Catch-up and off-plan years

[fiona1]

The catch-up (calendar) limit used for an off -plan year is the year in which the plan year ends. But what if there are no deferrals in that year?

4/1/2011 to 3/31/2012 ADP test failed. John needs an ADP refund of $900. John deferred all of his money from 4/1/2011 to 12/31/2011. He has not deferred anything in 2012 yet.

You can NOT take that $900 and consider it 2012 catch-up, correct? So do you have to look at 2011? If John did not max his catch-up for 2011, can you apply the $900 as catch-up for 2011? Or does it need to be refunded?

[Kevin C]

The catch-up (calendar) limit used for an off -plan year is the year in which the plan year ends.

No, the catch up limit applies to the participant's taxable year. See 1.414(v)-1©(1) & (2). The catch-ups counted in a non-calendar plan year are whatever amounts become catch-ups as of a date in that plan year. For example, if he defers $22,000 in December 2011 and $22,500 in January 2012, he would have two calendar years worth of catch-ups in the 3/31/2012 plan year.

4/1/2011 to 3/31/2012 ADP test failed. John needs an ADP refund of $900. John deferred all of his money from 4/1/2011 to 12/31/2011. He has not deferred anything in 2012 yet.

You can NOT take that $900 and consider it 2012 catch-up, correct? So do you have to look at 2011? If John did not max his catch-up for 2011, can you apply the $900 as catch-up for 2011? Or does it need to be refunded?

The timing rules in 1.414(v)-1©(3) tell you when the amounts are considered to be catch-up. For amounts reclassified due to a failed ADP test, it happens as of the last day of the plan year. In your case, 3/31/2012, which is in the 2012 taxable year, so it applies towards the 2012 catch-up limit. He has not deferred yet in 2012, so his full 2012 catch-up limit is available and the $900 does not need to be refunded.

The hard question is what happens with his deferrals for the rest of the year. If you only look at the catch-up regulations, it looks like his deferrals for the remainder of the year may be reduced. But, 402(g) says that the individual's deferral limit is determined without regard to the plan's determination of catch-ups. I think that means that he can still defer the full $22,500 for 2012, but it isn't very clear to me what deferrals you count in the ADP test at 3/31/2013 if he does defer the full $22,500.

[Mike Preston]

I have a spreadsheet which I programmed from Sal Tripodi's ERISA Outline Book on off-calendar year plans.

In this case the $900 is treated for all purposes as a 2012 catch-up.

So, Kevin, I don't think he can defer the full $22,500. Only $21,600.

[ETA Consulting LLC]

In this case the $900 is treated for all purposes as a 2012 catch-up.

So, Kevin, I don't think he can defer the full $22,500. Only $21,600.

"Like"

It would be different had the participant actually deferred at least $900 between 1/1/2012 and 3/31/2012. Since he didn't, the $900 effectively creates an additional deferral in lieu of a distribution from the plan.

Good Luck!

[cpc0506]

I have a spreadsheet which I programmed from Sal Tripodi's ERISA Outline Book on off-calendar year plans.

In this case the $900 is treated for all purposes as a 2012 catch-up.

So, Kevin, I don't think he can defer the full $22,500. Only $21,600.

Are you willing to share your 'programmed' spreadsheet?

[Kevin C]

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)).

If the plan allows deferrals up to the 402(g) limit, like almost all of ours do, I don't see how you could limit him to less than $22,500. When you disregard the plan's catch-up determination, as an individual he has not used any of his catch-up limit until his deferrals exceed $17,000.

I don't think the IRS contemplated this kind of situation when they wrote 1.414(v)-1 and in this unusual case those rules conflict with 402(g).

Maybe someone with some influence at ASPPA could get this on the Q&A list?

[ETA Consulting LLC]

If the plan allows deferrals up to the 402(g) limit, like almost all of ours do, I don't see how you could limit him to less than $22,500. When you disregard the plan's catch-up determination, as an individual he has not used any of his catch-up limit until his deferrals exceed $17,000.

I don't think the IRS contemplated this kind of situation when they wrote 1.414(v)-1 and in this unusual case those rules conflict with 402(g).

