Forcing a 415 Failure

[Guest Yeti68]

Question:

Is it permissible to force a 415 failure to create a catch-up?

Scenario:

• Document calls for any employer allocation to be reduced so as not to cause "the annual additions to exceed the maximum permissible amount".
• Participant is catch-up eligible but has not created a catch-up event through Plan Limit, 402g or ADP/ACP failure.
• Participant is an HCE and is being "maxed out" with a cross tested group allocation profit sharing contribution.
• Compensatoin is greater than $255,000.
• $17,500 was contributed in deferal. $7650 was contributed as Safe Harbor NonElective.

With the 2013 415 limit being $51,000, when "maxing out" the HCE can I allocate $31,350.00 as a profit sharing (assuming it passing relevant testing) thereby "creating" a 415 failure in order to create a catch-up eligible event (415 refund) to give the HCE $56500 for they year (415 plus catch-up)?

it seems, given the document language, that "creating" a 415 is not allowable even if the 415 refund would be catch-up eligible and retainable in the plan.

I am working with a Corbel document and Relius software. The Relius Optimizer option automatically creates the 415 failure in the optimizaton process. The act of creating the failure to induce catch-up seems contradictory to the plan document.

If anyone has input or citings that can assist with a proper approach, I would be interested to hear from you.

Thank you.

[Lou S.]

I think there are number of threads on this here if you do a search but what you are describing is not really a problem at at. The catch-up is for any plan limit, including 415, so if the employer allocation puts them over 415 you simply reclassify up to the annual catch-up limit.

[BG5150]

I agree w/ Lou. I see no problem with this.

[Guest Yeti68]

Appreciate the feedback.

I understand a 415 failure is catch-up eligible, but first their needs to be a failure before there is catch-up. Since the document says you can not knowlingly allocated a 415 failure, just seems you would never get to the point were you could create the catch-up via a profit sharing allocation as it should first be "reduced" prior to the 415 failure. According to the document, there are legitimate reasons for a 415 failure, such as a self employed deferring off draw amounts only to not have a positive income at year end, but simply allocating over the 415 limit simply to create a failure that can "subsequently" be deemed catch sees to be against the document language.

But your responses seem to echo the majority opinion, so thank you for replying.

[masteff]

Seems to me that you have 2 separate questions...

1) Is it generally permissible?

2) Given what the plan document says, can I do it anyway?

I'm going with: from what the others said, yes, it's permissible in theory, but you can't violate your plan document.

[BG5150]

You do not reclassify as catch-up if you have a failure. You reclassify when you hit a limit.

[Guest Yeti68]

BG5150,

In order to get the $5500 catch-up (in the absence of a 402g excess or adp failure) there would have to be a 415 failure, correct? Would you not need a 415 failure and a subsequent need for a corrective refund of deferral in the amount of $5500 that would be eligible for catch-up reclassification? Since catch-up can only be deferral and you haven't deposited more than $17,500, the only way to reclass deferall less than $17,500 is to deposit too much profit sharing, thereby creating a 415 failure where the deferral that is needed to be refunded per 415 failure correction methods (deferral gets refunded first). So I really don't see how you get around saying that a failure wasn't created. If it wasn't, then you just couldn 't have arbitrarily moved $5500 of deferral to catch-up, simply to make room for additional profit sharing. What am I missing here? With so many opinions to the contrary, I have to missing something.

[chc93]

From the original post...

---Document calls for any employer allocation to be reduced so as not to cause "the annual additions to exceed the maximum permissible amount".

Put another way... if the plan is a 401k, and at least $5,500 has been deferred, isn't the "maximum permissible amount" for a catch-up eligible participant $56,500?

[Tom Poje]

2012 ASPPA Conference #24

A participant makes $16,500 of elective deferrals for the

2011 calendar plan year. The plan has a 50% match

formula, so the matching contribution is $8,250. A

nonelective contribution of $32,000 is allocated as well. If

all of these amounts are treated as annual additions, the

$49,000 limit for 2011 is violated (i.e., $16,500 + $8,250

+ $32,000 = $56,750). The plan allows for catch-up

contributions, but the plan also states that catch-up

contributions are not matched. How should the §415

violation be corrected?

