible to program). And we didn't apply the comp limit midyear so if a very HCE contributed 3% in January and December and nothing in between, we would allow deferral and match in both months.

Keep in mind it also has impact on profit share, especially if it's paid as a fixed % per payperiod. In that case, you do effectively apply the limit mid-year because x% times $230K is a fixed dollar amount and the PS contribution S/B capped at that amount.

[alexa]

We do not true-up match at year end. But we do send all HCE's a letter letting them know the ramifications of not deferring evening throughout the year and the posssibility of losing match money.

Lexy

This takes us back to my answer above which stated it depends on how the plan is written. There are ramifications to several different issues. And any scenario we can make up has a real life fact pattern that puts that scenario on its ear.

I'll go you all one better.... we had a running true up.... so every payperiod we took the lesser of year-to-date deferrals or 3% of year-to-date eligible comp up to the limit and matched it. You could even have no deferral on the current payperiod and still get match because we calc'd it year-to-date (and yes, it was horrible to program). And we didn't apply the comp limit midyear so if a very HCE contributed 3% in January and December and nothing in between, we would allow deferral and match in both months.

Keep in mind it also has impact on profit share, especially if it's paid as a fixed % per payperiod. In that case, you do effectively apply the limit mid-year because x% times $230K is a fixed dollar amount and the PS contribution S/B capped at that amount.

[Guest Sieve]

Kevin C -- As to your hypo, in my twisted (?) mind I would see a continuing matching contribution even after reaching the $230,000 maximum. So, for the first half of the year when the participant makes $230,000 and defers 2%, the match is only $4,600, or 2% of each payroll. When the deferral changes to 6%, the participant continues to receive a match on deferrals with respect to compensation beyond the first $230,000, and will receive a match for each subsequent payroll of 4% of that payroll period's compensation (the maximum match). But, that match simply cannot exceed 4% of $230,000.

I don't see this as a true-up--which is where you compare the match to compensation after year-end, and put in MORE $ in some cases--but as a continuing deferral with a corresponding match which is limited, by definition, to the maximum match permitted (4% X $230,000). Maybe I have it all wrong (which wouldn't be the first time), but I see the match continuing as long as a deferral is made (not like masteff's match with no deferral!) and as long as the maximum match accrual has not been reached. (Of course, as I've said before, I'm not a TPA, so take this line of thinking with that in mind . . .)

If your hypothectical HCE defers nothing in the first quarter, then defers for the 2nd quarter, and doesn't defer again in the third, how do you calcualte the match when deferrals recommence in the 4th quarter? Do you look at compensation only while deferring (2nd & 4th quarters), or do you count the FIRST $230,000 (reached at the end of the 2nd quarter) so that there can be no match in the 4th quarter, or do you count the $230,000 starting with the 2nd quarter deferral commencement and continue forward even if no deferrals are made in any subsequent quarters?

[Kevin C]

Masteff,

You got my point. Payroll by payroll match or PS without true-up is one of those situations where the document effectively limits you to the first compensation earned up to the $ limit.

Sieve,

There was a second part to my last "hypo". What if the person deferring 2% for the first 6 months and 6% for the second 6 months only made $23,000 per half year? Wouldn't it concern you if the only ones who don't have to worry about the timing of their deferrals reducing their match are those who make over $230,000?

I also think your method is not following the terms of the hypothetical plan. The match is determined separately for each payroll based on compensation and deferrals only for that pay period, with NO true-up. What compensation amount is used? Every document I've seen determines the match amount using its definition of Plan Compensation. Plan Comp is also limited to the 401(a)(17) limit. If you have already counted $230,000 of Plan Compensation for prior payrolls, I would say that you have no Plan Compensation for those later payrolls. With zero Plan Comp for later payrolls, there can not be a match. In your scenario, you are allocating the match based on compensation in excess of $230,000 and then imposing a formula limit on the total match for the year using $230,000 of comp.

Your example of the HCE starting and stopping deferrals is a good one. What you do is follow the terms of the plan. If they are not clear, then the ERISA plan administrator has to interpret them.

Have I mentioned that I really like true-ups?

[Guest Sieve]

Kevin C -- I'm becoming convinced that your approach is the proper one re: payroll basis matching--i.e., the annual comp limit applies with respect to accrual of those matching contributions. It became more clear to me when thinking about your latest hypo (which I didn't see in your earlier posts): the participant deferring 2% on $23,000 of comp. earned per 6 months. I wonder, however, if most plan documents are specific enough to permit deferrals on comp above the annual limit but NOT to allow a match with respect to deferrals on comp above the annual limit (although Corbel does, in fact, remove the comp limit for the deferral election)--but let's leave issues concerning the potential lack of proper document drafting to QDROphile . . .