Limits on Plans with Plan Year other than 12/31

[Guest GordonJ]

I just took in a 401k plan with a plan year of 2/1 to 1/31. What year determines the limits to the plan-2008 or 2009? It is my understanding that the calander year is what counts. Am I right? Thanks.

[J Simmons]

The 415c limit on benefit accruals is $49,000 for plan years ending in or with 2009.

The limit on an employee's elective deferrals (402g) is $16,500 for calendar year 2009, regardless of the fiscal plan year. The catch-up is $5,500 for calendar year 2009.

The 401a17 limit on compensation is $245,000 for plan years beginning in or with 2009. It is $230,000 for plan years beginning in or with 2008.

For purposes of determining which EEs are HCEs, you use the dollar amount in effect at the beginning of the look-back year. So, if the determination year is the 2008-09 fiscal year that just ended for this plan, the look-back year would be that fiscal 2007-08 year. That look-back year began in or with 2007. So if an EE was paid more than $100,000 from 2/1/07-1/31/08, then that EE is an HCE for the PY 2/1/08-1/31/09.

[Guest ssmith]

Thanks J Simmons - I needed this information today Had trouble finding the info in our handy dandy books here at the office, so this came in handy today.

[Lori H]

The limit on an employee's elective deferrals (402g) is $16,500 for calendar year 2009, regardless of the fiscal plan year. The catch-up is $5,500 for calendar year 2009.

So for calendar year 2009 someone over age 50 could possibly defer 22K. Let's say for plan year 2008 which ran MAY to APRIL 2009, over 50 participant deferred $24,250....402g violation? What if they only deferred 20,500 calendar year 2008? Could they not just adjust deferrals to make sure they did not go over $22K for 2009?

[Guest Sieve]

402(g) limit is measured from January through December, based on when the deferrals actually occurred--plan year deferrals are not limited to any single 402(g) limit (unless the plan year is a calendar year).

So, you are correct: for a 2008-2009 overlapping plan year, each calendar year portion of the plan year is limited by each specific calendar year's 402(g) deferral limitations. Therefore, it is possible that the deferral will be (i) a full 402(g) limit for the portion of the plan year occuring in 2008, plus (ii) a full 402(g) limit for the portion of the plan year occuring in 2009--i.e., 2 full 402(g) limits. Nothing wrong with that (but, it could reek havoc with ADP testing).

[Belgarath]

I'd like to inject a very nit-picky observation to Jsimmons' first paragraph. The 415© limit is for limitation years, not plan years. Now, in 99.99% of the cases, they should be identical, but you might, on occasion, run into a plan that has different plan and limitation years. Why people do this I'm not sure, but that's another issue...

[Guest Sieve]

Belgarath --

I think sometimes the plan year/limitation year mismatch occurred inadvertently. Until the new regs permitted the limitation year to be designated in the plan document (new Treas. Reg. Section 1.415(j)-1(a)), it used to be that a limitation year designation had to be by written employer resolution (old Treas. Reg. Section 1.415-2(b)(2)(i)). So, because a limitation year automatically was (& is) the calendar year if not specified otherwise, the Board resolution requirement sometimes was overlooked and resulted in a limitation/plan year mismatch.

And, because the 415 limitation is based on the calendar year in which the limitation year ends (rather than the limitation year in which the plan year begins), there are games that can be played so that there is a small limitation year overlap into a new calendar year to permit using the higher adjusted 415 limitation numbers.

[Guest dobsonlaw]

402(g) limit is measured from January through December, based on when the deferrals actually occurred--plan year deferrals are not limited to any single 402(g) limit (unless the plan year is a calendar year).

So, you are correct: for a 2008-2009 overlapping plan year, each calendar year portion of the plan year is limited by each specific calendar year's 402(g) deferral limitations. Therefore, it is possible that the deferral will be (i) a full 402(g) limit for the portion of the plan year occuring in 2008, plus (ii) a full 402(g) limit for the portion of the plan year occuring in 2009--i.e., 2 full 402(g) limits. Nothing wrong with that (but, it could reek havoc with ADP testing).

Sieve,

Could you point me to published authority for your analysis of the potential 2 full 402(g) limits? I agree with your analysis, but need a site if you can help me.

Thanks.

[Guest Sieve]

Here's the best I can do (especially on a Friday afternoon) . . .

The annual 402(g) limit is a calendar year limit (i.e., the taxable year of the individual), and limits an individual's deferral during a calendar year. (IRC Section 402(g)(1)(A).) Deferrals excluded from an individual's income for the individual's taxable year are based on those amounts which are deferred and which do not exceed the 402(g) limitation for the individual's taxable year. (Treas. Reg. Section 402(g)-1(b)(1).)

A plan must limit the individual's taxable (calendar) year elective deferrals to the plan to the individual's 402(g) limit for the individual's taxable year beginning in the calendar year. (IRC Section 401(a)(30) & Treas. Reg. Section 1.401(a)-30(a).) Nothing requires the plan otherwise to limit deferrals during a plan year, so long as those deferrals meet the individual's own taxable year limit. Thus, a plan only looks to see if an individual's calendar year limit has been exceeded with respect to deferrals each plan year into the plan. Only "excess deferrals" for NHCEs are disregarded in the ADP test, and then only to the extent they represent excess deferrals per IRC Secton 401(a)(30)--i.e., according to the plan limits (rather than according to an individual's single calendar year limit). (Treas. Reg. Section 1.402(g)-1(e)(1)(ii).)

I'm sure there also are tie-ins in the 1.401(k)-2 regs, too.

Tripodi also discusses this: the 2008 reference is Chapter 11, Section VI, Part C.1.a.2.

[Guest dobsonlaw]

Thank you sooooo much!

[J Simmons]

Here's the best I can do (especially on a Friday afternoon) . . .

The annual 402(g) limit is a calendar year limit (i.e., the taxable year of the individual), and limits an individual's deferral during a calendar year. (IRC Section 402(g)(1)(A).) Deferrals excluded from an individual's income for the individual's taxable year are based on those amounts which are deferred and which do not exceed the 402(g) limitation for the individual's taxable year. (Treas. Reg. Section 402(g)-1(b)(1).)

A plan must limit the individual's taxable (calendar) year elective deferrals to the plan to the individual's 402(g) limit for the individual's taxable year beginning in the calendar year. (IRC Section 401(a)(30) & Treas. Reg. Section 1.401(a)-30(a).) Nothing requires the plan otherwise to limit deferrals during a plan year, so long as those deferrals meet the individual's own taxable year limit. Thus, a plan only looks to see if an individual's calendar year limit has been exceeded with respect to deferrals each plan year into the plan. Only "excess deferrals" for NHCEs are disregarded in the ADP test, and then only to the extent they represent excess deferrals per IRC Secton 401(a)(30)--i.e., according to the plan limits (rather than according to an individual's single calendar year limit). (Treas. Reg. Section 1.402(g)-1(e)(1)(ii).)

I'm sure there also are tie-ins in the 1.401(k)-2 regs, too.

Tripodi also discusses this: the 2008 reference is Chapter 11, Section VI, Part C.1.a.2.

Circumreferencing with logical deduction on a Friday afternoon? Impressive, Larry, impressive!