Deferral Limit on HCE's

[Guest scuba80]

In order to pass our ADP test we have to decrease the cap on our HCE deferral % from 15 to 12. This will create a problem for a select group of HCE's who are at the bottom of the HCE salary scale. With a 12% deferral cap in place they will not hit the 402g limit. My question is if the do not hit the 402g limit, where does the catch up come into play. Do participants have to hit the 402g limit in order to have catch up contributions? Does the HCE just elect a 12% deferral and because that is the max they can defer, they can also elect the catch up?

Thanks...Mike

[WDIK]

Exceeding a plan limit is an acceptable scenario for applying the catch-up rules.

[K2retire]

But it doesn't sound like 12% is a plan limit. So until the 15% plan limit is met or the ADP test is actually failed, you probably can't get to a catch up amount -- unless there is some other language in your document to allow it.

[Guest Sieve]

There actually are 3 situations where a catch up is allowed (all relating to exceeding a limit):

• Exceeding a plan-imposed limit. If you are imposing a 12% administrative limit, and the plan gives you the authority to impose such an administrative limit, then that's a limit that an individual eligible for catch-ups can exceed in a catch-up mode. (Treas. Reg. Sectin 1.414(v)-1(b)(a)(ii).)
  
• Exceeding the 402(g) limit. (Treas Reg. Section 1.401(v)-1(b)(1)(i).)
  
• Exceeding the ADP limit when the test is completed (excess amounts must be recharacterized as catch-ups to th4e extent possible). (Treas Reg. Section 1.401(v)-1(b)(1)(iii) & -1(d)(2)).)
  

Be aware that it is a violation of the universal availability rule if individuals are not given the effective opportunity to make catch-up contributions. So, if you limit deferrals to 12%, you have to allow those reaching age 50 in that calendar year to make contributions beyond that 12% on, e.g., a pro-rata payroll basis, so that they have the opportunity to make the maximum catch-up possible. Not allowing a catch-up eligible participant to exceed the plan-imposed limit violates that rule. (See Treas. Reg. Section 1.414(v)-1(a)(1) & -1(e).)

[John Feldt ERPA CPC QPA]

How about exceeding the 415 limit? profit sharing of 46,000 and a deferral of $5,000.

[buckaroo]

Yes, exceeding 415 is also an acceptable way to get CUC.

[Guest Sieve]

You're both obviously correct. My third bullet point was much too specific. Guess I've been working with way too many plans where there are only deferrals & match (manufacturing & other commerical/retail employers in MI don't have a lot of cash to throw around . . . I really must get out more often!!)