ACP fails, what about Catch-Up matches?

[Guest m.n.ouellette]

Hello to all. I have about 3 plans total that I have to run ADP/ACP tests on. I have a failing test <gasp!>, and have recharacterized deferrals as Catch-Up and am now passing the ADP.

Someone, Please! refresh my memory on what happens with the ACP test that is also failing... is there any correlation to the match that was based on the now-catch-up deferrals? I remember seeing somewhere, that I can disregard that matching, but cannot find where I would have read such a wonderful non-sensical thing.

I'm pretty sure the answer will be to distribute (??) the matching amount over the ACP limit.

Thanks SO much!!!

[BG5150]

Be careful with that. Are you sure that the catch-ups were matched? (Checkt he document--and amendments--to seeif it's even allowable.) You may just have a failed ACP test.

What's the match formula?

[Guest m.n.ouellette]

Their match formula is 50% up to 6% deferred (which results in no more than 3% being matched).

Catch-Up can be matched.

[BG5150]

So the deferrals that were re-characterized brought the people below the 6% threshold?

At any rate, I think they would stay in. The tests are independent.

[Guest m.n.ouellette]

Ok, darn. I was hoping to carve out the Catch-Up deferrals and pair it with it's coordinating match. Set those aside, and test what's left.

I know that is wishful thinking, but one never knows.

Thanks so much.

[Tom Poje]

For the sake of the argument, pretend there was no such thing as a catch-up. You determined how much deferral had to be treated as excess contribution. If any match was related to that deferral, it would indeed be forfeited (though you could always run the ACP test first and have excess aggregate contributions, so maybe you would get a distribution before forfeitures)

the last sentence in the catch up regulation pertaining to this situation says:

such elective deferrals are stll considered to be excess contributions under section 401(k)(8), and, accordingly, matching contributions with respect to such elective deferrals are permitted to be forfeited under the rules of section 411(a)(3)(G). [Treas. Reg. §1.414(v)-1(d)(2)(iii)]

one problem is some people read 'are permitted' to mean "I can forfeit them if I want to, but I don't have to" rather than "Normally you are not allowed to forfeit someone's match, but in this situation you are"

[Mike Preston]

I think the "if they don't want to" part goes hand in glove with a correction mechanism, such as QMACs or QNECs.

[Guest Sieve]

So, Tom, bottom line is that the match on excess amounts recharacterized as catch-up contributions would depend on the plan document and then on whether the ACP test also failed?

[Tom Poje]

that is my understanding.

[Guest m.n.ouellette]

Tom, in reading other threads before I asked my question, there was a discussion on whether or not deferrals that are re-characterized as Catch Up are actually Excess Deferrals. I can't link to it here, b/c it would take me half a day to find it, but what are your thoughts on that? And if catch-up deferrals are not "excess", then wouldn't it stand to reason that the correlating match is also not excess?

This is more a theory question at this point; I am going to refer to my document provider for their intention on this matter. I just think the term ' "excess" anything' has a negative connotation, and may not be appropriate in this circumstance.

Thanks.

[Tom Poje]

the cite I referred to in the regs comes from

Treas. Reg. §1.414(v)-1(d) Treatment of excess contributions

1.414(v)-1(d)(2) has the header Contributions not taken into account in application of the ADP test

(i) basically, this says that you don't count deferrals that exceeded a statutory or plan limit in the ADP test if they are treated as a catch up

(ii) says that excess contributions are subtracted from the participants deferrals [i read this to say that those deferrals treated as catch ups are indeed [i]excess contributions[/i]]

(iii) has the header excess contributions treated as catch-up contributions. (this describes how to handle them, which includes the forfetures of related match)

I am not sure if it was a typo on your part, but you referred to treating them as Excess Deferrals, which is a different animal. If it wasn't a typo, I don't see how they can be treated as an excess deferral.

[Guest m.n.ouellette]

I will read that Reg. Thanks. And I think I see. Because the deferrals are re-characterized as Catch-Up, they are then "Excess Contributions". The correlating Match is then forfeited, b/c you cannot match Excess Contributions.

