Failed ADP, Leveling and Catch-ups (Oh My!)

[No Name]

Am I doing this right? Have a client failing the ADP. A few HCEs are catchup eligible. The method I'm using to fix the ADP test is:

1) Calc the ADP of the NHCEs (we use prior year).

2) Calc the ADP of the HCEs. Fail.

3) Find highest ADR of an HCE and solve for amount of reduction needed to equal the next highest HCE's ADR.

4) Calc the ADP. Fail.

5) Repeat 3) with both HCE's (now equal) ADRs to the next lower level.

6) Repeat 5) and 6) 'til passing.

7) Calc the total amount of the reductions.

8) Assign a refund amount to the HCEs with the biggest dollar amount of deferral until it equals the next lower dollar amount. Repeat as necessary until Step 7) amount is used up.

Then, and only then, do catch-up considerations come into play. Catch-up eligible HCEs will receive smaller (or no) refunds.

Seems counter-intuitive.

[g8r]

The methodology is correct, but I'm not sure what you mean regarding the catch-ups.

In step 8 you determine the amount of refunds. But, for those who are catch-up eligible, you recharachterize as a catch-up (up the applicable catch-up limit) instead of refunding.

So, you're conclusion is correct if the reason for the catch-up is b/c of a failed ADP. The HCEs just get a smaller or no refund.

[Tom Poje]

the only exception I can think of is if a an ee has excess deferrals (e.g. above the 402(g) limit, those amounts are treated as catch up before the ADP test is performed. It doesn't sound like that is what took place in your plan, but one never knows.