$205,000 Compensation Limit

[Guest dmcmanus]

I cannot seem to find a straight answer on this anywhere...does the 2004 compensation limit of $205,000 apply in determining the contribution for both employee elective deferral AND employer matching contributions, or just for the match?

I have a client for whom several participants had only 6% elective deferral for 2004 - going by the $205,000, the max contribution should have been only $12,300, however they went to the $13,000 limit. For the employer match, however, which is max of 3%, that was correctly capped at $6,150 (3% of $205,000).

[Guest poberlander]

It depends on what the Plan document says. The $205,000 comp limit (2004) is the legal maximum a plan can recognize - but a plan could be written to define "plan comp" as something smaller.

But specific to your question, the plan could be written in such a way as to allow a deferral election up to the 402(g) limit ($13,000 in 2004) irrespective of the % elected and the $205,000 max compensation. In essence, the plan allowed the particpant to contribute 6.34% of $205,000 ($13,000), not 6% of $216,667. Unless there is special language in the plan or particpant communications to this effect, they could have a hard time explaining this to an IRS auditor.

[E as in ERISA]

The participant isn't expected to know code sections and the election form doesn't have to say "I elect to defer ___% of my 401(a)(17) compensation." You can put the election in plain terms. So they might elect a specific percentage of each payroll -- even when their cumulative payrolls have exceeded the $205,000. So they are actually electing more than 6% of $205,000 when you view it on a plain language basis. The IRS clarified this informally several years ago. But the clearer you make it in your documentation how you are applying the participant election, the better you will be ('cause its the HCEs who are going to exceed it).