Off calendar catchup

[Guest tommunson]

Catchup eligible HCE made the following deferrals

1/1/03 -12/31/03 $0

1/1/04 - 6/30/04 $5,000

7/1/04 - 12/31/04 $11,000

1/1/05 - 6/30/05 $18,000

I need to test for 6/30/05 PYE

Total deferrals for PYE are $28,000. I believe I test $24,000. (Sal's book suggests that for testing purposes $3,000 is classed a catchup for 2004 and $1,000 is classed as catch up for 2005).

Of course the plan fails the ADP test. $15,000 needs to be returned to correct the test. Can an additional $3,000 be classified as catch due to ADP failure (presumably the remaining unused 2005 catch up of $3,000) and only $12,000 actually returned? That means effectively, $7,000 is catch up over the 2 calendar years, but it all seems to happen in one plan year. Is this correct?

(Who wrote these rules!?!)

Thanks.

Tom

[Mike Preston]

Your conclusions are correct. But since you are an actuary, your arithmetic is incorrect, so your assumptions as to amount are wrong

java script:emoticon('') smilie.

My calculator says that $11,000 plus $18,000 is $29,000, not the $28,000 you suggest.

It looks like the calendar year 2004 deferrals were conveniently precisely equal to the allowable deferral without catchups ($13000) plus the allowable catchup deferals ($3,000), or $16,000. Clearly, $3,000 of that amount counts as catchup for 2004.

You don't mention whether the $5,000 contrubuted in the plan year ending 6/30/04 was subject to an ADP test that failed, thereby using some portion of the 2004 catchup in the 6/30/04 plan year. I'll assume there wasn't any so that the full $3,000 catchup for 2004 was available to the 6/30/2005 plan year overlap (7/1/2004 through 12/31/2004).

Still with me?

As of 1/1/2005, everything is copacetic. That is, you have used the 2004 catchup to the fullest extent allowable.

Now we look at the six month period ending 6/30/2005.

We find $18,000 of deferrals, which just so happens to be the limit of both the 2005 deferrals without catchups ($14000) plus the allowable catchup deferrals ($4,000). Sounds wonderful, huh?

Oh, you fail your ADP test, huh? You do so counting only those amounts which aren't catchup deferrals under 401(a)(30), right? That amount is:

2004 = $11,000 minus $3,000; or $8,000

2005 = $18,000 minus $4,000; or $14,000

Total of $22,000, not the $24,000 you mention.

You suggest, although you don't specifically say, that $9,000 is this participant's limit for the 6/30/2005 ADP test. You suggest that you test $24,000 and that $15,000 must be returned. I suggest that you test $22,000 and, assuming the same limit of $9,000, you return $13,000.

Do you agree with my math?

Couple more points, that probably are irrelevant. To do a complete test, you need to know that the person's compensation exceeds the deferrals (highly likely with an HCE, but you never know) and that there are no other ER contributions which might casue 415 to be violated if aggregated with the deferrals.

Who wrote these rules? <lol>

[Mike Preston]

Oh, to be complete, you also need to know if there is a plan imposed limit. I'll assume there isn't.

But if there were, and if this person violated both 415 and a plan imposed limit, there is an ambiguity in the regulations and it is unclear whether you are forced to use your catchup on the Plan Imposed Limit (PIL) before correcting the 415 violation.

So my spreadsheet asks two questions that I think need to be asked before one can be sure that there is a consistency in applying the calculations to a specific plan:

1) Correct 415© before Plan Imposed Limit?

2) Include Plan Imposed Limit violations in ADP?

Bet you are sorry you asked!

[Guest tommunson]

Thanks Mike,

You made all of the correct assumptions - no plan imposed limit and no ADP falilure for the 6/30/04 PYE. And you did the math correctly. (do I get 1/2 credit as I did the posting from home where I am limited to my fingers )

I looked over the examples in the regs and got somewhat lost. I'm a little surprised that you can get 2 catchups during the one 12 month testing period, but so be it. Rules are rules.

Tom

[Mike Preston]

You get two catchups during the 12 month period the same way that you get two 401(k) deferral limits during the 12 month period. Try explaining that you can defer, legitimately, $27,000 during a 12 month period to somebody unfamiliar with anything other than calendar year plans. Great fun. ;-)