Catch-Up/Testing

[CJS07]

Hi,

We have an HCE who put in 17,915 in deferral and 32,085 in profit sharing and he is over 50.

Should we consider that he made the full catch-up of 5,000 and thus for ADP purpsoses let the software put his deferral at 12,915 OR is the catch-up 2,415 and have the software put his deferral at 15,500? In what order do we recharacterize the catch-up -ie 402g, 415, and then ADP OR 402g, ADP, 415? We're getting different results from the software based on when we do the test (before or after the PS contribution is posted).

Thank you

[JanetM]

The order you do the tests is......

402(g) - means deferrals 15,500 and c/u 2,915

plan limits - if any exist could recharacterize more to c/u

415© is $45,000 is limit so that means you are down to deferral 12,915 and c/u 5,000

ADP is last - at this point you have to give him refund if the test fails.

[Tom Poje]

the IRS personal I have sat in with have expressed some concern about the issues of 415 limits and catch ups.

for instance, in your example it sounds like the deferral was deposited in the plan before pye, and then the profit sharing was determined. lets suppose for example you were to run the adp test before the profit sharing was deposited.

you would use the 15500 in testing. [and suppose your plan failed and you had refunds that were made]

now you allocate the profit sharing (which could be done as late as sometime in Sept in a calender year plan) if you allocate as you did creating a 415 limit issue, then treated more deferral as catch up, you have now run a bad ADP test and have really botched things up big time. ugh, try and fix that mess!

I can understand the IRS reasoning.

This would be different if there was a second plan that was money purchase or the dreading target benefit in which there was a required contribution and the 415 was limit was reached. In your example it is profit sharing and discretionary and so the IRS 'frowns' upon such practice.

can it be done? well, without specific guidance you can probably get away with it, I really doubt that was the intent of things.

[Mike Preston]

When Sal published his grand treatise on catch ups (an invaluable resource, of course) he made it clear that there was no clear answer as to the order of testing when it comes to this issue.

Janet's order makes all the sense in the world to me, notwithstanding Tom's lucid reiteration of the IRS' concerns in this area.

I say that after reading the catch up regs and finding nothing in there that would preclude Janet's order from being the right way to do it.

From a practical perspective, I don't think it makes any sense to do it any other way. Having an employee make a deferral which causes them to lose out on their rightful share of the employer contribution just doesn't go down well.

[Below Ground]

Does this mean that, without respect to any other limit, a person over age 50 could do a salary deferral of $15,500 and get a profit sharing allocation of $34,500; for a total of $50,000? (This would have only $10,500 of deferrals used for Annual Additions and ADP Testing. I am using 2007 values.) I was pretty sure that this was the case. It does tie in with Janet M's post, I think.

[Mike Preston]

That is the way it should work, if you ask me. And I think it is the way it does work. There are some at the IRS who have issues. See Tom P. for what issues means.