Elective Deferrals

[Guest Don123]

Is anyone familiar with the following:

Does the annual compensation limit under IRC 401(a)(17), which is currently at $210,000, trump the annual limit on elective deferrals under IRC 402(g), which for 2005 is $14,000? In other words, let's say you have an employee who on September 1 exceeded $210,000 of compensation, but as of that point had only contributed about $7,000 (because he elected to defer compensation at a low percentage (such as 2% per pay period)). Can this person keep deferring compensation since he has not yet reached the $14,000 limit imposed by 402(g) or does 401(a)(17) prevent him from making additional deferrals because he is over the annual compensation limit?

Thank you for you comments.

[QDROphile]

No trumping. Not a limint on timing of deferrals. Other threads cover this false issue exhaustively.

[david rigby]

In other words, it is an issue of proper plan drafting. Qdro is correct: several prior discussion threads on this topic. Try the Search feature.

[Guest Don123]

I did a search and found some useful threads.

Just a couple of follow up questions:

1) Previous threads on this topic suggest that one way of dealing with this situation is to do a "true up" either during the year or at the end of the year. I imagine that the plan must permit a true up before it can be done? How can I find if the plan permits a true up? [We use a prototype plan.] Do I look for the words "true up" in the plan or are there other buzz words that I should look for? Sorry for asking such a basic question, but I don't know where to look in the plan document or adoption agreement.

2) If our payroll dept has stopped salary deferrals and employer matching contributions when the compensation limit was reached but the 402(g) limit was not yet reached, how can this error be corrected if it has gone on for a few years? I suppose we would have to use the EPCRS?

Thank you very much for all your comments.

[Archimage]

1. Some documents will have the options to select how the match is calculated, either on payroll-by-payroll basis or plan year basis. Some give the administrator the flexibility to choose either method for any given plan year.

2. If the deferrals were stopped against the participants' designations, I think depositing a QNEC of the average deferral percentage for the group (HCE or NHCE) is the way to correct this error.

[QDROphile]

You have to look at what the plan document says. While not required by law or good sense, it is possible that the document actually does cut off deferrals when income reaches the limit. But it was probably a misguided effeort in payroll processing.

If you have a prototype, the prototype probably does not say anything about limitation of deferrals, so you probably have an administrative error and failed to have adequate contributions. The IRS has EPCRS guidance about correction of operational failures relating to inadequate contributions. You will have to go on principles rather than specific identification of your problem. I suppose one could argue that the fiduciary reasonably interpreted the plan to require the limitation and therefore plan terms were not violated, but that would be aggressive.

I don't know what you mean by "true up." That is meaningful whan you speak of matching contributions and adjust them at the end of the year to account for limited matching contributions during the year. For elective deferrals, since you have time left before the end of the year, you can allow the participant to restart deferrals at a level that will achieve the desired amount by the end of the year. Then you might have to look at the match problem if the match is made periodically during the year, which can understate the match for the year. Separate discussions relate to the match problem.

[Guest Don123]

The plan provides for employer matching on a payroll by payroll basis. Due to a payroll system problem, both employee deferrals and employer matching contributions were stopped. The question is how to correct. As you said, with regard to deferrals, they can be restarted. To the extent employees do not get in their full deferrals, I suppose the company will have to make a corrective contribution (under the self correction program).

What about matching? Could the company true up at the end of this year? Does the plan specifically have to allow for true ups? Where can I find this in the plan? Is it called a true up in the plan document or adoption agreement or is it called something else?

Thanks again.

[QDROphile]

It is proably not called a "true up" in the plan document or the adoption agreement. You will have to read all the provisions relating to matching contributions to see what they say. It is possible that they say nothing about matching per pay period. Then you are in another pickle if the per period match results in less than the match if you look at the aggregate for the year.

[Guest lhinson]

In the adoption agreement we use, it refers to matching contributions made on an "annual basis". This would call for a true up contribution at year end.

[Guest Pensions in Paradise]

Don - since you will be retroactively increasing the 401k & match amounts for highly compensated employees, you need to check with your plan administrator to see if there are any ADP/ACP issues for the years involved.

[Beltane]

Years ago the IRS took the position that allowing 401k deferrals to continue after the 401(a)(17) compensation limit had been reached was in effect recognizing compensation above the comp limit and thus disallowed. This contradicts the conclusion I am reading on the replies here, does anyone have a site or other reference to support the allowance of 401k deferrals after the comp limit has been reached?