the dreaded non-calendar ADP failure with catchups

[Bri]

Plan year end is 9-30-14. With the audit just about done, it's a good time to do the 401(k) test, right? (Shh!)

Plan fails. Three HCEs, all over 59½, would be in line to get refunds of about $1,000 each. But, they hadn't used any of their 2014 catchup amounts yet, and so those amounts are supposed to be recharacterized as 2014 catchups. (Calendar year in which the plan year ends.) None of them actually got to 17,500 by Sept. 30, though.

The problem is, at least one, if not all of them, probably got to 23,000 total when you throw on their 4th Q 2014 amounts. That's clearly a problem - they will have done too much in catchups, since their catchup limit for 2014 should then have been 5,500 MINUS that thousand dollars to be recharacterized.

And so amounts over the catchup limit are deemed to be excess deferrals. So that's why I'm glad they're over 59½ - I can't refund the amounts as excess contributions from the test.

It's after April 15, so at least their age provides a distributable event to get the money out. So typically you'd say the amounts are subject to double taxation. But their W-2s will not have shown an excess deferral, as back in January before the tests were run it certainly didn't SEEM like a problem to have $23,000 on the W-2.

Are they going to beat the double taxation, or should tax forms and returns be amended?

Thanks...

--bri

[Kevin C]

Take a deep breath, it isn't that bad.

Let's use some numbers. Say they deferred $17,000 for 1/1/2014-9/30/2014. After the reclassified $1,000 refund, their calendar year 2014 deferrals through 9/30 are $16,000 of regular deferrals and $1,000 of catch-up. Then, they defer another 6,000 in the 4th Q of 2014. After $1,500 of that $6,000 has been deposited, they hit the 402(g) limit and additional 2014 deferrals are catch-up when contributed. So, the last $4,500 of deferrals in 2014 is catch-up. For calendar year 2014, they end up with $17,500 of regular deferrals ($16,000 + $1,500) and $5,500 of catch-up ($1,000 + $4,500) for a total of $23,000. The catch-up limit is not exceeded and there is no double taxation.

For details on how the calculation works, see 1.414(v)-1.

Another fiscal year example with explanation is here:

http://benefitslink.com/boards/index.php/topic/55492-another-fiscal-year-catch-up-question

[Bri]

Hey yeah, thanks - I forgot that he could go back to "regular" (non-catchup) deferrals in Q4.

(Good thing, too, when I get an email like, "he's not going to take a refund"!)

[austin3515]

But here is the issue - in this example, for the 9/30/2015 ADP Test, you can only exclude $4,500 of his 2014 Deferrals from the 9/30/15 ADP test. Absent the failure, you could have excluded the full $5,500.