ADP failure/Catch-up

[Guest TrustMe401k]

7/31/04 Plan year end. ADP test failed and 1 HCE needs to have $1900 returned to him. HCE is catch-up eligible and the plan allows for catch-ups.

By 11/30/04 he had already deferred 16,000 in calendar year '04.

If we recharacterize the 1900 as catchup for the 7/31/04 plan year end, does he now have a 402(g) violation of 1100? Or must we return the ADP amount? I would think that had they gotten the data to us and we had known of the failure earlier we would have recharcaterized the excess and then told him to deposit less catch-up but now I'm not sure which comes first Chicken/Egg!

Any comments? (be kind, it's Christmas!)

Merry Christmas and Happy Holidays to ALL!

[austin3515]

The $16,000 came first, so you got nothing left to reclass. You need to send a check for the ADP refund. My understanding is that even if there were catc-ups left on the table for calendar 03, you couldn't use them, because 2003 is over and done with (despite the fact that this plan year covers part of 03).

[Guest TrustMe401k]

Austin,

Thanks, but why are you saying the 16,000 came first? Is it because we didn't know about the ADP failure prior to the time the HCE deferred the 16K? Remember, the plan year is 7/31/04 plan year end and he didn't defer the max until 11/30/04.

I agree about not using the '03 catch-up. There wasn't any available anyway.

I'm not saying I disagree with you but just trying to make sure I can explain it to the HCE correctly.

Thanks

[wmyer]

You'll want to look at examples 5 & 6 in the Final 414(v) regulations:

http://www.mhco.com/PDF%20Files/PDFs%20200...gs%207-7-03.pdf

As long as the HCE doesn't go over 16,000 in 2004, there is no 402(g) violation.

We would need to know the amount deferred during plan year 2003 to be able to tell you whether anything can be recharacterized as catch-up.

[Guest TrustMe401k]

After further review, the HCE deferred 10,320 for calendar year 2003. HCE was catch-up eligible in 2003.

Now what?

[austin3515]

I change my answer based on what's below. The ADP failure came first, and you have yourself a genuine 402(g) excess (I think, anyway). This is from the 414(v) regulations. Everything I read in the ERISA Outline Book "deferrals as of Plan Year End" and never mentioned your scenario, which I think supports my revised conclusion.

(3) Timing rules. For purposes of determining the maximum amount of permitted catch-up contributions for a catch-up eligible participant, the determination of whether an elective deferral is a catch-up contribution is made as of the last day of the plan year (or in the case of section 415, as of the last day of the limitation year), except that, with respect to elective deferrals in excess of an applicable limit that is tested on the basis of the taxable year or calendar year (e.g., the section 401(a)(30) limit on elective deferrals), the determination of whether such elective deferrals are treated as catch-up contributions is made at the time they are deferred.

[wmyer]

No, there's no 402(g) excess. 402(g) limit is calendar-year limit. So, $10,320 in calendar year 2003 -- no 402(g) excess there. $16,000 in calendar year 2004 -- no 402(g) excess there, since participant is age 50 or older.

[Guest TrustMe401k]

Ok, let's look at it this way.

HCE needs to get 1900 refund at 7/31. The 1900 is reclassed as catch-up. Now we have a catch-up amount of 1100 for the rest of 2004. Now the participant has deferred 16000 for 2004, 3K of which is catch-up. BUT, we have already counted 1900 as catchup to avoid returning the ADP money. What type of failure do we have? excess catch-up? 402(g)?

I'm inclined to agree with austin that it is a 402g excess. But again, I'll listen to anything at this point. The eggnog is flowing early!!!

[Guest cosmo1215]

You do not have 402g excess.

Example:

1/1/2004 - 7/31/2004 - Deferred $10K

adp failure reclassifies $1,900 leaving a net deferral of $8,100

8/1/04 - 12/31/2004 - Deferred $6k

When net deferral of$8,100 is added to $6k, you have $14,100 in pretax contributions. $1,100 is applied to excess above $13k

Pre-tax for adp testing purposes for 7/31/2005 would be $4,900

It appears that no refunds are necessary, unless there is a 415 or plan limit excess.

[austin3515]

How could there be no refunds? We failed the ADP test, and the participant was at the 402(g) limit plus catch-ups? What's the point of the test if no refunds are necessary? At a minimum, the only question is whether or not it's an ADP refund or a 402(g) refund, and according to my cite, it's an ADP refund (i.e., plan year limits occur on last day of plan year, and calendar year based catch-ups occur on the day they were deferred. Because the $16,000 wasn't reached until well after 7/31/04 (right?) the ADP failure came first.

Something's gotta go...

[pmacduff]

For what it's worth...I think you would recharacterize the $1900 so your ADP is ok for 2003/04, right? Now, you also said the participant deferred $16000 so far in calendar 2004 (I assume from Jan - October?), right? If he stops now, then all he has deferred in calendar 2004 is the $16,000 so there is no 402(g) excess. But I do agree that there is a $1900 excess catchup contribution for calendar 2004 so it is my opinion that you would need to go ahead and refund that excess.

[austin3515]

So we're sying it's an excess catch-up contribution? Isn't that corrected like a 402(g)?

[pmacduff]

Austin - FWIW - I agree...jehmig's initial comment said it best "the chicken or the egg"????????