Shifting Elective Deferrals

[austin3515]

Plan fails ADP test, but only using up $2,000 of available catch-ups. Can I shift enough NHC deferrals to the ACP test such that the total recharacterization in the failed ADP test will be exactly $5,500? I know the requirement is "passing with and without the deferrals", but can "passing" mean no refunds?

[Tom Poje]

I have leanings against such a strategy.

the first step of catch-ups is to treat any excess deferrals or deferrals exceeding a plan imposed limit as catch-up.

then you run your test.

if you fail your test, then you have more catch ups due to excess deferrals.

but I think once you get to the point of passing the test, then shifting comes, not shift and then run the test and determine if you have more catch ups due to failed test.

but who knows how the IRS would view things.

[K2retire]

At all 3 places where I have worked since catch up contributions began it has been standard practice to recharacterize deferrals as catch up if the ADP test failed. Your question confuses me. Is the person with the potential catch ups not the same person who would be required to take a refund for the failure?

[Tom Poje]

I think what is being asked is the following:

HCE 6% 6%

NHCE 6% 1%

can I shift as follows

HCE 6% 6%

NHCE 3% 3%

oh, I fail ADP, so now I treat it as catch up.

I don't think so because you are redoing the ADP test after the shift. It is my understanding the ADP test is completed and done before any shifting is tried.

[BG5150]

I've never thought of a plan that is failing the test, but there are no refunds due to re-characterizing some as catch up, as "passing." The test fails, but there is no corrective action needed.

[austin3515]

TAG Data found this gem which is exactly my question... The answer is "sort of" but see below

IRS Q&A 2009 ASPPA CONFERENCE

QUESTION #15:

Defined Contribution

401(k) Plan

Shifting ADP to ACP

QUESTION:

A 401(k) plan is tested for ADP and ACP. There is one HCE who is over age 50 who deferred $10,000. The ADP test was failed, and part of the HCEs deferrals were recharacterized. The ACP test will pass if some deferrals are shifted to the ACP test. Shifting is allowed only if the ADP test is satisfied before and after shifting. What is meant by "satisfying" the ADP test? If a refund was required, but fully recharacterized as catch-up, is the ADP test satisfied? If refunds are computed and properly made, is one still able to shift deferrals to the ACP test?

IRS ANSWER:

Yes, but once the excess contribution is recharacterized or paid out as a corrective distribution, the plan would then pass the ADP test right at the passing percentage. Therefore, if any shifting is to be done, it is likely to require shifting of both HCE and NHCE deferrals. See next Question.

Note however, that once a deferral has been recharacterized as a catch-up contribution, it cannot be used for shifting.

QUESTION #16:

Defined Contribution

401(k) Plan

Shifting ADP to ACP

QUESTION:

Is it permissible to shift after a correction has been made?

Example:

ADP ACP

HCE 7% 2%

NHCE 4% 0.75%

1% is recharacterized as a catch-up contribution reducing the HCEs percentage to 6% (a passing percentage).

After shifting 0.75% from both HCE and NHCE the percentages are as follows (and the ACP test is passed):

ADP ACP

HCE 5.25% 2.75%

NHCE 3.25% 1.50%

IRS ANSWER:

Yes, this is permissible. However, the fact that the correction method for excess contribution refunds allocates the 1% to various participants creates mechanical problems that have not been resolved.

[Tom Poje]

I am aware of those examples, but I didn't think they pertained to your question.

using the example I messed up on, but will now correct, it sounds like what you are asking would work something like as follows :

HCE 6% 6%

NHCE 6% 1%

can I shift so I have

HCE 6% 6%

NHCE 3% 4%

I now pass ACP

can I treat 1% of ADP as catch up?

or put another way: can I overshift so that I fail the ADP test and then treat more as catch up.

the IRS hasn't said so one way or another that I know of, I'd have leanings against it

guess it depends on how you interpret "The plan must pass ADP before and after the shift"...

can that be read as "The plan must pass ADP before the shift and after the shift with any additional catch ups.

[MWeddell]

... I'd have leanings against it ...

I also would lean against it. I would have a hard time interpreting "requiring the plan to pass ADP after the shift" to include failing the ADP but correcting the failure through reclassifying deferrals as catch up contributions.