Catch-up & top heavy

[R. Butler]

This seems too agressive to me on its face, but I'm hoping I'm wrong.

We have a take over plan that look like it is top-heavy. HCE's have contributed in 2013, but not in excess of $5,500. How big of an issue is it if we amend now to limit deferrals for HCE's to a low dollar amount plus the catch-up?

I don't see that there is a cutback issue to the non-keys because there is a last day requirement for top-heavy minimum. They haven't accrued anything until the last day.

I also don't really see a cutback issue to the HCE's because he right to defer is not a protected benefit.

I'm uncomfortable because the amendment is really being used to reclassify money that is already in the plan as catch-up when if we let htings play out some of it probably wouldn't be.

Thanks for any guidance.

[Lou S.]

First this won't help with top-heavy as catch-ups go in to the balance for determining TH.

Second it's probably prohibited if you are doing it after the fact.

Third I assume you are doing this for ADP reasons as there are probably some HCEs who are not cacthup eligible who are likely to get large refunds?

[BG5150]

Are all the HCE's key?

[Tom Poje]

taketh thy holy amendment, and raiseth it on high, and prepareth to throw.

Thou shalt then count to 3. Thou shalt not count to 4.

5 is right out, (as explained below)

Internal Revenue Bulletin 2007-28
5.05 Except as otherwise provided in section 5.06 and 5.07, the deadline for the timely adoption of an amendment with respect to any plan is determined as follows:

(1) In the case of an interim amendment, an employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted the amendment if the plan amendment is adopted by the end of the remedial amendment period described in section 2.05 (determined without regard to the extension under section 5.03 of this revenue procedure).

(2) In the case of a discretionary amendment (i.e., one which is not an interim amendment described in section 5.02), an employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted the amendment, if the plan amendment is adopted by the end of the plan year in which the plan amendment is effective.

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

to clarify a point made in another post, catch-ups do count toward determining if a plan is top heavy, however, if the only contributions received by a key employee during the year are catch ups, then, assuming no other key ee has received a contribution, then no top heavy would be required. but you don't get a chance to 'fix' 2013 at this late date.

[R. Butler]

1. It would help because although catch-ups are counted in the balances they don't trigger top-heavy minimums.

2. This is the real issue. All hce's/keys are at least 50. If the plan is amended now to limit hce deferrals to $500 plus the catch-up when someone has already deferred $3,000 is that a cutback? My inclination is yes, but I'm hoping that I'm wrong. No HCE intends on contributing more than $5,500; there are agreements in place stating that. I'm not comfortable though saying that they can now create a plan imposed limit to reclassify money already in the plan as catch-up.

3. That is the problem the plan won't fail ADP. Plan needs these deferrals classified as catch-up to avoid a top-heavy minimum.

Thanks for your reposnse.

[R. Butler]

taketh thy holy amendment, and raiseth it on high, and prepareth to throw.

Thou shalt then count to 3. Thou shalt not count to 4.

5 is right out, (as explained below)

Internal Revenue Bulletin 2007-28

5.05 Except as otherwise provided in section 5.06 and 5.07, the deadline for the timely adoption of an amendment with respect to any plan is determined as follows:

(1) In the case of an interim amendment, an employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted the amendment if the plan amendment is adopted by the end of the remedial amendment period described in section 2.05 (determined without regard to the extension under section 5.03 of this revenue procedure).

(2) In the case of a discretionary amendment (i.e., one which is not an interim amendment described in section 5.02), an employer (or a sponsor or a practitioner, if applicable) will be considered to have timely adopted the amendment, if the plan amendment is adopted by the end of the plan year in which the plan amendment is effective.

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

to clarify a point made in another post, catch-ups do count toward determining if a plan is top heavy, however, if the only contributions received by a key employee during the year are catch ups, then, assuming no other key ee has received a contribution, then no top heavy would be required. but you don't get a chance to 'fix' 2013 at this late date.

Thank you for your post. I was repsonding to another post as you posted this.

I understand the discretionary amendmnet time lines. So there wouldn't be an issue with reclassifying money that is already in the plan as catch-up by creating the plan imposed limit? That would be great.

[Tom Poje]

1.414(v)-1(b)(2)(I) eats you alive (I think) If I am reading this correctly, your limit for the first part of the year was 100% (since nothing was in place)

(2) Contributions in excess of applicable limit--(i) Plan year limits--(A) General
rule. Except as provided in paragraph (b)(2)(ii) of this section, the amount of elective
deferrals in excess of an applicable limit is determined as of the end of the plan year by
comparing the total elective deferrals for the plan year with the applicable limit for the
plan year. In addition, except as provided in paragraph (b)(2)(i)(B) of this section, in the
case of a plan that provides for separate employer-provided limits on elective deferrals
for separate portions of plan compensation within the plan year, the applicable limit for
the plan year is the sum of the dollar amounts of the limits for the separate portions. For
example, if a plan sets a deferral percentage limit for each payroll period, the applicable
limit for the plan year is the sum of the dollar amounts of the limits for the payroll
periods.

[Tom Poje]

and this was the example from the preamble to the catch up rules. so changing the limit is no problem, but in you case and at this late date, it would seem to be too late..let's suppose it was Jan and your rate was 100% (no cap) and you amend to 0%. then the weighted effect would be what - 100 / 12 or 8.3%. even that wouldn't help.

