415 and Off Calendar Year Catch-Up Conts (Again)

[buckaroo]

This is an example I received from an ERISA attorney. I am under the impression that you cannot fix the 415 violation using the catch-up for the calendar year that ends in the plan year. Am I wrong? (I thought it was "use it or lose it".)

Participant B, who is over 50 years old, had catch-up contributions of $1,000 for 2005 due to a correction of an ADP testing failure for the Plan year ended March 31, 2005. This equaled Participant B’s pre-tax deferrals of $1,000 for January through March, 2005. From April 1, 2005 to December 31, 2005, Participant B made $14,000 of pre-tax deferrals (equal to the $14,000 limit of Code Section 402(g), with no catch-up contributions). Participant B made pre-tax deferrals of $4,000 from January through March, 2006, and received $6,000 of matching contributions for the Plan year ended March 31, 2006. Therefore, his annual additions subject to Code Section 415 for the Plan year ended March 31, 2006, prior to considering transition benefit contributions would be $24,000. If the transition benefit contribution formula provides a contribution of $30,000 for Participant B, that amount must be reduced by $10,000 in order to satisfy the Code Section 415 limit of $44,000 for the Plan year ended March 31, 2006, unless Participant B’s pre-tax deferrals can be recharacterized as catch-up contributions. $3,000 of Participant B’s pre-tax deferrals from April 1, 2005 to December 31, 2005, may be treated as catch-up contributions because only $1,000 of catch-up contributions were previously taken into account for 2005. In addition, Participant B’s $4,000 of pre-tax deferrals between January 1, 2006 and March 31, 2006 may be treated as catch-up contributions. Therefore, $7,000 of Participant B’s pre-tax deferrals may be treated as catch-up contributions, and only a $3,000 reduction applies to Participant B’s transition benefit contribution. A $27,000 transition benefit contribution should be made to Participant B’s Plan account for the Plan year ended March 31, 2006.

[Mike Preston]

I'm glad this one is on the ERISA counsel's shoulders. There is nothing I know of that says you can make something a catchup contribution merely because you want to do so. As of 12/31/2005, unless there was a limitation in effect that otherwise precluded some portion of that last $14,000, I don't see where any part of it is a catchup.

[buckaroo]

Mike,

Thanks for the response. It is what we came up with.

I did try to analyze it and figure out what the attorney was thinking and the only thing I came up with is that he feels he is violating 415 for the plan year and, therefore, he can use any catch-up he wants for any calendar year involved in the plan year to rectify. Strange.