Catchup and ADP Test

[jmartin]

Facts: A contribution becomes a catchup in one of three ways:

Contribution in excess of 402 g limit

Contribution in excess of plan limit.

Failure of adp test and reclass as catch up

Issue: I have a client where an hce contributes 16500 and the owner does 5000. The owner is 50. Since the 5000 is not in excess of 402g and the plan has no limit, the 5000 is in the adp test. The non owner hce gets a refund.

Goal: I would like to count the 5000 as catch-up, and have the owner in the adp test as a zero.

Question 1: Which "wording" below can I use?

Question 2: Would the owner still be in the adp test as a zero or be removed from the test completely?

Example 1: "for any hce age 50 or over, the first 5500 of 401k will be treated as catch up"

Example 2: "salary deferrals for owners are limited to 0%" (with the thought being an owner over 50 contributes 5,000 and it is immediately reclassified as catchup)

[Tom Poje]

for clarification purposes

ADP test is first run treating excluding amounts above the 402(g) limits and plan limits.

if the plan fails, then additional amounts may be treated as catch-ups (if available)

as for wording, I don't think your example 1 works. it certainly doesn't match the definition of catch up. and there is, as I recall, an example if the regs, in which deferrals throughout the year were 'assumed' to be catch-ups, but when the final totals came in they weren't. I forget the exact context. possibly it was expected the ee would hit the 402g but comp or something else changed and it didn't happen.

its debatable if you can put a plan limit of 0%. the original preamble had an example of 0% plan limit.

that example was not in the final regs.

so, does that mean the IRS changed their minds or were they just saving space.

one argument is that if you have a cap of 0%, then technically the person can't defer and so he can't get a catch-up.

I lean toward the original preamble which I think said yes he can defer but its the plan that is limiting his opportunity, rather than, no he can't defer at all.

so does that mean you could put a limit of 1 cent. now the person can defer, so he should be eligible for a catch up.

but a counter argument could be that 1 cent is not a meaningful benefit.

[Guest Sieve]

An amount deferred is not a catch-up unless it exceeds a limit (like the 402(g) current $16,500, or an ADP test failure where propoer correction calls for recharacterization as a catch-up, or a plan-imposed limit). You have demonstrated the classic example of the non-catch-up eligible employee paying for an ADP failure which results from a catch-up eligible employee's deferral. We all wish the rule was as you state it in your non-compliant Ex. #1, but that's not the way it works.

Unfortuantely, if this is after the fact, there's no limit you can impose retroactively--you cannot reach your goal of considering the owner's $5,000 as catch-up (unless through a proper ADP correction process). I think the best you can do for this HCE is for the employer to make the individual whole outside of the plan (if the employer is so inclined).

On a go-forward basis, what's wrong with an owner deferral limit of, say, $100 or $250? Why use $1 or $0.01 and tempt fate.

[jmartin]

Thanks for the replies... example one is a no which is what I thought. Example two is a maybe but why take the risk. Sounds like I should go with door # 3 and place a limit of 1% or say $500.

Just to confirm. I can make an amendment saying that owners are limited to $500 (or even 1%)? And in this scenario if the owner contributes $5,000, he would immediately have $4,500 reclassified as catchup and the adp test would only show the $500.

[12AX7]

What you are describing sounds correct, but I would not make make that amendment retroactive for the current plan year. If you put in the amendment with a current date, any amounts over the $ or % limit after the amendment date, I would treat as catch-up contributions.

Tom: Are you dressed as a Jedi Master or Elvis in that picture?

[Tom Poje]

its an old Elvis photo from a Relius user group meeting from years ago.

(It was the anniversary of his death the other day)

posted a few Elvis pension songs under the thread

vesting and BRF (or soemthing lie that) under this same board yesterday.

[Guest Jules1]

If no one in the HCE group has salary reduction in excess of the $16,500 limit and all except one HCE are eligible for "catch-up" (over 50), How do I correct for a failed ADP test? I see, in my mind, different interpretations of the right way to re-characterize deferrals as "catch-up". If I start with the highest % of deferral and level down by re-characterization I can correct for the failed ADP before I get to the HCE that is under age 50. Is this first of all permissible and secondly the correct method?

[Tom Poje]

if no one is in excess of the deferral limit (it was been 17,500 in 2013 and 2014) then you run your ADP test.

(top down by %, the 'old rules')

then you calculate the refund by beginning with whomever deferred the most, so there really isn't any room for different interpretations

1.401(k)-2(b)(2)(iii)(A)

the contributions of the HCE with the highest dollar amount of contributions taken into account under this section are reduced by the amount required to cause the HCEs contributions to equal the dollar amount of the contributions taken into account under this section for the HCE with the next highest dollar amount....

then catch up rules kick in probably example 4 of 1.401(v)-1(h) example 4 is the best

which basically says ADP test fails, you run the test (using highest % of course) to determine the $ amount of refund. Then after leveling off by $ amount (in this example) all hces are reduced to 12,500.

that is the new 'limit'. if someone is catch up eligible then anything above this amount is a catch up. But if you have an HCE that deferred more than 12,500 and is not catch up eligible, he is out of luck.

there is no "I can borrow from an HCE who didn't use his full catch up and therefore reduce what I might have to refund to non catch up eligible ees"