Using catch-up in ADP testing of terminated HCE?

[Flyboyjohn]

Catch-up eligible HCE terminates employment in 2015 after making $18,000 of 401k deferrals.

We believe employee has taken another job and is making 401k contributions to the new employer's plan.

When we run 2015 ADP test can we reduce the corrective refund by the catch-up amount?

[Lou S.]

I'm confused. The other 401(k) plan has no relevance on the current 401(k) plan for ADP testing.

[401king]

I assume the concern is that he may be making contributions at the new company which may be considered catch-up contributions for the new company's ADP test. While I don't know what you would do if that were the situation, he is a new employee there so he (most likely) is an NHCE so he would not be making catch-up contributions there.

[Tom Poje]

the following could happen

ee defers 6000 at the new company.

so snapshot at the end of the year shows he has deferred 24000 in total for 2015 which is perfectly all right,

neither plan is in violation because neither plan has accepted amounts over the deferral limit.

The individual is fine as well, as he is entitled to defer that much for the year.

In fact, I see there is even an example in the ERISA Outline Book Chapter 11 Section XI Part F1.b.1)a)

"In effect, then, the individual has treated a portion of his elective deferrals as catch-up contributions, even though neither plan treats any of the elective deferrals as catch up contributions"

emphasis mine.

I have read an even stranger scenario. to keep things simple, suppose he is not catch up eligible.

no match at company A. ee defers 17,500

changes jobs to company B, which has a match. he defers 17,500 and gets a full match.

All of Plan A is treated as excess deferral.

that sounds like cheating, but I understand that is possible as well.

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

[Flyboyjohn]

Returning to and expanding on my original question, if in running our 2015 ADP test we determine that he needs to get a $6,000 refund, can we reduce his refund by his $6,000 catch-up amount?

[Tom Poje]

I don't think so, based on the ERISA Outline Book wording, the plan doesn't have a catch-up, it is the individual.

the IRS 'knows' [ha ha ha] the person's age, so it sums the W-2s and says the person has 23,000 in deferral which is ok because he is age 50 or older.

[Flyboyjohn]

Not sure I can agree because the testing rules clearly allow a reduction in corrective distributions for an available amount that becomes a "catch-up" because it exceeded a testing limit.

If we have to accept that a catch-up only belongs to the individual and not the plan we could never use the catch-up created from a test failure because we would never know if the HCE also contributed to another 401k maintained by an unrelated employer or after termination from our client's employment.

[Tom Poje]

as noted in the following article (page 6) participation in multiple plans of unrelated employers, such amounts would not be treated as catch-up contributions, and would be included in testing.

granted, this was in the original proposed regs for catch-up, the current regs are silent on the issue.

no reason is given why that particular item was not included is not provided. (The original propsed regs also included an example of having a 0% plan limit on HCEs and still permitted them to make catch up contribution because that was a plan imposed limit)

I think the reason being, is answering the question, what 'plan' limit did the person exceed? unless you aggregate unrelated employers no limit was exceeded, which is what the ERISA Outline book seems to say, it is an individual limit that is exceeded, not a plan limit.

catch up contributions.doc

[Mike Preston]

Tom, I still don't get it. In the case being discussed, the PLAN has failed a test and the appropriate correction is a refund of $6,000 (if not catch-up eligible). How is it possible that the correction is *NOT* reduced by the catch-up eligible amount?

[Tom Poje]

at least in the proposed regs there is no 'catch-up' in the 'plan', because no plan limit was exceeded.

let's suppose the person deferred 18000 in the second plan.

so he has 36,000 in deferrals for the year.

which plan is disqualified because it accepted amounts over the deferral limit?

neither plan, because in the unrelated plans no limit was exceeded. It is up to the individual.

the IRS will tax him because it add all the W-2s and determines there is an excess.

If the person doesn't request one of the plans for a distribution of the excess, then some day down the road when an actual distribution is taken he will be taxed again. certainly 'unfair' but that is how it works out.

[Mike Preston]

IF the ADP test is failed, how is that not a plan limit that has been exceeded?

[Mike Preston]

Tom, take a look at your post here:

http://benefitslink.com/boards/index.php/topic/52976-catch-up-rechartization-after-failed-adp/#entry229644

Have you changed your mind?

[Tom Poje]

haven't changed my mind.
the case we are talking about involves unrelated employers.

the article I posted says the following, but since it has only been downloaded once I can only assume that was a complete waste of my time and trouble.

Special Rule for Participants in Multiple Plans of Unrelated Employers. An issue arises when an individual terminates employment with one employer in the middle of the year and begins employment with an unrelated employer. If that individual participates in a 401(k) plan sponsored by each employer, his elective deferrals to each plan might not exceed a statutory or plan limit. In addition, his contributions might be permissible under the ADP test. In this event, a catch-up eligible participant may treat contributions in excess of the 402(g) limit as catch-up contributions. This treatment, which is generally consistent with the operation of the section 402(g) elective deferral limit, is deemed to have no impact on the plans -- they will not have to rerun their ADP tests to exclude the catch-up contributions. See Prop. Reg. § 1.414(v)-1(g).

so my point, and perhaps that is where the confusion comes in,

you do not say I deferred 18000 in one plan and 6000 in another plan. therefore, when I run my ADP I can treat 6000 as catch up and so use 12000 when I run my initial test. you still have to use 18000.

but then, I'm not sure the direction the original question is going in. If you fail the ADP test and the person is catch up eligible you can treat up to 6000 as catch up, but that is true whether or not there is another plan or not. The fact the person deferred in another plan is pretty much unrelated to the issue

[Mike Preston]

I think you are now saying "yes" to the question posed in message #5. As am I. I completely agree that the fact that this terminated HCE may or may not be in another plan is irrelevant to the question.

[Tom Poje]

as Lou S indicated in the 2nd post, the other plan has nothing to do with the testing in plan 1. (otherwise the question literally becomes
"if you are in 2 unrelated plans does that eliminate catch-up contributions entirely")
So I incorrectly assumed the question was asking "the ee could defer 24,000 in total between the plans, therefore can I treat 6000 as catch up in plan 1 [before running the ADP test].

[Mike Preston]

Well, if that was the question, I would have agreed with you!