Maximizing Catch Up

[khn]

We've been capping HCE's at 8% to avoid testing failures and refunds. A participant has been deferring 5% all year but now wants to maximize her contribution for the rest of the year. We have quarterly changes so she can increase her deferral to 8% on 10/1, and is over 50 so will also elect catch up contributions as well.

My question is how can we help her have the maximum withholding possible? Is there a way to set up her catch up contribution to take advantage of the full $6,000 between now and year end? Any ideas would be appreciated.

[Lou S.]

What about doing 8% + $6,000/number of remaining payrolls?

[ETA Consulting LLC]

What about doing 8% + $6,000/number of remaining payrolls?

It really is just that simple. You can say, if you're catchup eligible, then you may defer above 8%. Any amount will be catchup (up to the 6,000 limit); then back below 8% you go.

To add a little perspective, many many years ago the the notion of a plan limit or regulatory limit meant that the plan actually had to include a hard-written limit (i.e. 8%). The IRS has since relented and stated that a administrative limit such as this (limiting HCEs administratively in order to pass HCE) will also be considered a plan limit. So, there you have it. You're using the administrative discretion of limiting HCEs at 8% in order to help pass the ADP test. If your catchup eligible, you merely allow them to defer ANY amount over 8% until the resulting catchup reaches their $6,000 limit.

Good Luck!

[BG5150]

Given the fact that ADP excesses are taxable in the year of distribution now, rather than in the olden days where they might be taxable in the previous year, I don't see why anyone gets uppity about failed ADP tests.

To me, with a failed test, you are guaranteeing the economic engines of your firm are putting away, to the penny, the maximum allowed given what the staff is contributing.

[khn]

Thanks for all your insight. It almost seems too simple (which doesn't seem to happen a lot)!

[ETA Consulting LLC]

To me, with a failed test, you are guaranteeing the economic engines of your firm are putting away, to the penny, the maximum allowed given what the staff is contributing.

Not in all instances. A high percentage may cause a failure. When you consider that the actual distributions begin with the individuals who deferred the most dollars; it may make sense to keep the percentages lowered in "some" instances. But, you do make a good point.

Good Luck