Deferrals from Compensation over the limit

[Guest HRAdvisor]

Consider a 401(k) plan where participants elect to defer a percentage of compensation pre-tax during year. When a participant's compensation reaches the compensation limit during the year, e.g. $230,000 for 2008, can the person keep deferring from compensation from the remainder of the year, if the participant has not yet gone over the 402(g) limit?

I've seen information in the ERISA Outline Book that seems to say yes, but I've gotten feedback from others that say no.

One relatively hidden point that seems to be important is that the participant must have elected (I don't know any plans that have this operational election) to defer a specific dollar amount, even if it is equal to the current 402(g) limit, and that makes the compliance part work, since the deferrals would be accelerated as necessary theoretically to avoid coming from excess compensation.

Would it be arguable that a participant's election of a percentage, where the application of the percentage to the participant's entire year of compensation would result in an amount over the 402(g) limit, is deemed to be an election to defer the maximum allowable 402(g) amount? This would have the same compliance outcome as the previous paragraph.

[masteff]

can the person keep deferring from compensation from the remainder of the year, if the participant has not yet gone over the 402(g) limit?

Our interpretation (which was blessed by outside ERISA counsel) is that the 401(a)(17) compensation limit is an annual limit and not an intraperiod limit. So as long as the maximum deferral for the year is limited to the lesser of a) the 402(g) limit or b) the comp limit times the max % allowed by the plan, then you're okay.

Based on this, a person making $460K could wait to begin deferring until July 1st and still be allowed to make the maximum allowable contribution for the year (i.e., lesser of 402(g) or plan limit).

[Guest HRAdvisor]

Thanks for the feedback. Our ERISA counsel gave a different opinion, but I tend to agree with your counsel's opinion.

[WDIK]

http://benefitslink.com/boards/index.php?showtopic=33093

[Tom Poje]

perhaps one should look at the preamble to the final 415 regs.

for a copy:

http://benefitslink.com/taxregs/td9319.pdf

its so long, and it goes on and on...but wait...look there, at the bottom of page 47...

is is there in print....throw that in front of anyone who says otherwise!

bottom of page 47, last paragraph

"As noted above, the final regulations provide that a plan cannot take into account

compensation in excess of the section 401(a)(17) limit. In addition, the final regulations

provide that elective deferrals can only be made from compensation as defined in

section 415©(3). However, in applying these two rules, a plan is not required to

determine a participant’s compensation on the basis of the earliest payments of

compensation during a year."

[Pension Nerd]

Tom....

Just to clarify...are you saying you think the preamble to the 415 regs supports the answer provided in the ASPPA Q & A?

If so, the comp limit would not prohibit a person earning let's say $560,000 ($21,538 per pay) from spreading their contributions out over the entire year?

I am just a little confused by the language in the preamble...it sounds like the above example will no longer be allowed? I'm hoping this is not the case...

Thanks!

[austin3515]

What the Treasury is saying is that if a person earns $115,000 a month, you can make 401k based on the comp from any two months you want. Or, you can say that your $230K is taken pro rata from each pay check. The only way you would have a problem is if the regs said you MUST apply 401(a)(17) based on the comp paid earliest in the year. And they explicity state otherwise.

Tom is just the very capable messenger who has the insane ability to find these little gems

[QDROphile]

HRA Advisor:

The advice you got from your ERISA counsel is so outrageously incompetent that you should fire the person unless you get both some sort of explanation and a profuse apology. Even then, I don't see how you can trust any future advice. I am very curious about how you are going to respond to this situation.

[austin3515]

I've often wondered what is required of an attorney before he/she can refer to themselves as ERISA Attorneys. Surely their exists an attorney who spends 10% of their time on ERISA issues and bills themselves as an ERISA Attorney.

[Bird]

While you're wondering, Austin, wonder about how much the so-called ERISA attorney got paid for this advice, and how much everyone else who contributed accurate information got paid. Sheesh.