Maximizing employer contributions / 415 limit

[Guest tjt169]

A plan document limits a Profit Share contribution to the 415 limit. For the 1/1/2013 to 12/31/2013 plan/limitation year, an employee, age 30, defers $15,000 and has a match of $7,500. This employee is limited to a PS of $28,500 – as to not exceed the 415 limit of $51,000.

Another employee, age 55, also defers $15,000 and has a match of $7,500. Would there be an issue if the PS for this employee is $34,000? Yes, it would exceed the 415 limit – but the employee would be able to recharacterize the excess $5,500 to catch-up.

Any problems with this?

[cpc0506]

You can only reclassify salary deferral as catchup if the plan is failing the ADP Test.

[ESOP Guy]

I think you can do it. You can reclassify for a 415 failure.

Edit:

http://www.mhco.com/BreakingNews/CatchFAQ_122013.html

[Lou S.]

You can only reclassify salary deferral as catchup if the plan is failing the ADP Test.

Not true. It is any limit.

[Guest tjt169]

The plan document does not allow a PS contribution to exceed the 415 limit though. Am I essentially creating an operational failure and correcting the 415 failure by reclassifying? I can't do this year after year though because that would be violating the EPCRS practices and procedures, correct?

[Lou S.]

The plan document does not allow a PS contribution to exceed the 415 limit though. Am I essentially creating an operational failure and correcting the 415 failure by reclassifying? I can't do this year after year though because that would be violating the EPCRS practices and procedures, correct?

But by reclassifying you aren't exceeding the 415 limit. Catch-ups are not included as part of the 415 annual additons.

You had a problem if the under 50 was allocated the $5,500 over the limit and you corrected by refunding deferral and earnings but I think under the revised EPCRS procedures even that might once again be OK as it once was in pre-EGTRRA restatements.

[cpc0506]

Maybe, I was thinking of something else. is there an issue if you have a failed ADP Test that returns salary deferral contributions, these are counted towards the 415 limit and you can't give extra profit sharing to make up for the return?

[Lou S.]

Maybe, I was thinking of something else. is there an issue if you have a failed ADP Test that returns salary deferral contributions, these are counted towards the 415 limit and you can't give extra profit sharing to make up for the return?

They aren't catch-up contributions under 414(v) [i think that's the right section]. Catch-up contributions have special treatment in that they don't count against any limit.

[John Feldt ERPA CPC QPA]

That's right, ignore catch-ups when applying the limits.

Plan deferral limit: (e.g. 5% of pay maximum deferral limit for HCEs, HCE defers 5% of pay plus $5,500.

402(g) deferral limit: ($17,500 for calendar year 2014)

415 dollar limit: (e.g. wages $104,000 in 2014, defers $5,500, receives 50% of pay profit sharing, or $52,000)

100% of pay 415 limit: wages $35,000 in 2014, defers $23,000, receives 50% of pay profit sharing, or $17,500). Employee gets $40,500 overall.

Of course you can also get some regular looking deferrals characterized into catch-ups with the classic ADP-tested plan.

[Logan401]

A little late jumping in on this, but is it possible an Employee can receive a full $57,500 in profit sharing?

John using your example for the 415 dollar limit, what if the participant did not defer the $5,500?

[John Feldt ERPA CPC QPA]

A catch-up deferral is a deferral election made by the employee to defer from their wages.

If the employee defers zero, there is no catch-up deferral. So, $57,500 is not availbel. Only a $52,000 PS allocation instead.

[Tom Poje]

logan - only deferrals count toward catch-ups, so no you can't receive 57,500 and count 5500 as a catch up because there are no deferrals (as John indicated above).

the initial preamble to the catch up regs had an example in which the plan limited HCEs to 0% deferrals and therefore a catch up was available because this was a plan imposed limit. This language was removed from the preamble when the final catch up regs were released - but not necessarily because the IRS decided against it, but more than likely as a space saver. other language was removed from the preamble as well.

[Logan401]

Hi Tom,

Thank you very much with this informative reply! So that I understand, a participant would have to defer at least $5,500, and then he/she can receive a $52k PS.

If a participant deferred $4,500, then he/she can receive a $51k PS, correct?

[Tom Poje]

need to be careful here

for 2013 the 415 limit is 51,000. so one could have 5500 in deferral (treated as catch up) and 51,000 in profit sharing

for 2014 the 415 limit is 52,000 so now one could have 52,000 in profit sharing

the amount of deferral makes little difference if it is less than the catch up limit of 5500.

[Logan401]

If I was to base my examples strictly for 2014, someone deferring $5,500 can then receive a $52k PS as long as they meet all regs, etc..

This example would provide the participant with $57,500 in annual additions.

Someone that deferred $4,500 would reach $56,500 in annual additions.

Got it!

[actuarysmith]

super late to the party here. I was interested in a very related matter. 

 

Let's suppose you have a scenario where an employee is contributing a very high percentage of their compensation. (i.e. they earn $30,000 and contribute $24,500 - not too common, but sometimes with a second income). then it turns out the employer wants to make a generous profit sharing contribution which would then cause this participant to exceed the 415 limit. 

What happens next? is the Profit sharing contribution limited to remain under 415? (so the employee is penalized for deferring so much), OR is the full profit sharing allocated and the 415 overage is treated like an excess deferral? The employee would be taxed on the distribution, but would get the full employer profit sharing amount.   

[John Feldt ERPA CPC QPA]

Rev Proc 2016-51, section 4.04:

A plan that provides for elective deferrals and nonelective employer contributions that are not matching contributions is not treated as failing to have established practices and procedures to prevent the occurrence of a § 415(c) violation in the case of a plan under which excess annual additions under § 415(c) are regularly corrected by return of elective deferrals to the affected employee within 9½ months after the end of the plan’s limitation year.

[Lou S.]

In other words she could get the full profit sharing contribution.

If this is 2018 we are talking about and she $24,500 deferral on $30,000 income she could receive an employer allocation of $11,500 before you have a 415(c) issue on the 100% of pay issue.