Off Calendar Year Catch-Up

[§#$%!]

Plan year ended 09/30/2005.

ADP test failed and refund of excess contribtuion is required for $200 for a participant over 50.

Can this be treated as catch-up if the following deferrals occured?

$13,041.47 for the plan year;

$18,000.00 for calendar year 2005 ($10,458.35 in q1-q3 2005, $7,541.65 in q4 2005)

[Mike Preston]

Yes. Since you are asking about an amount ($200) which is less than the increase in the catchup limit between 2004 and 2005, you need less information to do the complete calculation. Nonetheless, in the future, when dealing with a non-calendar year 401(k) plan, in order to determine the catch-up eligibility as of the end of the plan year ending within the calendar year, you need to take into account the following information:

1. Plan imposed limit, if any, on elective deferrals. This is usually not applicable. I've assumed it is not applicable.

2. Annual additions through end of plan year (in this case 9/30/2005) from sources other than elective deferrals. I've assumed zero for this calculation.

3. The amount of the prior calendar year's (in this case 2004) catch up limit utilized at the end of the prior plan year. That is, how much of the $3,000 2004 catch up limit was used up at 9/30/2004. I've assumed zero, but since you are asking about recharacterizing less than the $1,000 difference between last year's catchup limit ($3,000) and this year's catchup limit ($4,000) it really doesn't matter for this particular calculation.

4. Elective deferrals for the relevant periods beginning on the first day of the prior calendar year:

a. Deferrals from the beginning of the prior calendar year (in this case, 1/1/2004) through the beginning of the plan year starting in the prior calendar year (in this case, 9/30/2004). I've assumed zero for this calculation. Again, since you are asking about recharacterizing less than the $1,000 difference between last year's catchup limit ($3,000) and this year's catchup limit ($4,000) it really doesn't matter for this particular calculation.

b. Deferrals for the period between the date above (in this case, 9/30/2004) and the end of the prior calendar year (in this case, 12/31/2004). For your plan, this amount was $13,041.47 less $10,458.35, which is $2,583.12.

c. Deferrals for the period between the first day of the current calendar year (in this case, 1/1/2005) and the end of the plan year that ends in the current calendar year (in this case, 9/30/2005). You showed this amount as $10,458.35.

5. ADP limit for the plan year ending within the current calendar year. For your plan, that amount was shown as $12,841.17 (determined as $13,041.47 minus $200).

Sal Tripodi has a great set of worksheets which ensure that if you know the above information you can fairly easily determine what the catchup limits are at various dates.

[§#$%!]

I lost that worksheet Sal prepared four years' ago. Somebody should have a copy in this office.

Would your answer change if:

1. None

2. I'm trying to give max ps cont to this person >$42,000

3. $3,000 was used up for ADP and 415 for pye 2004 (maximized ps for pye 2004)

4. $10,416.88 for q1-q3 of 2004; $2,583.12 for q4 of 2004 and $13,000 for 2004

I say that it can't since catch-up was used up for 2004 and this person deferred $18k in calendar 2005

Thanks Mike

[Mike Preston]

Well, I'd prefer a specific number for 2. Will you settle for $32,958.53?

In the absence of any other issues, you would normally look to the maximum that can be allocated at 9/30/2005 as being $32,958.53. Such that $32,958.53 + $13,041.47 - $4,000.00 = $42,000.00. This presumes that $4,000 is available to use as of 9/30/2005. I certainly think it is.

As far as your conclusion goes, certainly if you use the full $4,000 of the 2005 catchup limit at 9/30/2005, that means that you don't have any left to use at 12/31/2005.

Let's see if you need any:

$18,000 deferred during calendar year minus $4,000 treated as catchup as of 9/30/2005 from deferrals made through that date, resulting in $14,000. This seems to work.

I think the key is how much of a PS contribution you make as of 9/30/2005. That amount determines how much in of deferrals made in that plan year are treated as catchup deferrals. Once they are treated as catchup deferrals at 9/30/2005, they reduce the deferrals made for purposes of seeing whether your calendar limit is exceeded, don't they?

But one thing I'm curious about. You say that the ADP test failed at 9/30/2005. But before you can run the ADP test at 9/30/2005 you need to determine what the PS contribution is, because by virtue of the PS contribution being in excess of a certain amount ($42,000 - $13,041.47 = $28,958.53) that excess turns deferrals through 9/30/2005 into catchup deferrals. So, if you actually contribute the maximum I started this post with ($32,958.53), you lower the non-catchup deferrals to $13,041.47 - $4,000 = $9,041.47. Since you said that $13,041.47 exceeded the maximum by $200, I'm guessing that you don't have an ADP violation at 9/30/2005 at all any more, if you do things in this order.

I admit that the regulations are silent as to whether a 415 violation must (or may) be corrected before an ADP violation. I submit that it doesn't really matter much, and if the IRS had cared one way or the other they would have put in an ordering clause. But I don't remember there being one.

Hence, I think the easier way to do things is to fix the 415 limit violation, to the extent one exists, by changing deferrals into catchup to the extent necessary. After that is done, one runs the ADP test based, of course, on the amount of deferrals not already treated as catchups.

I'm glad you posted the additional detail because this is a case that draws the ordering issue out and places it front and center for all to see.

In our world it isn't so much "Which came first, the chicken or the egg?" as it is "Which do you fix first, a 415 violation or a failed ADP test?".

And the issue gets even a more fun if there is a plan imposed limit on deferrals that one needs to take into account. Do you fix a plan imposed limit before a 415 limit violation or after? Do you fix a plan imposed limit before an ADP violation or after? What if you have all three? Which do you fix first? Which do you fix second? Does it matter? Does anybody's document specify this? My head hurts. ;-)

It took me hours to program Sal's spreadsheets, but having them programmed in Excel has been a lifesaver for me. I suggest you dig out the worksheets and go at it. It will certainly crystallize the issues for you.

[§#$%!]

$32,958.53 is the number I used.

My initial reaction was to fix 415 first.

Thanks.