These final regulations retain the rule in the proposed regulations that a plan that changes an employer-provided limit during the plan year is permitted to use a time-weighted average of these limits as the employer-provided limit. For example, under this alternative method, a plan that provides for an employer-provided limit of 8% for the first 6 months of the plan year and 10% for the second 6 months is permitted to use 9% as the employer-provided limit for the plan year. These final regulations also provide that the plan is permitted to use the definition of compensation used for ADP testing purposes for this weighted-average simplification, and can use this alternative method without regard to whether the employer-provided limit is changed during the plan year

[R. Butler]

Thank you for the cite. That is what I was concerned about, just couldn't find the cite on my own.

[rcline46]

When does (permitted to average) become MUST average. I do not see a prohibition against locking it down now, just no refunds if one is now over the new limit.

[Tom Poje]

Because in the preamble the IRS is trying to prevent abuse? in this example with a 1% limit to start the year, you thus create a catch up in the first few months, but then after increasing the limit the individual can now defer more. thus over the whole year, even though he may have deferred only 15,000 you can't say, "But the first 5000 was catch up, so excluded from the test" I only have to use 10,000 in the test. but the IRS has said no, we aren't going to let you do that. that word 'require' seems somewhat restrictive.

from the preamble:

A number of advocates for a payroll-by-payroll determination of catch-up contributions acknowledged that their proposal creates a risk that ADP testing could be distorted through changes in plan limits during the year. For example, if a plan were to provide that HCEs’ elective deferrals are limited, on a payroll-by-payroll basis, to 1% of compensation for the first 2 months of the plan year, and then to 15% of compensation for the remainder of the year, the result would be equivalent to treating the first dollars deferred as catch-up contributions. While few employers might be likely to adopt such a design, a payroll-by-payroll system for determining catch-up contributions would require restrictions on the extent to which changes in employer-provided limits during the year could be made.
After considering these comments, Treasury and the IRS have determined that the need for rules to prevent abuse associated with a payroll-by-payroll method of determining catch-up contributions outweighs the relative administrative advantages of that method, and these regulations retain the annual method.

..........

[rcline46]

permitted to use. Not required to use. Also it says add up the limits, so limit -0- for part of the year, limit $100 rest of year. Add them up get $100. On an annual basis.

Catchup are by law/regulation determined ONLY at the end of the year, and by some incompetent payroll company interpretation.

I see no problem amending now.

[rcline46]

Now ask me how I REALLY feel!

[R. Butler]

permitted to use. Not required to use. Also it says add up the limits, so limit -0- for part of the year, limit $100 rest of year. Add them up get $100. On an annual basis.

Catchup are by law/regulation determined ONLY at the end of the year, and by some incompetent payroll company interpretation.

I see no problem amending now.

I understand the logic, but if they meant "permitted" the same way you are using it is there really a point in that language?

I have an issue with the inconsistency. Why does passing the ADP test possibly trigger additonal top-heavy minimums? In this very case if the plan sponsor has little to no participation the ADP test would fail, the deferral would be called catch-up and not count as a contribution for top-heavy purposes. However, this plan will pass ADP. That very same contribuion amount can't be re-classified as catch-up and now counts as a contribution for triggering top-heavy minimums. That does not make any sense.

Either the first $5,500 should always be called catch-up wihtout regard to limits or count the catch contributions as a key allocation for top-heavy purposes.

[Tom Poje]

I guess it is sort of like related match on a failed test.

the regs say you are permitted to forfeit it.

guess that means you don't have to forfeit related match instead of

normally you wouldn't do this (especially if someone was 100% vested) but in this case you are permitted to do it.

[legort69]

Would it have been too aggressive to get an amendment before the end of 2013 to limit  key employees to 0%. therefore, if they only contributed up to $5500, then they did not trigger the top heavy penalty if those were the only key additions in a top heavy year?

 

 

[Tom Poje]

probably.

let's suppose the HCE wasn't catch up eligible. would it have been too aggressive to say "retroactively to  1/1 HCE are no longer eligible for the plan" and therefore we need to remove the deferrals? I think the IRS would say at the time they made the deferrals they were eligible, so you can't do that. The same would hold true for someone who switched from non union to union. you can't go back and take away simply because they are now ineligible.

somewhat along the same lines, if the only deferrals were by HCEs and they were refunded does that get you out of top-heavy?

the research I put into the Coverage and Nondiscrimination Answer Book was:

The top-heavy regulations do not directly reference this issue. However, excess contributions, are still considered for purposes of Sections 404 (deduction limits) and 415 (individual contribution limit), even though distributed from the plan. This regulation is silent in regards to Section 416 (top-heavy). [Treas. Reg. § 1.401(k)-2(b)(2)(vii)(B)]. Excess contributions that are recharacterized as employee contributions are specifically mentioned as being continued to be treated as employer contributions for purposes of Sections 404, 409 (employee stock ownership plan (ESOPs)), 411 (vesting), 412 (minimum funding), 415, 416 (top heavy), and 417 (qualified joint and survivor annuity (QJSA)). Therefore a top-heavy minimum allocation to non-key employees would be required. [Treas. Reg. § 1.401(k)-2(b)(3)(iii)(C)] At the 2004 Annual ASPPA Conference, the IRS representatives indicated that a top-heavy minimum would be required. (IRS Q and A #29) As a reminder, note that any such comments in regards to the Q and As might not reflect an actual position of the IRS.

[legort69]

Thank you Tom as always.

In my particular situation, it was just an owner who had already contributed < catch up. So to amend the plan retroactively during the plan year would not have required a removal of deferrals and there were no other key employees. Rather, it would just require that we cap the owners contributions up to the catch up. Not sure if that changes anything?