415 limit vs Gateway Allocation

[Dennis Povloski]

Participant with low compensation makes a large salary deferral and is entitled to safe harbor match. The plan is also cross-tested, and the participant is entitled to a gateway contribution, but because of the large deferral, hits his 415 limit before all of the gateway contribution can be allocated.

For example:

Comp = $10,000

Deferral = $9,000

SH Match = $400

7.5% Gateway = $750

Only $600 of the gateway contribution can be allocated before hitting the 415 limit.

How do these requirements interact with each other?

[John Feldt ERPA CPC QPA]

Hope the plan allows catch-up and they are catch-up eligible?

What does the 401(k) document say happens?

[Dennis Povloski]

Good thought! I'm doing a DB/DC combo proposal, and just have plan specs from the DC valuation report. The plan does allow for catch up becuase other participants are deferring up to $22k.

Just for the sake of discussion, let's say we didn't have the ability to recharactarize the deferrals as catch ups. What would happen then?

[John Feldt ERPA CPC QPA]

Look at the 401(k) document, I would bet that it says something like:

"If a Participant receives an allocation of an Excess Amount for a Limitation Year, the Plan Administrator will dispose of such Excess by first returning to the Participant any Employee Contributions (adjusted for Earnings) and will forfeit any Associated Matching Contributions, to the extent necessary to reduce or eliminate the Excess Amount, secondly by distributing to the Participant any Elective Deferrals (adjusted for Earnings) and will forfeit any Associated Matching Contributions, to the extent necessary to reduce or eliminate the Excess Amount." etc. etc. etc.

Added upon edit:

Also: can you offset the 7.5% by the average actuarial value of the DB accruals? If might not help much anyway, just a thought. Also, if the DB has accrual requirements, like 1000 hours, you might not be able to say that it's usable for a gateway offset, I think, since the gateway cannot have any allocation conditions.

[Dennis Povloski]

Got it. Thanks!

[Kevin C]

You will also want to look at the plan's final 415 reg amendment. That language sounds like the old version. The newer language will probably reference EPCRS.

[John Feldt ERPA CPC QPA]

Oh, sorry about that, Kevin's right - I'm sure your 415 amendment has yougoing to Rev Proc 2008-50 for the solution. Look at 6.06(2) and (3) (page 35 of my version).

Here it is:

(2) Correction of Excess Allocations. In general, an Excess Allocation, as defined in section 5.01(3)(a) of this revenue procedure, is corrected in accordance with the Reduction of Account Balance Correction Method set forth in this paragraph. Under this method, the account balance of an employee who received an Excess Allocation is reduced by the Excess Allocation (adjusted for earnings). If the Excess Allocation would have been allocated to other employees in the year of the failure had the failure not occurred, then that amount (adjusted for earnings) is reallocated to those employees in accordance with the plan's allocation formula. If the improperly allocated amount would not have been allocated to other employees absent the failure, that amount (adjusted for earnings) is placed in a separate account that is not allocated on behalf of any participant or beneficiary (an unallocated account) established for the purpose of holding Excess Allocations, adjusted for earnings, to be used to reduce employer contributions (other than elective deferrals) in the current year or succeeding year(s). While such amounts remain in the unallocated account, the employer is not permitted to make contributions to the plan other than elective deferrals. Excess Allocations that are attributable to elective deferrals or after-tax employee contributions, (along with earnings attributable thereto) must be distributed to the participant. For qualification purposes, an Excess Allocation that is corrected pursuant to this paragraph is disregarded for purposes of § 402(g), § 415, the actual deferral percentage test of § 401(k)(3), and the actual contribution percentage test of § 401(m)(2). If an Excess Allocation resulting from a violation of § 415 consists of annual additions attributable to both employer contributions and elective deferrals or after-tax employee contributions, then the correction of the Excess Allocation is completed by first distributing the unmatched employee’s after-tax contributions (adjusted for earnings) and then the unmatched employee’s elective deferrals (adjusted for earnings). If any excess remains, and is attributable to either elective deferrals or after-tax employee contributions that are matched, the excess is apportioned first to after-tax employee contributions with the associated matching employer contributions and then to elective deferrals with the associated matching employer contributions. Any matching contribution or nonelective employer contribution (adjusted for earnings) which constitutes an Excess Allocation is then forfeited and placed in an unallocated account established for the purpose of holding Excess Allocations to be used to reduce employer contributions in the current year and succeeding year(s). Such unallocated account is adjusted for earnings. While such amounts remain in the unallocated account, the employer is not permitted to make contributions (other than elective deferrals) to the plan.

[buckaroo]

You may also want to consider having the plan sponsor amend the document to reduce the maximum deferral percentage to 85%. This way you should be able to provide the 4% SHMAC and 7.5% NEC without concern. (It also provides a cushion in case an additional allocation is necessary to comply with 401(a)4 testing.)