Cap on Deferrals for HCE in Plan Document?

[lkpittman]

Client wants to put a cap on the HCE deferrals (9%)in the plan document. I guess this doesn't cause a problem--does this smell funny to anyone?

[Mike Preston]

No, it sounds fine to me. The client should be congratulated for wanting to have the plan document actually reflect administrative practice. On the other hand, there is no requirement to have the document state a limit with respect to HCE deferrals in order to enable a limit to be imposed. The regs make it quite clear that a plan sponsor may impose such a limit. I would like to see that the document dovetails to the regs (most do), though. So, if the document gives the plan sponsor the authority to administratively cap HCE deferrals, then the plan sponsor can implement the cap without resorting to an amendment.

With all that said, even if the document gives the plan sponsor that ability, there is nothing that would preclude the plan sponsor from deciding that the best course of action is to have the plan document match the administrative methods. The only argument against it is that the Plan Sponsor may someday wish that they had the administrative flexibility that the regs allow.

[Tom Poje]

ah, Mr. Mike:

would a plan limit on HCEs

the lesser of 2 times or 2 points plus last years NHCE rate

be definitely determinable?

obviously at the beginning of the year that amount might be overshot because it hasn't been 'determined' yet, but at some time it will be. and if hce is over that amount and age 50 would that constitute a legitiment catch up?

[lkpittman]

Mike's was the answer I was looking for--but I was fearing the problem as Tom has identified it. But the plan in question simply wants to limit HCEs to a flat 9% of comp. This should be okay, right Tom?

[Mike Preston]

Tom wrote:

"would a plan limit on HCEs

the lesser of 2 times or 2 points plus last years NHCE rate

be definitely determinable? "

Why wouldn't it be? It is definitely calculatable. The only issue would be timing. Most plans have a good feel for what the ADP is for the NHCE's before the end of the year, so establishing this as an administrative limit makes all the sense in the world, if you have HCE's, all of which want to contribute the absolute max, especially if you are using prior year testing!

Tom also wrote:

"obviously at the beginning of the year that amount might be overshot because it hasn't been 'determined' yet, but at some time it will be. and if hce is over that amount and age 50 would that constitute a legitiment catch up?"

Great question. Currently, I think that catch up contributions are only those amounts that exceed the plan document limitations. Catch up contributions do not include those amounts that exceed an administratively imposed limitation. The IRS has time to disagree with me on this because the catch up rules haven't been finalized, have they? I didn't see this issue mentioned in the guidance we've received to date, though. But maybe I just missed it. In any event, if you have catch up contributions in a plan that imposes an administrative cap, I think the administrative policy should allow contributions up to the applicable catchup amount in excess of whatever that cap turns out to be!

[Tom Poje]

so, if I understand things correctly:

I write my document to say I am going to use prior year testing.

I should be able to put into the document language that says

cap limit on hces of 2 points plus prior year NHCEs.

at this point I have a plan document limitation rather than an administartive limit, and therefore I am ok.

Maybe I would never do that, but just want to make sure if logically one could do that.

thanks Mike!

[Mike Preston]

I don't think there is anything precluding you from doing that at all. But, as I said, I think it limits Plan Sponsor flexibility and this particular case seems to really make sense only if everyone in the HCE category would be deferring the "maximum", if given the opportunity.