Who gets the "catch=up" contribution?

[Guest RBlaine]

HCE A has salary of $70k with $5,600 in deferral for an ADP of 8%

HCE B has salary of $200k with $11,000 in deferral for an ADP of 5.5%

Maximum ADP for HCE's is 6%.

HCE A is over age 50 but HCE B is under age 50.

Refund for HCE B is $1,400.

Since HCE A causes the plan to fail, is he the one that exceeds the limit and can count $1k as "catch-up" contribution and lower the refund for HCE B to $400, or;

Since HCE B is getting the refund, is he left in the cold because he is under age 50 and can't use the "catch-up" provision.

Thanks.

[MWeddell]

Your post seems to assume that this is an ADP test for a plan year that already has ended. In that case, HCE B gets the $1,400 refund and neither employee made catch-up contributions.

Note that if the plan document authorizes it, one could have limited HCEs to a lowered max deferral percentage. This a plan limit not an ADP test limit, using the terminology from the proposed catch-up contributions regulations, and any contributions HCE A wanted to make over this amount could be made as catch-up contributions (subject to the dollar amount max).

[Guest RBlaine]

I don't see how it being a plan year that has ended is relevant. The examples I've seen show HCE's getting a refund (so, presumably the plan year had ended) but lowering the refund by the $1k. But it is a calendar year plan.

[david rigby]

B is not "left in the cold because he is under age 50". He simply does not meet the statutory definition that permits a catch-up contribution.

[MWeddell]

It doesn't matter whether your plan year is a calendar year or not. However, the reason for the refund is because the plan year has ended, you ran the ADP test which failed, and you are correcting the test by making refunds. In that case the refund is to HCE A, who according to your facts is not over age 50 and cannot reclassify any of the money as catch-up contributions to avoid a refund.

[Brian Gallagher]

mweddell,

did you have a typo? i think is "B" who gets the refund.

[Guest RBlaine]

The examples show people lowering refunds by the amount of the catch-up contribution, so that is probably the way to go. HCE B gets a refund and since he is under age 50 does not get to use the catch-up provision.

The reason that I brought this up is that I was originally thinking that:

The ADP limit for HCE's is 6% and that the limit exceeded by HCE A only. Since he has exceeded a limit, change $1k of his deferral to catch-up contributions, then run the test.

Again, I think the person getting the refund is the one that gets to use the catch-up provision if age 50 or older.

[Brian Gallagher]

you have to remember how refunds are calculated: you take the highest dollar amount deferred and work backwards to the second-highest, then to the third-highest, etc.

since hce b deferred more than a, you use his $11,000 and go from there. in the example, it looks like the entire amount to be refunded from the test is $1400. since reducing b's contribs by $1400 doest bring him down to a's level, he is the only one getting a refund.

[rcline46]

I think the process is calculation of failure of ADP test at the % level, applying 'catch up' where appropriate to adjust the %'s. Then calculating $ to give back, then applying $ by the new rule. Remember, the correction for the ADP testing is still by %'s first, only the giveback piece is calculated on high dollars. The failure is in the %'s and therefore I belive the reclassifying should be on the %'s.

[Guest RBlaine]

rcline, that was my initial thought as well but the treasury guidance says that "the ADP limit is the highest amount that can be retained in the plan by a Highly Compensated Employee after the application of Section 401(k)(8)©". That section describes the distribution of excess contributions.

That is why I decided that the refund HCE is the one used to determine if catch-up is applicable. However, I like your approach better.

[Brian Gallagher]

i just thin that hce b is sol (pardon my french)

what if the ages were reversed and b was over 50? the adp limit is 6% (for this test) and he put in 5.5%. is the first .5% refundable and the rest traetd as catchup?

[imchipbrown]

Am I missing something here? Wouldn't you say HCE A has a deferral % of (5600-1000)/70000 or 6.57%. Average becomes 6.036% for HCEs. Refund HCE B roughly $200?

Chip Brown

[Brian Gallagher]

why minus $1000?

[Brian Gallagher]

the catch-up "recharacterization" is only applied after the test is run, not before.

[MWeddell]

Brian, Thanks for correcting my typo several posts ago.