Mike Preston

3/31/07 Plan Year Participant defers $20,000 in September 2006, and nothing else in the Plan Year. Only $15,000 of deferrals are taken into account because $5,000 exceeded the 2006 statutory 402g limit. That $5k is a 2006 catchup because, as of 12/31, the 402g limit had been exceeded ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups. This $5k is a 2007 catchup because it is available. 3/31/08 Plan Year: Participant defers $20,500 in September 2007 (as mentioned above). Only $15,500 of deferrals are taken into account because $5,000 exceeded the 2007 statutory 402g limit. But at this point, the 2007 catchup is all gone, so the plan sponsor must send $5,000 out of the plan due to it being a 402g violation. 3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups. That's ok, the 2008 catchup limit wasn't invaded above, so it is available. Participant defers another $20,500 in September 2008 As with the point above, $5k must be refunded because the 2008 catchup has already been used.

I guess the cryptic nature of the posts has me confused. Care to lay out the numbers? When you say that: 3/31/07 Plan Year: Participant defers $20,000 in September 2006, and nothing else in the Plan Year. ADP Test fails for 3/31/07, requiring $5,000 in refunds, all reclassed as catch-ups. Does this mean that you took into account the entire $20,000 and then determined the refund should reduce his deferrals from $20,000 to $15,000 and then because that was $5,000 treated it all as 2007 catchups? Or are you saying that you treated $5,000 as catchups for 2006 since the $20,000 was made in 2006 and therefore you took into account only the net of $15,000 and then determined the refund should reduce his deferrals from $15,000 to $10,000 and then because that was $5,000 treated it all as 2007 catchups? Which is it? Participant defers another $20,500 in September 2007, and so has deferred the max under 402(g) for 06 and 07. 3/31/08 Plan Year: Participant defers $20,500 in September 2007 (as mentioned above). 3/31/08 ADP test fails, requiring $5,000 in refunds, all reclassed as catch-ups. Participant defers another $20,500 in September 2008 Sem question.

I just ran your last scenario through my spreadsheet and it seems to require a refund for the 3/31/2008 plan year because the dollar amount of deferrals that is taken into account as of 3/31/2008 in the ADP test is the full $20,500, not the $15,500. Yes, there is a $5,000 catch up available, but it is taken into account by the amount in excess of the 402(g) limit and hence there is nothing left to allow the exceess ADP deferrals of $5,000. Is your scenario the same as Buckaroo's? Should we just start this whole thing over again? I'm willing if you are.

You are missing something.

Yes.

And, yes, I used commutation functions. This is one (?) FUGLY formula.

I think there is a slight misconception. In your calendar year plan, the max allowed by ADP is 402(g)-1800, which if catchups allowed in that year are 5k, means the person can contribute all that the ADP allows, plus 5000 more. The same thing happens "to" the HCE that decides to put in money in a non-calendar year plan to the tune of 1800 more than the max allowable. Because of the effect of "rollover" you are stating that the individual never suffers. But carry it to the extreme, where the amount rolled, when added to the amount deferred again goes over the allowable limit. Do you get a spillover effect of "one 402(g)" limit? Sure you do. I am hopeful that this would not be enough of a reason to have a non-calendar year k plan, though, because frankly, they are a bit of a struggle to deal with.

Don't really know. All I know is that this is how we have been told to handle it and this is the way I've done it whenever it has been needed. Worst case scenario is that the mis-match either generates a letter asking for clarification or the "audit score" for the client is "enhanced".

I'm glad this one is on the ERISA counsel's shoulders. There is nothing I know of that says you can make something a catchup contribution merely because you want to do so. As of 12/31/2005, unless there was a limitation in effect that otherwise precluded some portion of that last $14,000, I don't see where any part of it is a catchup.

Austin, <loudspeaker invoked> Step away from the plan. <loudspeaker turned off>. Now that you are away from the plan, just look at what this individual deferred in 2005. $18k, right? Isn't that the limit for that year? From a personal perspective, he has contributed no more than the max allowed for the calendar year. Now, back to the plan. That, too, doesn't have a violation in any year, so all is well. I really don't see the issue.