Do I have it?!? This is very confusing. Thanks for all your help. Here and all over BenefitsLink!!

[BG5150]

From our buddy Sal: [from ERISA Outline Book, 2008 Edition, TRI Pension Services, 2008]

1.b.4)Treatment of excess contributions that are recharacterized as catch-up contributions. If an employee is eligible to make catch-up contributions under IRC §414(v), all or a portion of the employee's elective deferrals in excess of the ADP dollar limit, as determined under IRC §401(k)(8), might be recharacterized as catch-up contributions. See Treas. Reg. §1.414(v)-1(d)(2)(iii) and the discussion in Part A.1.f. of Section VIII of this chapter. If matching contributions have been allocated to such recharacterized catch-up contributions, the plan is permitted to treat the recharacterized catch-up contributions as excess contributions for purposes of IRC §411(a)(3)(G) and forfeit the attributable match. See Treas. Reg. §1.414(v)-1(d)(2)(iii) (last sentence). If the plan takes this approach, then the match so forfeited would also be disregarded from the ACP test.

1.b.4)a)Forfeiture is not required. In lieu of the forfeiture described in the prior paragraph, the plan also may choose to retain in the HCE's account, the match on excess contributions that are recharacterized as catch-up contributions. Retention of the match in the HCE's account will not fail to satisfy IRC §401(a)(4). In other words, matching contributions on catch-up contributions that exceed the ADP limit are not treated as creating a discriminatory rate of match, even though the person making such catch-up contributions is an HCE and would have had the match forfeited had the HCE not been catch-up eligible. This is emphasized in the preamble to the final regulations (see 68 F.R. at 40513, July 8, 2003), and is consistent with Treas. Reg. §1.414(v)-1(d)(4), which provides that a catch-up eligible participant is not treated as having a right to a different rate of allocation of matching contributions merely because an otherwise nondiscriminatory schedule of matching rates is applied to elective deferrals that include catch-up contributions. In other words, matching contributions on elective deferrals that would otherwise be refunded but for the catch-up rules are not treated as creating a discriminatory rate of match within the meaning of the "benefits, rights and features" test under Treas. Reg. §1.401(a)(4)-4.

Seems like you can have it either way.

[Tom Poje]

my notes, ha, not mine, but a print out I have from Groom Law Group (from 2002) sums it up as follows:

If the plan does not provide for matching contributions on catch-up contributions, any matching contributions made with respect to amounts recharacterized as catch-up contributions must be forfeited.

by the way, a safe harbor plan is required to match catch-up, but the way things operate, I can't imagine you not wanting to match catch-up, the way the regs operate.

[Guest m.n.ouellette]

Ok, : ), so based on Sal's book, and like you said, I will NOT forfeit his match on the now Catch-Up deferrals. Right?

Thank you EVER so much.

[Guest Sieve]

Tom --

What say -- "a safe harbor plan is required to match catch-ups"? Do you mean that one requirement of a SH plan is that catch-ups must be matched? Or do you mean that catch-ups can only be matched if the plan is a SH plan? I assume you mean the former.

[Tom Poje]

I grabbed this one a number of years ago, figured it summed things up pretty well.

the Corbel comment is as follows:

Safe Harbor Plans: Allocation Conditions and Matching Catch-ups. The final regulations retain the rule of the proposed regulations against allocation conditions with respect to any matching contributions the employer uses to satisfy the ACP test safe harbor. Therefore, the plan will not be able to apply a “last day” or “1,000 hours of service” condition to an “additional” match not used to satisfy the ADP test safe harbor. With regard to catch-up contributions, the IRS solicited comments regarding circumstances under which elective deferrals by an NHCE to a safe harbor plan would be treated as catch-up contributions but would be less than the amount required to be matched by the safe harbor plan (e.g., less than 5% of safe harbor compensation). The final regulations do not include any special rules for the treatment of catch-up contributions in a safe harbor plan. Therefore, a plan making safe harbor matching contributions may not exclude catch-up contributions in applying the match.

[BG5150]

How many situations, though, do we see where an NHCE who is putting in catch-up contributions isn't already over the 5% of comp when the catchup hits?