Proposed answer

The §415 limit is $49,000, but up to $54,500 is

acceptable to the extent the additional $5,500 is

attributable to catch-up contributions. Normally,

$5,500 of elective deferrals would be recharacterized

as catch-up contributions, leaving an excess of

$2,250, which would be forfeited as an excess annual

additional. However, since the plan does not match

catch-up contributions, if $5,500 is recharacterized

as catch-up contributions, the participant would lose

$2,750 of match. The better approach is to treat the

amount needed to correct the violation of §415 as

consisting proportionately of deferrals and match

(2:1 ratio with a 50% matching formula). This results

in $5,166.67 of deferrals being recharacterized, and

the corresponding match of $2,583.33 is forfeited.

When the dust settles, the annual addition limit of

$49,000 is satisfied (i.e., $32,000 nonelective

contributions, $5,666.67 of match and $11,333.33 of

deferrals subject to the match) plus $5,166.67 of

catch-up contributions.

IRS Response

The correction looks appropriate, since it maximizes employer and

total contributions, while complying with IRC §415, match, elective

deferral, and catch up requirements, and also follows plan terms

with respect to matching contributions.

................................

of course, this does not address possible issues of document language, but as I recall, it does follow the guidelines set forth in EPCRS.

it is also true such response do not necessarily reflect an actual Treasury position, but the questions are presented to the IRS personal beforehand and I suppose they could have changed it if they felt differently.

[fiona1]

Yeti68 - I remember seeing a very similar question posed a few weeks ago:

http://benefitslink.com/boards/index.php?/topic/55105-maximizing-employer-contributions-415-limit/

I believe the underlying argument (as I see it) is that there is no 415 failure. I don't believe the 414(v) catch-up regulations say that you can reclassify in the event of a 415 "failure" - but you can reclassify in the event of hitting the 415 limit. The correction for an actual 415 "failure" is outlined in the EPCRS and it says nothing about reclassifying as a means of correction. It says that you refund, forfeit, and/or reallocate excess annual additions.

From the final catch-up regulations:

• Catch-up contributions are elective deferrals made by a catch-up eligible participant that exceed an otherwise applicable limit and that are treated as catch-up contributions under the plan…
• As discussed above, whether elective deferrals in excess of an applicable limit can be treated as catch-up contributions is determined based on the year (e.g., plan year, calendar year, or limitation year) with respect to which each applicable limit is applied.
• The final regulations retain the rule that the amount of elective deferrals in excess of an applicable limit is generally determined as of the end of a plan year by comparing the total elective deferrals for the plan year with the applicable limit for the plan year. For an applicable limit that is determined on the basis of a year other than a plan year (such as the calendar year limit on elective deferrals under section 401(a)(30)), the determination of whether elective deferrals are in excess of the applicable limit is made on the basis of such other year.

[Guest Yeti68]

I sincerely appreciate the responses.

I still have not seen a proper explanation. Maybe there isn't one.

If catch-up can only be "employee deferral" and there is no 402(g) failure (deferrals) and no ADP refund (deferrals), then how does breaching the 415 limit via an Employer contribution create a catch-up situation, as the moneys deposited that caused the 415 limit failure does not consist of a deferral?

It has been my understanding that deferral portion of the refund necessary to correct for a 415 failure can be reclassed as catch-up. Thus, the 415 failure comes first, the need to distribute deferral to correct the 415 failure comes second, then the ability to reclass the deferral portion of the refund comes third.

It there is actuallyt no 415 failure, thenyou are simply depositing employer money and reclassing as catch-up, which just seems incorrerct.

In regards to doing a refund to correct a 415 failure.....the instructions below on how to to correct a 415 failure come staight from the IRS.gov website.

Fixing the Mistake:

If contributions for a participant include both employer and employee elective contributions, then correction for contributions that exceed the employee’s limitation under §415 should be made, to the extent required, in the following manner:

Step 1: Distribute unmatched elective contributions (adjusted for earnings) to the affected participant. If any excess remains, then proceed to Step 2.

