ADP & Catch-up

[Guest Rosemary Raymer]

I am probably making this way to difficult. If you fail the ADP test and have HCEs over 50 you can recharacterize some deferrals as catch-up. But does the maximum deferral percentage have to remain uniform for all HCEs?

For example, the NHCE ADP is 3% so the max average for HCEs is 5%. I have an HCE over 50 that is deferring 3% and an HCE under 50 that is deferring 9% for an average of 6.5%. If I recharacterize 2% of the over 50 guy to be catchup, don't I also have to limit the under 50 guy to 1% since I am effectively setting a limit of 1%?

[Mike Preston]

A "plan limit" is a limit imposed by the terms of the plan. You don't have that.

I don't think you can recharacterize the over 50 guy at all. He isn't subject to having any of his monies returned, so he has no catchup. At least, I think that is what is going on. Without numbers I guess it is possible that your under 50's 9% is less than your over 50's 3%. But I doubt it. Care to share?

[Guest Rosemary Raymer]

Actually he was subject to having money returned because refunds are based on the monetary amount instead of the percentage and he had the higher monetary amount.

[Guest Rosemary Raymer]

I hit the submit button before I was finished typing on that last post.

The 3% over 50 guy deferred $6k of his $200,000 comp and the 9% under 50 guy (10% owner) only made $50k and deferred $4.5k.

[Mike Preston]

The devil is in the details. So, 9% has now changed to 10%? So be it. If you need to give back $1000, then all $1000 would be taken from the 90% owner and since that person is over 50, all $1000 would be characterized as a catchup. If you need to return $1,200, then $1,000 would be characterized as a catchup from the 90% owner and then $100 would be refunded to each.

And so on.

[Guest Rosemary Raymer]

No Mike, the 9% didn't change to 10% - I tried to note with the parenthesis that it was 10% owner - The details are so UNIMPORTANT - plan limit vs. ADP limit for recharacterization, etc. - I don't need correction on those things. Can we go with the spirit of the question? I just want to know if reductions have to be uniform, please. If I set the ADP limit at 1% for one person, do I have to do it for all HCEs? In Quantech you do to get it to work, but is that truly the way the rules read?

[MWeddell]

According to the proposed catch-up regulations, one cannot set a lower maximum deferral percentage for those who are catch-up eligible participants (i.e. age 50 or older) versus those who are not catch-up eligible participants. Hence, if the maximum deferral percentage for HCEs is 5% (yes, I realize that'll very likely produce an average HCE ADP of < 5%), then you can't set a lower limit for HCEs who are age 50 or older. HCEs age 50 or older will be able to contribute 5% + $2,000 for 2003.

If you're talking about deferrals in excess of the ADP limit, not a plan limit, then one runs the ADP test just as before except that instead of making corrective refunds to HCEs, one checks to see if any of the HCEs about to get refunds instead are catch-up eligible and haven't fully used that calendar year's maximum catch-up amount.

[Earl]

are you proposing to set a 2002 deferal limit on the HCEs in February 2003?

and isn't 5k 10% of 50k?

I think your error is when you say: If you fail the ADP test and have HCEs over 50 you can recharacterize some deferrals as catch-up.

That is only true if the 50+ would be due a refund. You can't recharacterize his deferral to avoid a refund to someone else.

[Guest Rosemary Raymer]

I have corrected the inconsequential math error above since that seems to be the focus instead of the actual question.

I have gotten my answer from other sources and for those of you interested, the answer is that you are not setting a limit by recharacterizing a refunded amount as a catch-up contribution. The recharacterization occurs after the test is run and all deferrals are set. Thanks MWeddell - your response was helpful.

Now, I'm off to review everyones' posts and reply by correcting their spelling and grammar. (just kidding)

[Mike Preston]

The devil is in the details.  So, 9% has now changed to 10%?  So be it.  If you need to give back $1000, then all $1000 would be taken from the 90% owner and since that person is over 50, all $1000 would be characterized as a catchup.  If you need to return $1,200, then $1,000 would be characterized as a catchup from the 90% owner and then $100 would be refunded to each.

And so on.

Well, if you are going to correct your numbers, so my response looks wrong, I guess I should correct my numbers, too, huh?

Let's reword the above (which was based on $6,000 and $5,000, to $6,000 and $4,500).

If you need to give back $1000, then all $1000 would be taken from the 90% owner and since that person is over 50, all $1000 would be characterized as a catchup. If you need to return anything up to $1,500 then $1,000 would be catchup and the balance would be refunded. If $1,700, then $1,000 would be characterized as a catchup from the 90% owner, $500 from him would be refunded and then $100 would be refunded to each.

What part of my original response is inconsistent with the "correct" answer you received from another source, other than relying on your inconsequential numeric errors?

[Guest Rosemary Raymer]

Just that I wasn't asking anyone to calculate refunds or check the math. My degree is in math, not typing. The question was, if I decrease the limit for one, do I have to do it for all. The answer is no. Simple.

[Guest Ben S]

New thought if any of you can help me...

I know that a plan-limit on deferrals is one of three triggers for the eligibility to make catchups. What I do not know is if the Regs contemplate the plan that imposes "administrative" deferral limits on its HCE's, which is designed to pass the testing. For example if HR tells all the HCE's that their limit is 6% in a plan that has a limit in the Document of 15%. OR must the plan imposed deferral limit STRICTLY be in the terms of the plan.?

What if the document indicates that such a limit may be imposed on HCE's but doesnt "hard-code" a percentage, just implies that it is at the discretion of tha Administrator? Any thoughts or directions/discussion welcome!!!

Thanks

[MGB]

Ben,

The authors of the catch-up regulations indicated (see the discussion in the preamble; they have also talked about this at conferences and on conference calls) that they felt such an administrative practice is prohibited in general because it does not meet the criteria of "definitely determinable benefits." However, they also made it clear that the catch-up regulations are not the place to address this. So, I expect it to be addressed in the upcoming omnibus 401(k) regulations (due out soon).

In the meantime, if you were to ask the authors of the regulations, you would get the answer that an administrative limit does not trigger catch up. There are many practitioners that are ignoring this.

However, if you did allow catch up on an administrative limit, it only means that the amount would be included in the ADP test. If the test fails, the amount becomes a catch-up, which is exactly what you desired. Note that you are allowing the over-50 HCEs to defer more than the under-50 HCEs before knowing that it is a catch up. This may run afoul of 410(b) requirements of a benefit, right or feature.