off calendar year ADP testing

[EBDI]

The ADP test for a plan year that ends on 6/30/12 failed. One of the HCE's reaches age 50 three months after the plan year end (Sept. 2012). Can the excess deferral for this HCE be recharacterized as catch up even though he turns 50 after the plan year ends? He has only deferred $7,700 for the plan year.

[ETA Consulting LLC]

Yes. In fact, they must be recharacterized as catchup since he turns age 50 in the calendar year 2012.

Good Luck!

[EBDI]

Thank you for the quick answer!

[Guest BUG]

Is it also correct, that the amount recharactorized, counts against the 2012 catch up? ex: 2012 Catch up is 5500, if 2000 of the 7000 is recharactorized as catchup, then the max deferral for the 2012 W-2 is 20000 (17000 plus 3000). If 2012 exceed 20000, then 402g refund.

[EBDI]

I do not believe the amount that is recharacterized counts against the 2012 deferral and catch up limits. Those are on a calendar year basis.

[ETA Consulting LLC]

Is it also correct, that the amount recharactorized, counts against the 2012 catch up? ex: 2012 Catch up is 5500, if 2000 of the 7000 is recharactorized as catchup, then the max deferral for the 2012 W-2 is 20000 (17000 plus 3000). If 2012 exceed 20000, then 402g refund.

This would be true only to the extent no deferrals were made between January 1st and June 30th 2012. Notice that this is where the plan year overlaps into another calendar year. If no deferrals were actually made in the calendar year, then the catchup would reduce the amount of deferrals that may be made. HOWEVER, if $2,000 deferrals (in your analysis) were contributed during 2012, then it would not further reduce the deferral amount.

Good Luck!

[dcoderre]

I agree. If the entire $7K was deferred in latter half of 2011, a $2K ADP failure nevertheless is applied to the 2012 catch-up for 6/30/2012 testing. Thus, for the remainder of the year 7/1/2012 - 12/31/2012, the participant could defer max of $17,000 (402g limit) plus the remaining catch-up of $3,500 for 2012 grand total of $20,500. When 6/30/2013 is tested, only the first $17K of this is included in the test (plus applicable 2013 amounts) and any ADP failure will be applied to the 2013 catch-up to the extent it is not already used.

If the $7K was deferred ratably throughout the year for 6/30/2012 PYE, such that $3,500 was contributed 1/1/2012 - 6/30/2012, then participant still gets maximum use of the $17K 402(g) limit and $5,500 catch-up for 2012 as follows assuming a $2K ADP failure: $3,500 for first half of year of which $2k is 2012 catch-up, plus up to $15,500 for remaining 402(g) and up to $3,500 for remaining catch-up, for grand total of $22,500. Of this amount, the 6/30/2013 ADP test will include only $15,500 (plus applicable 2013 contribs), and any ADP failure is applied to 2013 catch-up even if the contributions were all made in 2012.

HCEs can hinder or help their ADP results depending on how they bunch up or spread out contributions in a noncalendar plan, as well as potentially decreasing their ability to put in the full $22,500 as in the first part of this example.

[Kevin C]

If you look solely at 1.414(v)-1, I agree that is what those regulations say. After having this issue come up and trying to figure out what our valuation software was doing with the participant, I'm not so sure any more. When you take into account 402(g), that interpretation of 1.414(v)-1 has some problems.

402(g)(1)©Catch-up contributions.—

In addition to subparagraph (A), in the case of an eligible participant (as defined in section 414(v)), gross income shall not include elective deferrals in excess of the applicable dollar amount under subparagraph (B) to the extent that the amount of such elective deferrals does not exceed the applicable dollar amount under section 414(v)(2)(B)(i) for the taxable year (without regard to the treatment of the elective deferrals by an applicable employer plan under section 414(v)).

The amount the participant can defer for a tax year is determined without regard to treatment of the deferrals as catch-up by the plan or plans. So, what happens when the participant defers the full amount allowed under 402(g), but because of the timing of those deferrals, the rules in 1.414(v)-1 break down and make it look like the participant exceeded 402(g), when he did not? No, I don't have a good answer for that.

[Kevin C]

Here is the thread on the situation I was referring to.

http://benefitslink.com/boards/index.php?showtopic=48300

In retrospect, one thing I missed back then was the lanuage of 402(g). One issue I struggled with then was did he really get to defer $22,000 for that calendar year? Based on the language in 402(g), I think the answer is yes, he could defer $22,000. Then, the plan tries to use 1.414(v)-1 to determine catch-ups and it gets a little weird. If you go by a literal reading of the regulations, it looks like he should not be allowed to defer the full $22,000. The IRS has an example in the 414(v) regs where a similar problem would come up and they reclassify some deferrals as catch-up to make the rules work. The problem is that the example has the person deferring each month. It's not clear how their example applies with a once a year deferral like we had.

[dcoderre]

Here's my take on Kevin's example:

2/28/2010 PYE - $1600 of deferrals reclassified as 2010 catch-up (no other 2010 YTD deferrals at this point)

July 2010 contributes $16,500 402g max, plus $3,900 remaining catch-up max, plus $1,600 which is in excess of 402g & max catch-up

2/28/2011 PYE - ADP test includes $16,500, plus $1,600 excess 402g (because he's an HCE)

It would be interesting to know what the software would have included in the ADP if this person had been an NHCE for 2/28/2011. If my above analysis is correct, only $16,500 would have been included in the ADP test for an NHCE.

[Kevin C]

2/28/2011 PYE - ADP test includes $16,500, plus $1,600 excess 402g (because he's an HCE)

There's one small problem with that. He didn't exceed 402(g). Look at 402(g)(1)© quoted above. The 402(g) limit is determined without regard to the plan's determination of catch-ups under 414(v). If you are looking at the 402(g) regs, take note that they were not updated for EGTRRA (Public Law 107 - 16), so they do not reflect catch-ups.