Amendment to Limit HCE to $1 of 401k

[austin3515]

When must an amendment be signed to implement this change effective January 1, 2011. In my situation the owner (age 50+) has not made any deferrals. So I should be able to still sign this amendment, correct?

[Tom Poje]

my understanding yes you could do that, since the right defer could be entirely eliminated. not sure you could word it "anyone over age 50" because that would be related to age (and age and service are no-no descriptions)

the preamble to the original catch-up rules actually had an example of having a 0% cap on deferrals for HCEs, with the idea that they could only make catch ups. that example was removed from the final preamble, not necessarily because they decided you couldm't do that, but somethimes those thing get eliminated for space. It would seem kind of odd to say "If you have a cap at 0% you can't defer and therefore you can't have catch ups, but you could have a cap at 1 cent, and then since you could defer you can do the full catch-up, but what do I know about things like that.

[austin3515]

I would be limiting the owner to $1. Thanks Tom!!

[Lou S.]

Curious as to the why. Are there muliple HCEs and you want to limit the owner ADP to $1/comp and still put in $5,500 as catchup that isn't tested?

[austin3515]

That's the one. Only other one I know of is to limit the top-heavy minimum to a few pennies.

But yes, in this case, I have an HCE that wants to save for retirement who "only" makes $120K. So he's deferring about 15% of pay. The owner has oodles of money and would prefer to allow this fella to save for retirement. Just warms your heart, doesn't it?

[Guest ebgroup]

I am a little confused by Tom's reference to being able to eliminate the elective deferral entirely. The 414(v) regulations define a "catch-up eligible participant" as an employee who...

"Is eligible to make elective deferrals during the plan year under an applicable employer plan (without regard to section 414(v) or this section)."

This is in 1-g of the final regulations and was in 1-a(4) of the proposed regulations. I see that the proposed regulations used a scenario where the key employees' contribution was 0% to illustrate how to apply catch-up contributions in calculating the top heavy minimum. Is this the reference to 0% that you are referring to? If so, I have to wonder if they did not eliminate it in order to avoid any confusion regarding the applicability of 1.414(v)-1(g) that I reference above.

In addition, if I can ask a question about limiting the HCEs to $1- Is anyone concerned about the requirement in 1.401(k)-1(e)(2) to provide an "effective opportunity" to employees to make or change a cash or deferral election. Is it possible that the IRS will call "$1" not an "effective opportunity" The only references I am finding relating to this requirement come from the context of requiring a notice for automatic contribution arrangements.

Thank you.

[Tom Poje]

no one knows for sure why certain things are ever eliminated from the preamble.

the same thing happened when the final 401k regs were released. I forget what it was, but what was eliminated is still part of the 401k rules, so sometimes (or at least someone told me) is 'space saver'.

in all cases I have ever heard of, the limiting of deferrals was always to the HCES, and usually the IRS doesn't have a problem with that - why is it not a problem to say HCEs can't defer at all, but to then turn around and say. ok, you can't limit deferral to $1 plus you get catch ups. Of course we will never know until the IRS comes out and makes a statement one way or another. but as you pointed out, where do you draw the line. $100? $1000?. again in every case I have heard of, this strategy was used to limit HCEs not NHCEs.

but we do know that currently the regs simply say a catch up is anything above a plan imposed limit (and there is nothing in the regs to indicate what the plan limit could be)

[Guest ebgroup]

Thank you for your reply. I guess I am thinking that $0 versus $1 makes a difference when we get to the testing situation. Hypothetically, if the HCE can defer $1, he or she is in the ADP/ACP and coverage test.