Step 2: Distribute elective contributions (adjusted for earnings) that are matched, and forfeit related matching contributions (adjusted for earnings). If any excess remains, then proceed to Step 3.

Step 3: Forfeit other profit-sharing contributions.

The following excerpt comes from McKay Hochman that seems to echo the only the deferal portion of the 415 refund that would be necessary due to a 415 failure can be reclasssed as a catch-up....

Do the special rules regarding "catch-up contributions" exempt such contributions from discrimination testing, such as ADP testing?

Yes. Elective deferrals will be deemed to be "catch-up" contributions:

• when the deferrals exceed the Code Section 402(g) limit or another statutory limit, or
• when the deferrals exceed a limit specified in the plan document, or
• when a highly compensated employee has an excess contributions due to an ADP test failure, or
• when the section 415 annual additions limit is exceeded.

Are elective deferrals that result in excess annual additions that violate the annual additions limit of Code §415© included in ADP testing for a catch-up eligible participant?

No. See the example below:

Assume that a catch-up eligible highly compensated employee will receive an allocation of employer contributions of $34,500 for 2013.

Since the maximum allocation that the employee can receive is limited to $51,000 in total, he contributes elective deferrals of $16,500. He also contributes an additional $2,000 that he believes to be catch-up contributions for a total of $53,000. This aggregated amount includes contributions that exceed both the Code Section 402(g) limit on deferrals by $1,000 and the Code Section 415© limit on annual additions by $2,000.

Since the participant deferred in excess of the Code Section 402(g) limit, the $1,000 between $17,500 and $18,500 is clearly catch-up and will automatically be exempt from ADP testing.

What about the amount between $16,500 and $17,500 that did not exceed the Code Section 402(g) limit for 2013 but did exceed the Code Section 415© limit on annual additions?

Because the participant is catch-up eligible, the excess annual addition will not be returned and is not included in the ADP test. Instead it is recharacterized as a "catch-up" contribution due to the violation of the Code Section 415© statutory limit. See Treasury Regulation §§1.414v-1(b)(i) and (d)(2)(i).

[austin3515]

In what way is your question different than the interaction between 402g and catch-ups? It's precisely the same application, just a different limit. I think it is border line impossible that your document would not permit this.

Our Corbel doc defines catch-up as (notice that there is no distinction between 401a30 (which is 402g of course) and 415©:

1.11 "Catch-Up Contribution" means, effective for taxable years beginning after December 31, 2001, an Elective Deferral made to the

Plan by a Catch-Up Eligible Participant that, during any taxable year of such Participant, exceeds one of the following:

(a) a statutory dollar limit on Elective Deferrals or "annual additions" as provided in Code Sections 401(a)(30), 402(h), 403(b), 408,

415©, or 457(b)(2) (without regard to Code Section 457(b)(3)), as applicable;

It then goes on to say:

(d) Certain amounts are not "annual additions." For purposes of applying the limitations of Code Section 415, the transfer of

funds from one qualified plan to another is not an "annual addition." In addition, the following are not Employee contributions for the

purposes of Section 4.4(e)(1)(b): (1) rollover contributions (as defined in Code Sections 402©, 403(a)(4), 403(b)(8), 408(d)(3) and

457(e)(16)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee

pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section

411(a)(3)(D) (mandatory contributions); (5) Catch-Up Contributions; and (6) Employee contributions to a simplified employee

pension excludable from gross income under Code Section 408(k)(6).

So you never have a 415 excess. The very first penny over the statutory limit is NOT AN ANNUAL ADDITION. 1.11 makes it a catch-up contribution, and the next paragraph tells us that catch-ups do not count towards the limit. The argument of "well how do you know it was the 401k and not the profit sharing that went over the 415c limit" to me is a non-starter because only Elective Deferrals can be catch-ups (I've pondered this question myself). So, did you make a contribution over 415©? Yes? OK, then the profit sharing gets pushed up the 415 tube and the deferrals spill out of the top and into the catch-up tube. If the profit sharing was dropped in at the top of the tube and were left there above the 415 limit, then the reference to 415c has no effect. And it is well accepted that to interpret a law in a way that renders it useless would not be a reasonable interpretation.

Your document probably uses similar structure. Check it out.