The issue, KevinC, is that "IF" the Participant actually deferred at least $900 between 1/1/2012 and 3/31/2012, then he would be allowed to proceed with the maximum deferral. What makes this different is that there were ZERO deferrals between 1/1/2012 and 3/31/2012. In this case, the $900 that would've been refunded "as of" 3/31/2012 will now become a de facto deferral of $900 for the 2012 calendar year.

Good Luck!

[BG5150]

If anyone has access to the CCH Technical Answer Group, they have a spreadsheet that'll help. And one for control groups, too.

[Kevin C]

ERISA,

I think you are missing the point I'm trying to make. The rules you are citing as saying he can't defer the full $22,500 are in 1.414(v)-1. Section 402(g) says the maximum deferral for an individual is determined without regard to the plan's catch-up determination under 414(v). Under 402(g), you are disregarding the plan's determination that he used up $900 of his 2012 414(v) catch-up limit on 3/31/12, so how are you able to limit his deferrals to $21,600? The only way you get a limit of $21,600 is by applying the plan's 414(v) determined catch-up amount.

In this situation, 402(g) and 414(v) conflict with each other. But, 402(g) says you ignore 414(v), not the other way around. It's a mess, but I'm not convinced the answer is to ignore 402(g) and limit his deferrals due to 414(v).

[ETA Consulting LLC]

ERISA,

I think you are missing the point I'm trying to make. The rules you are citing as saying he can't defer the full $22,500 are in 1.414(v)-1. Section 402(g) says the maximum deferral for an individual is determined without regard to the plan's catch-up determination under 414(v). Under 402(g), you are disregarding the plan's determination that he used up $900 of his 2012 414(v) catch-up limit on 3/31/12, so how are you able to limit his deferrals to $21,600? The only way you get a limit of $21,600 is by applying the plan's 414(v) determined catch-up amount.

In this situation, 402(g) and 414(v) conflict with each other. But, 402(g) says you ignore 414(v), not the other way around. It's a mess, but I'm not convinced the answer is to ignore 402(g) and limit his deferrals due to 414(v).

I see your point. I "believe" our differences in opinion relate to the fact that you are referencing 402(g) as your deferral limit. My reference is 401(a)(30). In your case, let's assume the participant is in a plan of two totally unrelated employers. In such case, he (the individual) would be allowed a maximum deferral regardless of any other catchup. 401(a)(30), on the other hand, imposes the 402(g) limit across plans of the employer; precluding that plan from allowing those deferrals.

Would your conclusion change if you incorporate 401(a)(30) instead of 402(g)?

[Kevin C]

No, it doesn't change anything. We are talking about a single plan, so including other plans of the employer isn't an issue. 401(a)(30) refers to 402(g) to specify the amount of the deferral limit, so the 402(g) language is still the key.

401(a)(30)Limitations on elective deferrals.—

In the case of a trust which is part of a plan under which elective deferrals (within the meaning of section 402(g)(3)) may be made with respect to any individual during a calendar year, such trust shall not constitute a qualified trust under this subsection unless the plan provides that the amount of such deferrals under such plan and all other plans, contracts, or arrangements of an employer maintaining such plan may not exceed the amount of the limitation in effect under section 402(g)(1)(A) for taxable years beginning in such calendar year.

Now, if 402(g) had said the regular deferral limit could be exceeded to the extent of the available catch-up limit under 414(v), you get the result you describe. But, it does not say that.

1.401(a)-30 refers you to the 402(g) regulations for the amount of the deferral limit. Those regulations have not been updated for EGTRRA, so they don't help here.

What do your plan documents (and SPDs) say about the deferral limit? Ours mirror the language in 402(g).

[ETA Consulting LLC]

I'm trying to catch up to your logic (no pun intended ). I'm beginning to see what you're saying, but still disagree. In this instance, the $900 would normally be distributed (period).

It would not be catchup for 2012 because it was not deferred in 2012. It was actually deferred in 2011, and cannot be counted as catchup in a year it was not deferred. It, then, becomes a deferral (by designation as catchup) for 2012, as it was not contributed in 2012. Without this catchup feature, it would've been distributed; and would have to have been deferred again. Your approach would be double dipping.

This clearly contrasts from a situation where it is actually deferred in the first part of 2012. Under your approach, there would be no authority to classify it is catchup for 2012, because nothing was deferred in 2012.

