LLC Loss - Catch up eligible?

[Sully]

Partner in an LLC who is over age 50 made 401(k) contributions of $10,250 during 2007 from his guaranteed payments. LLC ended up with a loss for 2007 so he has no earned income and a 415 excess contribution. Question: Is this employee eligible for a catch up contribution? Should we refund $10,250 or $7,250?

Thanks in advance for any insight.

[QDROphile]

Catch-up contributions are elective deferrals. The key difference is that they are not subject to upper limits on elective deferrals imposed by plan terms generally or by certain statutes. Are elective deferrals possible under the circumstances?

[ERISAnut]

You cannot defer into the plan when you have no 'earned income'. This is not a 415 issue, but an elective deferral issue. You must have income in order to defer.

The 415 issue comes into play when a participant defers into the plan, say $5,000 when he has only $5,000 in income. While he is at his deferral limit of 100% of compensation, he may receive another $5,000 in employer contribution. His 415 limit, including catchup, will become 10,000. But, you cannot achieve a catchup without an elective deferral. You cannot have an elective deferral that exceeds compensation.

Hope this helps.

[Kevin C]

If you want to see it in writing:

1.414(v)-1

© Catch-up contribution limit

(1) General rule. --Elective deferrals with respect to a catch-up eligible participant in excess of an applicable limit under paragraph (b) of this section are treated as catch-up contributions under this section as of a date within a taxable year only to the extent that such elective deferrals do not exceed the catch-up contribution limit described in paragraphs ©(1) and (2) of this section, reduced by elective deferrals previously treated as catch-up contributions for the taxable year, determined in accordance with paragraph ©(3) of this section. The catch-up contribution limit for a taxable year is generally the applicable dollar catch-up limit for such taxable year, as set forth in paragraph ©(2) of this section. However, an elective deferral is not treated as a catch-up contribution to the extent that the elective deferral, when added to all other elective deferrals for the taxable year under any applicable employer plan of the employer, exceeds the participant's compensation (determined in accordance with section 415©(3)) for the taxable year. See also paragraph (f) of this section for special rules for employees who participate in more than one applicable employer plan maintained by the employer.