Catch up contributions in off-calendar year plan

[Guest Dave Peckham]

ABC Company has a plan year end of 6/30.

John HCE is over age 50 and has maximum comp of $245,000 for both plan year 7/1/09 to 6/30/10 and 7/1/10 to 6/30/11.

For plan year 7/1/09 to 6/30/10, John HCE made $0 salary deferrals.

During 7/1/10 to 12/31/10, he deferred $5,500.

During 1/1/11 to 6/30/11, he deferred $5,500.

For plan year ending 6/30/10 his PS allocation was $49,000.

For plan year ending 6/30/11 his PS allocation will be $49,000.

Is it possible to treat all $11,000 salary deferred from 7/1/10 to 6/30/11 as catch-up contributions?

Perhaps the only yes answer is if the plan document has a deferral limit for HCEs of $0.

Any other ideas?

[ETA Consulting LLC]

I would say no, since the catchup is caused by a 415 limit excess which would make it as of 6/30/2011.

My train of thought on this matter is (using examples):

Suppose it were a safe harbor plan funding a 3% NEC for the off calendar year (for argument sake).

1) Between 7/1 and 12/31/2010, John could've deferred $22,000.

2) Also, Between 1/1/2011 and 6/30/2011, John could defer another $22,000.

3) Assuming his compensation is $245K during this time, he'd receive a SHNEC of $7,350.

4) John could now receive an additional Profit Sharing contribution of $8,650 for a total plan year allocation of $60,000.

This breaks down as follows:

1) We know deferrals are limited by calendar year. The $22,000 in deferral produced a $5,500 catchup for the 2010 calendar year.

2) By the same regard, the additional $22,000 in deferrals produced another $5,500 catchup for the 2011 calendar year.

3) The SHNEC exempts him from the ADP test, even though he would normally have a whopping $33,000 in deferrals within the ADP test. This $33,000 is all that counts toward his $49,000 415 limit. The $7,350 plus additional $8,650 gets him the additional $16,000 to reach that limit.

Notice year that it was the $22,000 deferral in step 1 that pushed the catchup back to 2010. Your question is basically can that 2010 deferral get counted as a 2011 catchup in addition to a $5,500 catchup that was deferred and counted in 2011. I would say no.

Good Luck!

[12AX7]

I would also say that a plan limit could cause a contribution to classified as a catch-up, but I would perhaps argue that a $0.0 or 0.0% HCE limit would not permit an HCE to defer only catch-up contributions. I think the HCE would need to have some ability to defer before a catch-up is permitted. Others will certainly argue differently on this approach.

If I were to use this type of method, I would allow an HCE to defer a marginal amount or percentage by plan definition. Any amounts in excess of the plan limit would certainly then be classified as catch-up. I'm not addressing any other plan issues here such as TH, 415, etc.

[ETA Consulting LLC]

I would also say that a plan limit could cause a contribution to classified as a catch-up, but I would perhaps argue that a $0.0 or 0.0% HCE limit would not permit an HCE to defer only catch-up contributions. I think the HCE would need to have some ability to defer before a catch-up is permitted. Others will certainly argue differently on this approach.

If I were to use this type of method, I would allow an HCE to defer a marginal amount or percentage by plan definition. Any amounts in excess of the plan limit would certainly then be classified as catch-up. I'm not addressing any other plan issues here such as TH, 415, etc.

I like the way you think. The way it would likely play out is that the written document would obviously not contain the limitation and it would, therefore, be done administratively; which is allowable. The issue, however, becomes that such administrative limit isn't done arbitrarily, but for purposes of helping the ADP test to pass. That would be a hard argument that you've administratively limited HCEs to Zero deferrals at the beginning of the plan year. Nonetheless, it helps to think in those terms in order to maintain a perspective of various vantage points to the same equation. I wouldn't try to make those arguments, but do try to understand them

[Bird]

I can't say I'm looking at the code or regs and may be missing something obvious, but I'm inclined to think it's ok. You have a 2010 deferral of $5500. At 6/30/11, you run a 415 test and determine that it is in excess of the 415 limit. The deferral was made in 2010, and the catch-up wasn't used, so I see it as being available for use as a 2010 catchup. The fact that it's caused by 415 and not by some other limit is, I think, not relevant.

