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It's not considered a catchup until you hit a limit. So, you have $17,500 in 401(k). Note: not 12k & 5.5k. Are you over the base $17,500 (for 2013)? No. No catch-up yet. Are you over a plan-imposed limit? (ex. plan limits deferrals to 6% of pay, and person makes $100,000). No? No catch-up yet. Have you failed the ADP test and this person needs a refund? No? No catch-up yet. Are you over the 415 limit of $51,000 (for 2013) after profit sharing? (17,500 + 39,000 = 56,500) Yes! You can now re-characterize up to $5,500 as a catch-up.

no comp = no opportunity to defer; not in the test.

Better yet, show me Compensation that you can benefit on that is not included in Section 415. When you ask me to prove to you that an apple is a fruit, my approach would be to ask you to prove to me that it is not. We established that the $80,000 payment: 1) was not for services rendered 2) Would not have been paid to the employee had he remained employed. Therefore, this amount was not included in Section 415 Compensation. You are saying he can benefit on this amount? Show me plan language that would suggest he can. Honestly, I'm under the impression that 'Includable Compensation' in a plan starts with Section 415 and then excludes amounts such as overtime and bonuses. Good Luck!