Non Calendar Year 401k

[DP]

I'm setting up a new Safe Harbor PS 401k Plan for a client with a 10/31 year end. The plan is effective 11/1/02 and the 401k portion is effective 1/1/03.

For the 10/31/03 plan year, is the maximum 401k deferral $11,000 or $12,000? Can the catch-up deferral be $1,000 or $2,000? I wasn't sure if you looked at the beginning date of the plan year to determine the 401k limits for that fiscal year - or if you go by the ending date of the plan year.

I understand I'll have to watch the individual participant deferrals on a calendar year basis also to make sure they don't exceed the calendar year limits. The plan year limit is what's throwing me. Please help!

[austin3515]

I'm pretty sure the limits are all set based on the calendar year in which the Plan year starts. So whatever the limit is in calendar 2003 ($12,000?), is the limit in the plan year starting 11/1/03.

[Tom Poje]

unless the plan imposes a limit, there is no such limit.

Anything dealing with issues of 11,000 or 12,000 and a catch up of 1000 or 2000 are all based on the calendar year.

The plan could impose a limit, but then all you would have to do is look at the document to see what its limits are. I doubt there are any in regards to this issue.

In your case, it appears an ee could defer 11,000 by last paycheck in 2002 and therefore qualify for an additional 1000 in catch up for 2002 since he hit a limit.

in 2003 he could defer a total of 12000 any time during the year, plus then be eligible for 2000 in catch up.

[DP]

Tom, So you're saying that with a FYE 10/31/03 plan year, a participant under age 50 in a Safe Harbor Plan could defer $11,000 in December 2002 and $12,000 in January 2003? Then no more deferrals could be made until 2004.

[Tom Poje]

yes, that is conceivable, assuming the document doesn't have a cap on deferrals (I have never seen one with a $ limit, though I have seen them with a % cap)

I would add the caution if ee deferred 11,000 on Dec 31,2002 (even though it was in Dec, it probably wouldn't be reflected until the first paycheck in 2003. talk about blowing it.

but yes, it is possible.

Of course, that would give the ee 23,000 in deferrals for the plan year, and at max comp 11.5% deferral rate. talk about blowing the ADP test out of the water!

The easiest way to remember things is that the govt is going to look at the w-2 statements. add them up, and see if the ee deferred too much in the calendar year. Except for passing the test, you could defer any amount for a fiscal year plan.

[kocak]

I agree with Tom. The limits for 402(g) and catch-up are calendar year. In this case, you probably won't have to worry about blowing the ADP test, since it is a safe harbor 401(k) plan.

You may run into trouble if the PS component is cross-tested, since the ABR will include deferrals.

Also, you may want to consider that pesky benefits rights and features issue. Can all employees afford to defer $11,000 in two months?

mck