off calendar year/catch-up

[Guest deathbycashcall]

June 30, 2005 year end, HCE defers $10,000 for the plan year. ADP test fails and $4,000 is reclassified as a 2005 catch-up contribution to avoid refund.

It appears that it would be necessary to advise the HCE that his 402(g) limit for the calendar 2005 year is now $14,000, not $18,000 as he may think. Would you agree?

If he continues to defer $18,000 for the calendar year, then it also would seem that he would have a 402(g) violation for 2005 that must be corrected by 4/15/06. Of course, unless the Plan Administrator advises him that his 05 catch-up was already used in the testing, he (and his accountant) would be unaware of the violation. Quite possibly, this would not be brought to his attention until the 6/30/06 plan year is tested. Thus the consequence would not be the "double taxation" as it usually is in the case of a 402(g) violation not timely corrected.

Am I missing anything here?

[Guest trumpy]

Just so we are on the same page - assume that the HCE deferred $5,000 during the period 1/1/05 - 6/30/05. Due to the failed ADP test $4,000 of this $5,000 is recharacterized as catch-up contributions for the 2005 calendar year. I believe then that the participant can defer an additional $13,000 for the period 7/1/05 - 12/31/05 without violating 402(g). Ofcourse, ADP for plan year ending 6/30/06 is another issue...

[Brenda Wren]

Doesn't sound like you two are on the same page.

Assuming the 50-year-old participant deferred $5,000 for the 2005 calendar year, $4,000 was reclassified as a catch-up on 6/30/05.....can he defer $9,000 for the remaining calendar year or $13,000?

Appears Death is saying $9,000 and Trumpy is saying $13,000.

[Mike Preston]

I'm with Trumpy.

[Brenda Wren]

I'm with Death.

Mike, in lieu of receiving $4,000 back to satisfy ADP, employee is using up his 2005 catch-up contribution. If he later defers $13,000 (achieving $18,000 2005 calendar year deferral), he has used his catch-up twice in the same calendar year.

Or look at it like this......the refund of $4,000 was processed and not used as catch-up. Employee defers $13,000 more in the calendar year for a total of $18,000. His net deferral for 05 will be $14,000.

I'm pretty sure the software we use (Relius) would agree......if the 2005 catch-up bucket had already been filled up, it wouldn't allow it to be used again.

[Guest trumpy]

It has always been my impression that once deferrals are recharacterized as catch-up due to failure of a test or exceeding some limit they are catch-up for all purposes.

For example, suppose in 2005 a 50 year old participant defers $18,000 and $4,000 is recharacterized due to exceeding 402(g). When you go to run ADP test you would only test $14,000 - not $18,000.

It's like using a QNEC to satisfy ADP and turning around to use it to satisfy something else, like top heavy or gateway.

[Brenda Wren]

Not sure I'm following you, Trumpy. I agree with your second paragraph, but off-calendar year 401(k) plans with catch-up provisions create special challenges.

If the employee is allowed to contribute $18,000 for the calendar year 2005, it would be as if the recharacterization of the 6/30/05 ADP refund to catch-up didn't occur or didn't matter.

[Guest trumpy]

I appreciate that this is an off-calendar year plan - however, here is an excerpt from the ERISA Outline Book (2004 Ed.) Ch. 11 Section XI Part B.3.b.4 -

"Secondly, elective deferrals that are catch-up contributions as of the last day of a noncalendar plan year (or noncalendar limitation year), because they exceed IRC 415© limit, an employer-provided limit, or the ADP limit, are not taken into account to determine if the IRC 401(a)(30) limit is exceeded for the calendar year which begins in that plan year (or limitation year)."

[Brenda Wren]

Well, I'm looking at Sal's 2005 Edition, see your quote, and the example. Sal said it, it must be so. Sure wish I could understand it! Seems to me that the employee is able to take advantage of the catch-up provisions twice. What am I not understanding??

[Guest trumpy]

I think that its timing that gets confusing - they aren't really using the catch up twice but rather that once deferrals are recharacterized for one reason they are recharacterized for all purposes.

So, in the previous example you have $4,000 being recharacterized due to ADP failure within the 2005 calendar year. So for any other limit/test for the plan year ending 6/30/05 or the 2005 calendar year its like those deferrals don't exist whether its 402(g), 415©, etc.

[RTK]

A little late to the thread, but here are my comments.

My view is that the off calendar plan year ADP test never changes the total elective deferrals and catch-up contributions a participant can make for a calendar year under 402(g). The impact instead is on the amount of elective deferrals considered to be catch-up contributions for the next plan yearADP test.

Thus, in the example, HCE after the ADP test had $1,000 elective deferrals and $4,000 catch-up as of 6-30-05. This means that HCE can have $13,000 more of elective deferrals for the remainder 2005 without violating 402(g), because only $1,000 of elective deferrals would have been made as of 6-30-05. Thus, total elective deferrals for 2005 would be $14,000 and total catch-up contributions would be $4,000. However, none of the $13,000 of elective deferrals for the remainder of 2005 could ever be considered catch-up contributions for purposes of the 05-06 plan year adp test.

[Mike Preston]

RTK, a very nice description that. Correct, too. Very nice.

[RTK]

Mike, thanks for the kind comment. I've been really busy lately (I guess not a bad thing), but I am going to try more active on the boards.