[ETA Consulting LLC]

I can't say I'm looking at the code or regs and may be missing something obvious, but I'm inclined to think it's ok. You have a 2010 deferral of $5500. At 6/30/11, you run a 415 test and determine that it is in excess of the 415 limit. The deferral was made in 2010, and the catch-up wasn't used, so I see it as being available for use as a 2010 catchup. The fact that it's caused by 415 and not by some other limit is, I think, not relevant.

Let's suppose there weren't any deferrals between January and June, and the only deferrals were made at the later half of 2010. You could then give a $49,000 Profit Sharing and the $5,500 in deferrals will become catchup. You're now saying that the individual could then defer an additional $22,000 between July and December of 2011, because that $5,500 catchup would've applied to 2010.

You see how inconsistent that is? Because it was deferred in 2010 doesn't make it a 2010 catchup. It is a catchup based on the limit that was exceeded; and 415 is a year end limit.

Let's get the usual suspects on this one; KevinC, Sieve, or Poje to chime in

[K2retire]

I can't say I'm looking at the code or regs and may be missing something obvious, but I'm inclined to think it's ok. You have a 2010 deferral of $5500. At 6/30/11, you run a 415 test and determine that it is in excess of the 415 limit. The deferral was made in 2010, and the catch-up wasn't used, so I see it as being available for use as a 2010 catchup. The fact that it's caused by 415 and not by some other limit is, I think, not relevant.

Let's suppose there weren't any deferrals between January and June, and the only deferrals were made at the later half of 2010. You could then give a $49,000 Profit Sharing and the $5,500 in deferrals will become catchup. You're now saying that the individual could then defer an additional $22,000 between July and December of 2011, because that $5,500 catchup would've applied to 2010.

You see how inconsistent that is? Because it was deferred in 2010 doesn't make it a 2010 catchup. It is a catchup based on the limit that was exceeded; and 415 is a year end limit.

Let's get the usual suspects on this one; KevinC, Sieve, or Poje to chime in

How could money deferred in 2010 be a catch up contribution for any year other than 2010?

[ETA Consulting LLC]

How could money deferred in 2010 be a catch up contribution for any year other than 2010?

Catchups are determined at year end; either calendar year or plan year. Since the amount is question was not determined to be a catch-up and calendar year end, then it will become one at plan year end; which makes the difference.

The only way those amounts could be catchup for 2010 was if the determination was made during a plan year or calendar year (that's right), ending in 2010.

[12AX7]

The catch-up would apply when some "limit" was reached during the plan year. When the contributions were made would determine the tax year it's applicable to. Is it conceivable that you could have up to $11,000 in catch-up contributions for a plan year (e.g. p/y/e 6/30/11)? Not according to what you are saying ETK. Can the determination be made at the end of the plan year 6/30/11 for the two tax years?

[Bird]

You see how inconsistent that is? Because it was deferred in 2010 doesn't make it a 2010 catchup. It is a catchup based on the limit that was exceeded; and 415 is a year end limit.

Catchups are determined at year end; either calendar year or plan year. Since the amount is question was not determined to be a catch-up and calendar year end, then it will become one at plan year end; which makes the difference.

I see what you're saying, that the catch-up for 2010 must be determined as of the end of 2010. But I don't necessarily agree. I'm looking in the EOB and it starts by saying that "first" some limit must be exceeded in order for deferrals to be deemed catch-ups, which might imply that in a 415 limit scenario the PS money has to be in first, but then it goes on to cite IRS speakers at ABA and ASPPA Q&As approving the retroactive designation of catch-up money based on discretionary contributions being made after year-end (in a calendar-year situation), so that's not an issue. (Maybe that's going off on a tangent that doesn't need to be gone on.)

Looking at it your way, I guess you would say the $49,000 PS would have to be limited to $43,500? Because you're determining that on 12/31/10 the $5,500 was a legit "regular" deferral and then PS s/b restricted?