Payroll Vendor erroneously stopped HCE 401k+catch-up at $18k

[cheersmate]

Facts:

401k Safe Harbor with Profit Sharing Plan (cross tested plan design)

the 3% non-elective Safe Harbor is provided to NHCEs only

Calendar Year Plan

payroll is monthly

professional staff, mostly HCEs, a few age 50+, many less than age 50

2 employees who are HCEs, elected the maximum 401k+catch-up, 1 of whom unfortunately passed away early in the year

payroll vendor changed starting with April 2015 payroll

all prior 401k+catch-up amounts were accounted for with change by new payroll vendor (error is not because of this).

Error:

HCE (age 50+) elected BOTH the maximum 401k deferral be withheld proportionately from each pay for the 2015 Plan Year ($1,500 per pay) AND the maximum catch-up be withheld proportionately from each pay for the 2015 Plan Year ($500 per pay). Total per pay withholding $2,000, representing deferral + catch-up. In addition this participant elected 100% of any bonus pay be withheld up to the maximum limits permissible. As it turned out for 2015, the only bonus pay was late December (no deferral was withheld).

$2,000 deferral + catch up amount was withheld from monthly pay January through September (old payroll vendor and new payroll vendor). Starting with October's pay, the payroll vendor ceased withholding the $2,000 amount, and this continued through December 2015 (3 months). A late December bonus was paid but no deferral was withheld. Total missed deferral and catch-up:

October 2015: $1500 deferral and $500 catch-up

November: same

December: same

Total $4,500 deferral and $1500 catch-up

Starting January 2016, the same withholding recommenced $1500 401k deferral + $500 catch-up (2016 limits unchanged) and are to this date continuing.

Questions:

1. Given the withholding recommenced within 3 months is there a correction necessary, given the recent IRS new correction methods announced to avoid "windfall" to employee receiving full compensation and contribution?

2. If correction is necessary, is the catch-up amount included in the correction of missed deferrals, i.e. a corrective contribution is made for missed catch-up?

3. Is there any way to recharacterize the contributions totaling $18,000 (withheld as $1500 401k * 9 = $13,500, and, $500 catch-up *9 = $4500) that were made as $6,000 catch-up, $12,000 401k deferral? In this way the employer PS contribution can be maximized, assuming passes n/d testing, and the overall total maximum to this participant still achieved... in a good faith effort to make the participant's total annual additions for the year "whole."

Thank you

[GMK]

1. My understanding is that it's all deferral and none is catch-up until you hit $18k or a plan-imposed deferral limit, so there's no way to recharacterize the 2015 contributions. Maybe someone on these boards knows of a way to do it, and that might explain the rationale behind deferral election forms that ask for both a deferral election and a separate election for what the form calls catch-up. Still don't understand that form format.

2. cheersmate - Any chance that you'd identify the payroll vendor, so we can avoid them in future searches. Thanks.

[cheersmate]

Thank you GMK.

The form is specific for each - 401k and catch-up amounts.

What I would like to know is if the $18,000 total amount could be recharacterized as $6,000 catch-up and the balance of $12,000 as 401k... If the employer elects to contribute $41,000 PS for this participant (assuming passes all discrim testing), then this PS plus a $12,000 401k will not exceed the $53,000 maximum annual addition limitation.

BUT before the employer considers a $41,000 PS contribution, is the employer required to make a corrective or restorative contribution on behalf of this participant? While it is my understanding the restorative contribution is not counted as an annual addition for 415©, the employer may not want to be so generous as to "over correct" with such a generous PS in addition to a corrective contribution.

The payroll vendor is ADP

[BeginnersLuck]

As for your first question, yes, 6k can be re characterized as 6k leaving 12k as pre tax/roth. As for your second question, I would probably consider this missed deferral opportunity in which the employer is required to pay 50% of the missed deferral amount. See link below for further details

https://www.irs.gov/Retirement-Plans/Fixing-Common-Plan-Mistakes---Correcting-a-Failure-to-Effect-Employee-Deferral-Elections