I have a plan that is subject to the ADP Test, and it is going to fail the ADP Test this year. Here are the facts:
3 HCEs
HCE 1 – under 50, Compensation $184,933.34, deferrals of 10,113.72 (5.47%)
HCE 2 – over 50, Compensation $139,516.62, deferrals of $13,445.60 (9.64% with extra 5500, 5.70% without)
HCE 3 – over 50, Compensation $131,000.00, deferrals of $12,654.30 (9.66% with extra 5500, 5.46% without)
Plan is using Prior Year testing, and the maximum amount they can contribute for 2010 is 5.42%. The company tried to have them contribute the 5.42%, and then added an additional $5,500 for catch-up contributions for the 2 HCEs over age 50. Plan document has no deferral limit, and says that the participants can contribute up to the maximum amount it will not cause the Plan to violate the ADP Test.
My question is concerning when I take out the Catch-up contributions. Since the participants have not deferred $16,500, do I have to calculate their ADP based on total deferrals (which would be the $13,445.60 and $12,654.30), or, can I take out the 5,500 BEFORE I run the ADP Test since they reached the ADP limit first, exclude the Catch-up contributions and then run the ADP Test using deferrals of $7,945.60 and $7,154.30.
Here are the results of both ways:
1. If I keep the full deferral in the ADP Test, there are total excess contributions of $11,528.23, and the excess is allocated $1,885.25 to HCE1, $5,217.14 to HCE2, and $4,425.84 to HCE3. Because HCE2 and HCE3 are over 50, their contributions get re-classified as catch-up, so they have no refund, while HCE1 is stuck with a refund of $1,885.25 before allocable income.
2. If I take out the $5,500 before we run the test, there are total excess contributions of $528.23, and the entire amount goes to HCE 2 (before allocable income). Both HCE2 and HCE3 get to use the $5,500, and HCE1 is not stuck with a big refund.
Please let me know what you think. Thanks.
