Catch up Contributions in Failed ADP Test

[Guest KMP]

Is the amount of the catch up contribution determined from hitting the ADP limit equal to the amount of refund (up to $1,000) that the catch-up eligible HCE would receive?

Suppose that a catch-up eligible HCE defers $5,000 and the plan passes the ADP test, but if he defers $6,000, the plan fails the ADP test. However, since he does not defer the most, others are required to get the refund and he does not have a catch-up contribution. Is that correct?

[E as in ERISA]

See the regs. It doesn't matter who gets the distributions. You compare the $6,000 to the highest amount that ANY highly compensated employee can defer. What is that amount?

[Tom Poje]

You run the test.

If it fails you calculate the refund.

If one of those ees is eligible for catch-up the refund to that ee is reduced.

You do not reduce deferrals first then run the test. Never. Catch ups are due to someone hitting a limit. If you reduced first that would be before someone hit a limit. (or put another way, you are not allowed to treat something as a catch up to avoid hitting a limit)

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It might be of interest to note that prop reg 1.414(v)-1(d)(2)(iii) last sentence

"...such elective deferrals are still considered to be excess contributions...and accordingly, matching contributions with respect to such deferrals may be forfeited under the rules of section 411(a)(3)(G)

[E as in ERISA]

See 1.414(v)-1(b)(1)(iii) Actual deferral percentage (ADP) limit. In the case of a section 401(k) plan that would fail the ADP test of section 401(k)(3) if it did not correct under section 401(k)(8), the ADP limit is the highest amount of elective deferrals that can be retained in the plan by any highly compensated employee under the rules of section 401(k)(8)© (without regard to paragraph (d)(2)(iii) of this section).