Effectivity of 401k limit changes

[Guest fred37]

I am looking for information about effectivity of IRS imposed changes for pension plans. My 401 k program is not on a calendar year, but begins on Nov 1 and ends on Oct 31. I just received a letter from my benefits department stating I crossed the HCE threshold for the plan year Nov 2001-Oct 2002, and as a result my contributions are limited for the plan year Nov 2002-Oct 2003. I did some searching, and found IRS document IR-2001-115. This document announces an increase in the contribution limit to $11,000 and an increase in the definition of an HCE to $90,000, both effective for the tax year 2002. My plan allowed a maximum contribution of $11,000 for the plan year Nov 2001-Oct 2002. However, my administrator says that the $90,000 limit for HCE will not become effective until the Nov 2002-Oct 2003 plan year, and I cannot resume making full contributions until plan year Nov 2003-Oct 2004 (I barely exceeded $85,000 this year due to a 53 week pay period, and will be below $90,000 for next year). I do not understand how changes with the same IRS effectivity date can be invoked on different years in the company plan. My questions are: (1) is this normal? (2) if so, is this an IRS mandate or a plan administrator's choice? and (3) are there specific IRS documents providing a definitive effectivity?

Thanks in advance.

[Tom Poje]

it is always easier to think in terms of calendar year, but the plan you are in does not fall into this category.

plan year 11/1/2002 - 10/31/2003

1.to determine if one is an HCE you look at the prior 12 months, which would be

11/1/2001 - 10/31/2002. This plan year begins in 2001, and the HCE determination is anyone who made 85,000 in this time period.

The plan could have made what is called 'a calendar year election' and used the period 1/1/02 - 12/31/02 to determine HCE status.

in this case, one would have to make over 90,000 to be an HCE. (note: in the calendar year)

Note further, to make the calendar year election, the plan would probably have to be amended, otherwise (apparently) you would not be considered an HCE at this point.

2.the 11,000 limit on deferrals is a calendar year limit. When you send your W-2 to the government they look at the amount and determine if you are above this level. If you worked for more than one company, the govt adds up all the W-2's to see if you overshot the limit.

There is no reason a plan itself couldn't cap deferrals at 11,000 either, though I would say that is unusual.

3. some plans do put a limit on what HCEs can defer, because all plans are required to pass discrimination testing, and if the HCEs defer too much, then money has to be refunded. (In other words suppose you wanted to defer 10% of pay, but the plan says you can only defer 8% because you are an HCE. If you had deferred 10% and the plan failed they would have refunded 2% and you are at the same spot you started so you aren't out anything.)

(The above statement simplifies things in regards to testing, but hopefully is adequate)

4. If you are age 50, and the plan has been amended to allow catch-up contributions, you will be able to defer an extra $1000 above any plan imposed limit.

[Guest fred37]

Thanks for the response, I think I have a better understanding. However, I do have one additional question. It appears that the contribution limit for a non-HCE ($11,000 for 2002) is independent of a non-calendar year plan. For example, the total contributions for the 2002 tax year could result from two separate plan years (i.e. Jan-Oct from plan year starting in Nov 2001 and Nov-Dec for the plan year starting in Nov 2002. If this is true, can the contribution for a given plan year (Nov-Oct) exceed $11,000 as long as the total for any individual tax year does not exceed $11,000 (or the limit for that tax year).

[Tom Poje]

You have to make sure if you are talking what the law allows and what the document allows.

for example, I know an individual who works for a company and they restrict HCEs deferrals to 5% of comp. That is a plan limitation. there is no such restriction on the NHCEs.

but, to try and clarify things with an example.

Plan year runs 7/1/2002 - 6/30/2003.

The deferral limit (calendar year) for 2002 is 11,000

and for 2003 is 12,000.

If someone entered the plan on 7/1/2002 he could defer 11,000 on 12/31/2002 and 13,000 on 1/1/2003.

well, ok, you would have to be careful about that. perhaps I should say he could defer 11,000 and have it show up on his last paycheck in 2002. Remember, the govt works off of the W-2s, not the actual date the deferral is made. Of course, in the case of an HCE this would probably not work, because for the plan year he would show up with 23,000 in deferrals, and the test would most likely fail. So, in answer to your particular question, yes, an individual could defer more in a plan year, as long as his calendar year deferrals are capped to the limits.

Also, if the person deferred 13,000 in January, that person would be done for the year in deferrals. He could not defer the rest of the year.

[Guest fred37]

Tom:

I should be back in the NHCE category this year due to a combination of the increased IRS HCE definition and a 52 week pay period for this plan year (instead of a 53 week period like last year), so your answer should work for me. I really appreciate your help.

[Tom Poje]

you are more than welcome.

Have a great Thanksgiving!