Off Calendar Catch-Ups - SOLUTION!

[austin3515]

To all those who participated in that ridiculously long exchange from a month or so ago, I hope this helps conclude it. I think there were a few who were in fact saying this, but I now know why, and I took a good deal of time to lay it all out. I hope it helps (it certainly helped me clear my head).

I painstakingly read through EOB on this issue and here is what was missing, at least for me (from Example 5 of 414(v) regs) (the bolded entry is what inspired this post):

(v) Even though Participant E's elective deferrals for the calendar year 2006 have exceeded the section 401(a)(30) limit, Participant E can continue to make elective deferrals during the last 2 months of the calendar year, since Participant E's catch-up contributions for the taxable year are not taken into account in applying the section 401(a)(30) limit for 2006. Thus, Participant E can make an additional contribution of $3,400 ($15,000 minus ($16,000 minus $4,400)) without exceeding the section 401(a)(30) for the calendar year and without regard to any additional catch-up contributions. In addition, Participant E may make additional catch-up contributions of $600 (the $5,000 applicable dollar catch-up limit for 2006, reduced by the $4,400 ($1,000 plus $3,400) of elective deferrals previously treated as catch-up contributions during the taxable year). The $600 of catch-up contributions will not be taken into account in the ADP test for the plan year ending October 31, 2007.

SO: ADP test at 3/31/08 plan year is failed, resulting in $5,000 of refunds to be distributed. Participant is over age 50 so the amounts are reclassed as catch-ups. As long as the participant made at least $5,000 of 401(k) for 2008, those amounts are disregarded for calendar 2008's (a)(30) limit. SO the participant can make $15,500 of 401(k) for the remainder of 2008, calculated as follows:

Line 1) (a)(30) limit for 2008: $15,500

Line 2a) 2008 Calendar Year To Date 401(k): $5,000

Line 2b) 2008 Calendar Year To Date 401(k) reclassified as catch-ups, and therefore disregarded with respect to the 2008 (a)(30) limit: $5,000

REMAINING contributions for 2008 =

Line 1 minus (2a minus 2b), OR

$15,500 minus ($5,000 minus $5,000) = $15,500.

Therefore, for all of 2008, the participant can make the full $20,500 in 401(k).

THE CATCH

For the 3/31/09 plan year, the full $15,500 in 401(k) made from 4/1/08 to 12/31/08 is included in the test, in addition to any 401(k) made from 1/1/09 to 3/31/09 (which to be consistent we will assume is the same $5,000). So the full $20,500 is included in the test because the 2008 catch-up was consumed in the 3/31/07 ADP test. This of course means his ADP refunds will be higher in the following year because refunds are in descending order, starting with he who hath contributed the most.

This is dead-on consustent with EOB, at the bottom of page 11.283 of the 2008 version if anyone wants to review.

THE ONLY REMAINING QUESTION

What if the participant made no 401(k) from 1/1/08 through 3/31/08? Are there any 401(k) contributions to be disregarded? The answer would appear to be no.

Line 1) (a)(30) limit for 2008: $15,500

Line 2a) 2008 Calendar Year To Date 401(k): $0

Line 2b) 2008 Calendar Year To Date 401(k) reclassified as catch-ups, and therefore disregarded with respect to the 2008 (a)(30) limit: $0*

*The intent of this adjustment is to disregard deferrals actually made. Note that for (a)(30): (taken from 1.414(v)-1©(3):

with respect to elective deferrals in excess of an applicable limit that is tested on the basis of the taxable year or calendar year (e.g., the section 401(a)(30) limit on elective deferrals), the determination of whether such elective deferrals are treated as catch-up contributions is made at the time they are deferred.

Since no deferrals were actually made, I have a hard time seeing a case for entering $5,000 here (which would effectively increase the (a)(30) limit for 2008). The purpose of the adjustment is to disregard deferrals actually made; since there are none, there is nothing to disregard.

Therefore, if there were no actual deferrals made from 1/1/08 through 3/31/08, then participant has solely the $15,500 limit for 2008.

[austin3515]

The following also occured to me an hour ago. I was struggling with the justification for that first bolded sentence regarding disregarding the catch-ups for the 06 (a)(30) limit. BUT, we're essentially doing the same thing when someone does $20,500 of 401(k) (in 07) and also goes over 415 by the same $5,000 in a calendar year plan. I've never felt that was getting two catch-up limits. I realize now that the same logic applies (or at least it is being applied by the IRS in these regs).

I sure do hope Mike Preston weighs in on this

[Mike Preston]

I'd love to, but it isn't going to happen this week. Bump it next week, ok?

[austin3515]

You're on my Outlook calendar...

[austin3515]

Mike Preston, reflagging per your request!