I believe this is where we are getting hung up.

[Kevin C]

Closer. Let's take it a step at a time.

1. First, the easy part

The 414(v) catch-up rules say the $900 becomes catch-up as of 3/31/12 due to the failed ADP test. That is in the participant's 2012 tax year, so it is a 2012 plan determined catch-up. That part, to me is clear.

The flip side is under 401(a)(30) - 402(g). The plan's catch-up determination is disregarded, and the participant has not yet deferred for 2012. At 3/31/12, he has used up zero of his 2012 402(g) limit.

2. Now comes the messy part

If he had deferred during 1/1/12 - 3/31/12, the 414(v) reg examples say you reclassify part of those deferrals as catch-up, which lets him still defer the full $22,500 for 2012. The 414(v) regs don't address what you do if he did not defer from 1/1/12 - 3/31/12, which causes our problem. When you go through the 414(v) reg rules literally, it doesn't work because it looks like he exceeded his deferral limit using the plan determined catch-up. The first $900 of the plan determined catch-up limit is used at 3/31/12. Then, when his deferrals for the year get over $17,000, he uses up additional plan determined catch-up. At $21,600, the 414(v) regs say he has maxed out the plan determined catch-up limit.

But, 401(a)(30) and 402(g) say to disregard the plan's determination of catch-up. When he has deferred $21,600 for 2012, those sections say he can still defer another $900, because he has not hit his $17,000 + $5,500 limit for the year. Our plan document provisions mirror the 402(g) language and say he can defer $22,500 for tax year 2012. There are two separate catch-up determinations; one for the plan under 414(v) and one for the participant under 402(g).

3.

So, do we ignore the plan terms and 402(g) and limit his deferrals to $21,600? Or, do we let him defer the full amount allowed under the plan and 402(g) and have the 414(v) regs blow up on us? After widening my view of the 414(v) regs to include 402(g), I think we have to let him defer the full $22,500.

How do we deal with the 414(v) regulations problem? I don't know. I think we will need some additional guidance from the IRS to get a good answer.

[ETA Consulting LLC]

But, 401(a)(30) and 402(g) say to disregard the plan's determination of catch-up. When he has deferred $21,600 for 2012, those sections say he can still defer another $900, because he has not hit his $17,000 + $5,500 limit for the year. Our plan document provisions mirror the 402(g) language and say he can defer $22,500 for tax year 2012. There are two separate catch-up determinations; one for the plan under 414(v) and one for the participant under 402(g).

But, if he defers a full $22,500 instead of $21,600, his catchup would be $6,400. Regardless of what he's allowed to defer, his catchup must not exceed $5,500 for the year. That $900 IS still a catchup with a limit.

Where does that leave us?

[Kevin C]

No, his plan determined catch-up is only $5,500. Under the 414(v) regs, amounts only get classified as a plan determined catch-up to the extent of the available catch-up limit. At the point that he reaches $21,600 of deferrals, he has a plan determined catch-up of $5,500, so additional deferrals do not create additional plan determined catch-up. I think that is what you and Mike are pointing out. The only point we disagree on is whether that affects his ability to defer the last $900 for the year.

I'm not sure what that means for the plan. It could mean that the last $900 of deferrals count in the ADP test. It could mean something else. That's something the IRS gets to decide.

At a previous job, my supervisor had a plaque on his wall that read: "You don't have to be crazy to work here, but it helps!" I need one of those.

[ETA Consulting LLC]

The only point we disagree on is whether that affects his ability to defer the last $900 for the year.

To your point, here is where I'd agree with you in that the $900 "may" be deferred to a 401(k) plan of another employer. This would be a difference between 402(g) and 401(a)(30). There wouldn't be any room to defer additional amounts to a plan of the employer where that $900 was already classified at catchup. However, there would be nothing to preclude him from deferring the full $22,500 during 2012 across different employers, as his combined deferrals on his W-2 forms would not exceed $22,500. I just don't think he would be able to contribute the full $22,500 into the current plan for the aforementioned reasons.

At a previous job, my supervisor had a plaque on his wall that read: "You don't have to be crazy to work here, but it helps!" I need one of those.