This issue is not an easy one to get ones arms around. My reading of the regs is that it matters not where the annual addition comes from, you can recharacterize elective deferrals as catchups if needed. The IRS seemed to have a little hiccup over the issue at the ASPPA annual conference in 2006. You might want to listen to the tape of the final session. They are concerned that a plan sponsor could contribute $1 (above the $29,500 in your example) and "turn" a regular deferral $ into a catch-up. Even Sal's outlines and worksheets on the issue are ambiguous on whether this is allowable. So, we are back to our own reading of the regs. I see nothing that prohibits it and I give my clients a choice when the issue comes up (believe it or not, it actually has!). So, I believe you should be able to work off of $50,000. But it is worth noting that there is at least somebody at the IRS who has, consistent with your initial comment, pretty short arms.

Since there is no deficiency, there is no requirement to refile. Just modify the opening credit balance on the 2007 Schedule B as if the amount was properly reported on the 2006 Schedule B.

I get 121.2147781, but I'm not sure I've spent enough time on it to ensure that rounding isn't an issue somewhere it shouldn't be.

I admit to being thoroughly confused by your post. Maybe it is just too early in the day, but I need clarification.

Seems to me that if I'm concerned solely about exceeding a market rate that only the first segment rate is a true "not greater than market rate" indicator.

You are not wrong.

The goal is to eliminate whipsaw.

Use the "survey" to your advantage. Liberally sprinkle with language that makes it clear that the decision as to actual contribution must rest with somebody other than the individual you are seeking input from. Sure, they should be told that their input is being sought, but each time you ask for information, mention twice that the ultimate decision is somebody else (Committee? Plan Administrator? other). Then make sure that the amount in not changed each year or, in the eyes of the IRS, "too frequently." (whatever that means). Rumor has it that partnership new comp plans with each partner in their own group are going the way of the dodo bird, anyway, so you might want to let them know that the current arrangement has a limited life expectancy.

OK, I'll bite. Let's say the document doesn't provide any guidance on this point. The 2007 year is top-heavy and the plan sponsor wishes to postpone, as long as possible, the required 3% contribution. Your words indicate that the plan sponsor may delay the 3% contribution until.....? When, exactly?

In no way did I mean to imply that "disagreement = disagreeable"! I think we are on the same page now, anyway.

My plan is to change 417(e) to first segment rate of 417(e) rates and see if that flies. Do you think it will?

He should look for a company that offers Roth and meets his objectives with respect to non-Roth. The 401(k) martketplace is big and burly. Surely it can be done.

No problem on the duplicate posting. It is highly likely that the TPA was just concerned you were going to ask the unanswerable question, which is: **when** is a contribution for top-heavy really due? Nobody really knows. Honest. There is not one definitive piece of guidance on this isse and the top-heavy regs were issued in 1984! The conservative approach is to contribute it before the date which is 30 days after the due date of the tax return, so that you can be sure it is treated as an annual addition for the prior year (bad things happen when you have to give a 3% contribution to a terminated employee with no compensation in the current year - the plan is disqualified!). If they convince you that the 2007 contribution must be made before the due date of the 2007 tax return, they have ensured that you won't accidentally contribute too little and be forced into a 415 violation. Just guesswork, of course.

I sense a slight disagreement. If the plan is imprecise as to the amount being determined (some oblique reference to "financial need" as defined in the regulations, then you can include it. If the plan is precise and attempts to define "financial need" and does so without including a reference to grossing up the amount otherwise determined, it would violate your plan's terms to gross up. Better?

DC contributions are generally deductible in the taxable year when they are made. That is the default. Hence, if you make a contribution for the 2007 year sometime in 2008, the default is that it is deductible in 2008. There is a section of the IRC that allows a contribution made within a certain period of time after the end of the fiscal year to be deductible notwithstanding the fact that the amount was contributed after the end of the fiscal year. See 404(a)(6). The fact is that most employers want to take advantage of 404(a)(6) and deduct the amount contributed after the end of the year not in the year when it is actually contributed, but the prior year. But one doesn't have to take advantage of 404(a)(6). So you are free to deduct a contribution for 2007 in 2008 if it is actually made in 2008. You mention 415 and that is a completely different discussion. In general, as long as the contribution for 2007 is made before the date which is 30 days after the due date for the 2007 tax return, then the amounts allocated in the 2007 plan year (actually, limitation year, but they are frequently the same) are treated as annual additions for 2007 even if they are deducted on the 2008 tax return. Hope this helps.