Deferrals and limits that affect other participants

[K-t-F]

What are people's thoughts on this situation... Let me know if and where I go wrong:

Plan makeup:

- LLC taxed as a partnership

- 401k non SH, No match, W/ER PS contribution

- 10/31 FYE & PYE

- Cross Tested: Group 1 Partners (3 partners), Group 2 all others

All partners make $200k+

Passes ADP

No problems W/Cross testing contribution

Here is the situation... One partner is retireing on 10/31/04. That partner has deferred $1,000/month for each month of the 10/04 plan year. 2003 402g not exceeded. Partner wants to defer an additional $3,000 in month 10/04 to get to the 2004 402g of $13,000 which would mean a $15,000 deferral to the plan for the 10/31/04 plan year (see my math... $1,000 each month of 10/04 PYE + $3,000 additional in 10/04 for $15K).... ok? Partner also wants to deffer the $3,000 catchup. (With me so far)

Questions:

1 - Can the partner have a $15,000 deferral for the 10/31/04 plan year? (+ $3,000 catchup?)

2 - Wont it limit the max non elective contribution to the other partners to $41,000 - $15,000 or $26,000? That will ultimately mean that the other partners will not max out.. they will get $26,000 + $12,000 or $38,000 (if they continue at their usual rate of $1,000/month).

CAN they (the other partners) also make that $15,000 deferral like the retireing partner as outlined? Basically use up their 2004 402g in the first 10 months of 2004, not make any deferrals in 11,12/04 and then as a business going forward their employer profit sharing contribution will just be more to get them up to the max for the 10/05 year end?

Is there a better way? Thanks!

[Blinky the 3-eyed Fish]

1. Yes, you obviously are aware the 402(g) limit is a calendar year limit, so nothing is precluding a deferral in the plan year in excess of the 402(g) limit.

2. You don't give enough information about the document to answer this question fully. I can tell you that in my documents, if someone cannot receive a contribution within an allocation group because they are at a 415 limit, the document provides that the unallocated contributions for that group spill over to the other participants in the group. With the language in my documents, the other partners would be able to get $29,000 in PS allocations, even though the one partner is only getting $26,000 because he's at a 415 limit.

The answer to the question in you last paragraph is yes, but as I stated in (2), it may not be necessary.

[jquazza]

Blinky,

catch up contributions don't count towards 415, so there really is no issue. The Partners could get 41k + catch up.

[Blinky the 3-eyed Fish]

Jquazza, I read in the question that $15,000 in deferrals were being made NOT including the catch-up.

[jquazza]

I see, then, if catch-up are not taken into consideration, the partner who is making the extra deferral contribution would be shorting himself out of his PS contribution. If all the partners get on board with his strategy, that could help them reduce their staff contribution costs, however, they might have an ADP test issue.