I've heard that about the industry

[Mike Preston]

Kevin, I see your logic but I just don't agree with it. 401(a)(30) is there as a backstop against a single employer trying to double dip. Once the $900 is determined to be a plan catchup on 3/31 it must count for 401(a)(30).

Be that as it may, this is an issue that is not specifically addressed on Sal's worksheets and I agree that a question put to the IRS may be best.

Kathy, I have already agreed to share it with one person, but I'd rather not post it publicly on BenefitsLink. In order to share it I need the person (or organization) to accept it "as is" along with a series of caveats. If anyone is interested in the spreadsheet, please send me a private message and I'll send out a preliminary email. It is a messy spreadsheet that has at least one question programmed that is not addressed in the regs (although this thread is not that question) and therefore there are people who might disagree with the way I've programmed things, not to mention the fact that there is always a possibility that the programming is incorrect and therefore the results must be reviewed by someone capable of understanding when the results are incorrect before it is used on an actual case.

[Kevin C]

Once the $900 is determined to be a plan catchup on 3/31 it must count for 401(a)(30).

My read of 401(a)(30) is that it is saying plan determined catch-ups are disregarded. With plan determined catch-ups disregarded, you are left with actual deferrals and 402(g) triggered catch-up. In effect, we have two separate catch-up determinations, one for the employee under 401(a)(30)/402(g) and one for the plan under 414(v). 401(a)(30), quoted in a prior post, says to combine deferrals in all plans of the employer and use the deferral limit in 402(g). 402(g)'s reference to catch-up, also quoted in a prior post, says to disregard the plan catch-up determination under 414(v). What am I missing that says we use the plan catch-up determination under 401(a)(30) / 402(g)?

But, let's assume for a minute that we do count the plan catch-up under 401(a)(30) / 402(g). When is the $900 determined to be a plan catch-up as of 3/31? It certainly isn't on 3/31. In most cases, it would normally be within 2.5 months. But, if the sponsor is considering a QNEC, or for some reason they just don't get around to the testing, it could be substantially later. Until the testing is finalized, it is decided by the employer to issue refunds instead of doing a QNEC, AND the participant is notified, how is the participant (or anyone else) going to know exactly what portion of his deferrals are being considered as plan catch-up as of 3/31? Plan catch-ups are required to be universally available, so you have other problems if your testing is later corrected yielding lower refunds. It gets even more interesting if you have a later plan year end. We have a 401(k) with a 10/31 year end. How would you handle your interpretation when the testing normally isn't completed before the participant's tax year ends?

[fiona1]

Thanks for all the replies. Let me throw out another one. Assume a Limitation year is 7/1 to 6/30 and a participant's tax year is 1/1 to 12/31. As of today, 11/19, a ptp has deferred $20,000 into their 401(k) from 1/1/2012 to 11/19/2012. Their employer also has a profit sharing plan (with the same LY) - and it's just realized that they have a 415 excess of $6,000 (during the LY of 7/1/2011 to 6/30/2012).

Since the participant has already deferred $20,000 this tax year - they only have $2,500 additional to defer. Is it correct to say that of the $6,000 415 excess that $2,500 would be moved to "catch-up" (for 2012) and then $3,500 be refunded? Is it also then true that the participant couldn't defer for the remainder of 2012 since they have maxed out on both the $17,000 elective deferral limit and they have also maxed out on their catch-up limit?

[Mike Preston]

Kevin, this isn't the first issue that presents itself when you have overlapping plan years with calendar year tax years or different fiscal years. I think the plan sponsor takes on the responsibility of doing things timely when the circumstances dictate. For example, in your 10/31 example on the day the plan is adopted they should have a procedure in place to make sure everything gets tested before 12/31. Can't do it? Adopt a 12/31 plan year end.

Fiona, it is very difficult to answer when facts are left out. How much of the deferral went in between 1/1 and 6/30? How much of the $6,000 excess is from the employer's contribution versus the deferral? What does the plan say about correcting 415 errors? There is just so much left out that no general answer is available other than: you are safe only if you limit people in such a way so as to guarantee no 415/402(g)/414(v) violations.

[Kevin C]

Sorry Mike, but unless you can show me something in 401(a)(30) that says you consider the plan determined catch-up, we'll have to agree to disagree.

Have you looked to see what your DC valuation system does with this situation?