Catch-up Contributions

[Gilmore]

A participant defers $12,000 during the 2003 plan year, 12/31/2003 year end. The participant is eligible for catch-up, also allowed in the plan doc. Now that the plan year has ended we are working on the profit sharing contribution. Can the participant be provided a $30,000 ps contribution and have $2,000 of deferrals recharectorized as catch-up? Assuming of course that all of this passes non-discrimination testing.

To add a twist, suppose the plan year ended on 2/29/2004. Assuming again that the partipant deferred $12,000 during the calendar year ending 12/31/2003. The 415 limit is now $41,000. Assume also that the participant defers the same amount each month so that the amount of deferrals for the 2/29/2004 plan year is also $12,000. If the answer above is "yes", that additional ps can be made with the deferrals being recharectorized, what is the amount of catch-up available now that we are in a new calendar year? $2,000, $3,000, $5,000?

Thanks!

[Gilmore]

Ok, I've done a bit more research and discovered that the catchup limit applies for the calendar year in which the plan ends. So for the plan year that ends 2/29/2004 the catchup would be $3000. I'm assuming than that we could give the participant an additional $3,000 in profit sharing so long as he only defers $13,000 during the 2004 calendar year?

The effect of all this being to shift the additional deduction for the employer to the fiscal year that ends 2/29/2004 rather than waiting until 2/28/2005's fiscal year?

[QDROphile]

Isn't it a little strange to be talking about changing a profit sharing contribution allocation to a participant based on the participant's deferral amount? Are you asking this in the context of an adjustment to comply with section 415 limits?

[Gilmore]

In order to ensure that a participant does not exceed the 415 limit when we calculate the ps contribution after the plan year ends we need to know what other additions were made during the plan year; in this case the salary deferrals.

If we are taking about a calendar year plan ending 12/31/2003, and a catchup eligible participant who deferred $12,000, my question is, can we allocate $30,000 in a profit sharing contribution? Since the $30,000 and the $12,000 add up to $42,000 that exceeds the 2003 415 limit by $2,000. Is it possible at that point to consider $2,000 of salary deferrals as catchup? Once again this is assuming that all of these contributions pass nondiscrimination testing.

I guess by making the $30,000 ps contribution we are "forcing" the participant to exceed a statutory limit (415) and thus creating the situation for recharactorizing deferrals as catchup.

[QDROphile]

Deferrals become "catch up" amounts to the extent they exceed a plan or legal limit, including the 415© limit, and don't exceed the applicable catch up limit. For 2003, a $30,000 profit sharing contribution and $12,000 of deferrals would not violate the 415© limit because $2000 of the deferrals would be a catch up amount, as you have suggested.

[Gilmore]

Thank you.