Annual Compensation Limit and Deferrals

[StevenM]

I have a client that believes she should limit the Per Payroll Deferral Calculations to the Annual Compensation Limit divided by the number of Payrolls in the year for employees that have a base salary that is greater than the Annual Compensation Limit.

The Plan allows employees to continue to defer on money after they've reached the Annual Comp Limit.

I'm looking specifically for documentation to prove that she's incorrect in her interpretation of how the Annual Comp Limit works but I'm having difficulty finding anything and she's refusing to budge.

Example:

Employee Earns $360,000 Annually and has elected 5% Pre-Tax. EE is paid $13,846.15 on a Bi-Weekly basis. Payroll calculates a Pre-Tax Deferral of $692.31. Plan Sponsor says this is incorrect. States that since the EE earns > than $265,000 the Bi-Weekly Pre-Tax Deferral should be $509.62 = ($265,000 / 26) * .05.

Thank you,

[QDROphile]

A plan can be designed to do this. Although the client is probably not acting rationally or intelligently, is it your job to change the "desired" design?

A thread in the last week revealed all of the authority on the subject, including preamble to the section 415 regulations and an article from the IRS Employee benefits news.

[masteff]

http://benefitslink.com/boards/index.php/topic/55659-deferral-based-on-comp-limit-or-total-comp/

[401QUE]

Might this be what you're looking for:

https://www.irs.gov/Retirement-Plans/401k-Plans-Deferrals-and-matching-when-compensation-exceeds-the-annual-limit

I'm actually searching for answers to whether the per-pay-period match accrual must stop when Year-to-date pay hits $265,000. The IRS addresses that deferrals may continue after 401a17 is reached (absent the "first" 265k reference in your document), but the above link does not address the stoppage of match upon reaching the 265k mark during the year. Any thoughts?

[rcline46]

The match cap should be set the same way as the 402(g) limit, max $ amount. So if you have a discretionary match, and increase it mid-year, the payroll system self-adjusts.

[StevenM]

Might this be what you're looking for:

https://www.irs.gov/Retirement-Plans/401k-Plans-Deferrals-and-matching-when-compensation-exceeds-the-annual-limit

I'm actually searching for answers to whether the per-pay-period match accrual must stop when Year-to-date pay hits $265,000. The IRS addresses that deferrals may continue after 401a17 is reached (absent the "first" 265k reference in your document), but the above link does not address the stoppage of match upon reaching the 265k mark during the year. Any thoughts?

We're familiar with that information and in the example Mary is deferring on a fixed dollar amount which is almost the exact amount she needs to defer each month in order to reach the maximum contribution limit for 2014,

The problem that I have is that an employee has requested to defer on a percentage of his compensation. However, the Plan Sponsor insists that he should not defer that specific percentage of his true compensation but that he should defer that percentage of the 401(a)(17) limit divided by the number of pay periods in the year because he's estimated to earn more than the 401(a)(17) limit. Does that make sense?

The answer to your Match question can be yes or no. It depends on what the employee is deferring. Is he receiving the Match cap each payroll?

Basically the Match he receives can't exceed the Match formula when applied to $265,000 Annual Contribution Limit. If he's under that for the year through payroll he is still eligible to receive more regardless of his true YTD compensation (assuming there is no first $265,000 specification in the Plan Doc).

[Kevin C]

From the 1998 ASPA annual conference DC Q&A session:

40. In a 401(k) plan, does 401(a)(17) preclude the following:

A. A earns $300,000 annually. He enrolls in 401(k) calendar year plan in August, after earning

$175,000.00. He defers $10,000 in the balance of the year.

B. A earns $300,000 annually. He participates in a calendar year 401(k) plan making monthly

deferrals of a flat dollar amount of 1/12 of $10,000.00 in 1998, even though his pay exceeded $160,000 before he

was done making elective deferrals.

C. Same as 2, but deferrals are a percentage of pay (3.33333%).

A. All of the above are acceptable, assuming the plan is not drafted in such a way as to prevent

it.