Limit HCE's to 4% of pay

[Jim Chad]

Is it still legal to limit HCE's to 4% of pay to get them into catchup area sooner?

Ii read something today that makes me wonder.

[BG5150]

As long as the NHCE threshold isn't lower, I don't see the problem.

What did you read?

[david rigby]

Is it important to get HCE's into catch up?

[BG5150]

Is it important to get HCE's into catch up?

ADP tested plan that fails a lot?

[ESOP Guy]

Is it important to get HCE's into catch up?

ADP tested plan that fails a lot?

Why not just tell them to contribute exactly the catch up amount, regardless of % of comp, and they will never have an ADP refund-- I am assuming failure is very common? But that way a low paid HCE because of ownership can still get the full catch up in.

Obviously this only applies to HCEs who are old enough.

[BG5150]

But maybe 4% is enough to pass the ADP test each year. So someone making $200,000 a year could put in 13,500. Way more than just a $5,500 catchup.

Maybe the company want to put in a 21% PS.

[Jim Chad]

First: What I read was something from the IRS website a telling auditors what to look at. It includes sample language of many regulations. I don't remember how long ago i printed it. Bottom of page 3 says" [Note to reviewer: If a plan that permits catch-up contributions limits the amount of Elective Deferrals a Participant is allowed to make, the limit may not be a percentage that is less than 75 percent of compensation.]

My Situation. Owner has comp around $35,000. So when ADP fails and refunds are made, owner has highest percentage and causes failure but lowest dollars. So the refund hits the other two HCE's.

[Kevin C]

That's part of the catch-up universal availability requirement. A limit on deferrals of 75% of compensation or higher is treated as restricting deferrals to the amount available after other employee withholdings. See (B) below. A limit of 4% for HCEs works as long as you let them defer 4% plus the full catch-up. See (e)(1)(i) below.

1.414(v)-1(e)Universal availability requirement

(1)General rule

(i)Effective opportunity.—

An applicable employer plan that offers catch-up contributions and that is otherwise subject to section 401(a)(4) (including a plan that is subject to section 401(a)(4) pursuant to section 403(b)(12)) will not satisfy the requirements of section 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions. A plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit (e.g., an employer-provided limit) that applies to a catch-up eligible participant and does not permit the participant to make elective deferrals in excess of that limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants.

(ii)Certain practices permitted

(A)Proration of limit.—

A applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because the plan allows participants to defer an amount equal to a specified percentage of compensation for each payroll period and for each payroll period permits each catch-up eligible participant to defer a pro-rata share of the applicable dollar catch-up limit in addition to that amount.

(B)Cash availability.—

An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because it restricts the elective deferrals of any employee (including a catch-up eligible participant) to amounts available after other withholding from the employee's pay (e.g., after deduction of all applicable income and employment taxes). For this purpose, an employer limit of 75% of compensation or higher will be treated as limiting employees to amounts available after other withholdings.

[Tom Poje]

agree. in fact, if you couldn't limit the comp, that would negate example 2 of 1.414(v)-1h which limits hces to 10%.

what Jim is referring to is coda_lrm1011

I'd say the note to the reviewers is poorly worded (or at least leads to a mis reading)

see the note on page 5 of the pdf file.

coda_lrm1011.pdf