Catch-up and 5330

[Guest bjschiedel]

When you do ADP refund calculations, do you do the earnings calculation and then recharacterize from the employee source to the Catch-up source after earnings, or do you recharacterize the actual excess amount before earnings? Specifically, I am working on a 5330 and am not certain whether to enter into the form the total excess contributions minus any catch-up recharacterization before the earnings calculation or after. Deducting Catch-up before the earnings Calc. results in a cheaper excise tax for the client.

I would love to talk to you directly about this via e-mail:

BJS@Burkegroup.com

Thanks :-)

[Blinky the 3-eyed Fish]

The recharacterization of what can be classified as catch-up contributions is done first. Then you determine what amount needs to be refunded and compute earnings on that. Simple example:

In 2002

HCE - defers $11,000 which is 6% of salary and is over 50

NHCE - defers 3% of salary

So HCE must return 1% to pass testing, which equals $1,833.33

Catch-up available is $1,000, so now only 833.33 needs to be returned

Calculate earnings on 833.33 refunded.

I would recommend you not ask people to reply to you by email since it defeats the purpose of sharing information with everyone. Also, all the information above could be total crap and someone out there would be able to rebut it.

[Guest bjschiedel]

Can you steer me towards something in the regs that prescribes your method? I cannot seem to find Any guidance on this matter. I like your answer b/c it results in a cheaper excise tax for the client, but I would like some concrete evidence that it is to be done in that order. Any suggestions?

Brian

[Blinky the 3-eyed Fish]

See Prop. Reg. 1.414(v)-1(d)(2) or read the ERISA Outline Book if handy. If it's not handy, I highly recommend changing that situation.