Catch up contribution review

[Guest DCquestioner]

I'm mostly a DB guy, so when it comes to 401k's, I always like to make sure I've got it right....

Background:

The plan has 1 HCE and uses prior year testing. His comp exceeds $230,000. I know that the maximum deferral for 2008 will be 6.56%, or $15,088. He is 64, so he is eligible for a catch up contribution. He should be able to defer another $5,000 which would bring his total to $20,588.

If I understand it correctly, anything over the $15,500 surpasses the 402(g) limit, and is considered a catch-up contribution. Then, I fail my ADP test because he deferred $15,500 instead of $15,088. At that point, I can recharactarize the difference of $412 as a catch-up contribution, and everything is ok.

Since I'm doing prior year testing, do I already know the limit, and therefore don't have to worry about failing and recharactarizing?

I know it works out the same way in the end, I'm just trying to understand the concept.

Thanks for your comments.

[masteff]

I think you typo'd a number... $15,088 + $5,000 = $20,088 total

It's essentially a recordkeeping issue and a matter of how your plan is designed. If you plan allows you to limit him in the current year based on your testing results (to the 6.56% stated above), then that limit superceeds the 402(g) limit for purposes of determining where regular deferrals end and catchup begins.

The Code talks about applicable limits which can be statutory (eg 402(g)), employer-provided (eg a plan cap of, say, 10%), and/or the ADP limit.

If your plan permits you to limit him in the current year based on ADP testing, it's a matter of how your payroll and recordkeeping system are setup... work it out so that $15,088 are recorded as regular deferrals and $5,000 are recorded as catchup. Otherwise be sure he's limited to $20,088 overall and then deal w/ the recharacterization later.

(Only reason I'm slighly ambiguous is the plans I worked w/ didn't limit during the current year, so I've never administered that.)

[Tom Poje]

I'll go out on a limb and assume the following.

last year's NHCE avg was 4.56.

I'll also assume the following, there is nothing limiting the HCE deferrals except for your knowledge of what the maximum is. but that is not a plan imposed limit, only knowledge of what will pass/fail the test.

If that is the case, then there are no 'catch-ups' until he has deferred 15,500. anything above that is catch-up.

for purposes of testing you would use 15,500 / 230,000 = 6.52, which of course fails. refund is $412

if he hasn't used up the full 5000 in catch up then he can reduce his refund by whatever amount he has left.

(by the way, at the moment for the indexed limit I have $5505 for next year's catch up (this of course would be rounded to $5500) so it looks like we will bump up a little next year.

[Bird]

Recap/probably beating a dead horse.

Yes, you've got it, assuming you meant $20,088. You started by knowing the ADP testing limit, $15,088, and added $5,000.

When you run the tests, you start by saying anything over $15,500 is catchup - 20088-15500=4588. Then you run the test, and find that 15500/230000 exceeds the ADP testing limit, and that you are $412 over. There is that much additional catchup left over, so it becomes catchup and you're in a happy place.

[Guest DCquestioner]

You called the typo correctly. I guess I'm so used to typing $20,500 when talking about catch-ups that the "5" just magically appeared and slipped my notice.

Thanks for your input. I really appreciate it!