Maximum Deferral

[khn]

 

An employee's salary is capped at $270k and they've elected to contribute 6%. The payroll system is capping them at 270K * 6% = $16,200 and reclassifying the next $6k above that as catch-up since he's over 50.  However, they are paid biweekly and the only plan-imposed limitation is participants can contribute up to 50% of compensation, so i believe they should be allowed to contribute $18k, barring any HCE limitations. Am i thinking about this correctly? 

[ETA Consulting LLC]

You are correct. If the individual makes over $270K, then his deferrals should continue until his 401(a)(17) limit is reached.  Typically, a payroll system should withhold the elected amount and ensure the statutory limits are not exceeded.  I can see these types of issues when the payroll system is used as a plan-administration function and try to implement plan imposed limits that (as reflected in this case) may not actually exist.

Good Luck!

[QDROphile]

"deferrals should continue until his 401(a)(17) limit is reached." 

I am confused by this statement; perhaps it makes sense in the context that I do not understand.  I am concerned that this resonates with a debunked notion that 401(a) (17) indirectly limits elective deferrals.

Generally, elective deferrals should continue until the elective deferral limit is reached, without regard for the 401(a) (17) limit.  The plan terms may impose an elective deferral limit that is lower than the 402(g) limit, but that should be done only advisedly.

[ETA Consulting LLC]

18 minutes ago, QDROphile said:

"deferrals should continue until his 401(a)(17) limit is reached." 

 

I meant 401(a)(30); which is my own way of saying 402(g).  My bad!

 

[khn]

Thanks for your feedback, it's much appreciated!

[BG5150]

What do you mean by " reclassifying the next $6k above that as catch-up since he's over 50."?  Does he make more than $270,000?  The 6% should come out of his pay until he hits $24,000 or the end of the year.

If he made $400,000, the $24,000 is 6% of his pay.

Don't confuse it with the % used for the ADP test.  That would be 6.67% ($18,000/$270,000).

You do not look at the comp limit when you are implementing the participants deferral elections.  Just plan limits and 402g/catch-up.

Deferrals are not "reclassified" until they go over one of the limits:  402(g), ADP test, plan limit.

 

[khn]

This payroll system has catch-ups set up as a separate money type. This participant makes close to $700k a year, so the payroll system is capping his salary at $270, then calculating his 6% deferral election based on $270k * 6% = $16,200 as 'regular' elective deferrals, then the next $6k is classified as catch-up. So i agree, this seems incorrect and he should be allowed to contribute $18k + $6k catchup for a total of $24k. I'm not sure why some companies have catchups set up as a separate money type, it seems unnecessary. 

[BG5150]

The payroll system is wrong.

[Bird]

Quote

I'm not sure why some companies have catchups set up as a separate money type, it seems unnecessary. 

Because they think they have to limit regular deferrals to $18K and call anything over that catchup.  (Which would be fine but as in this example, you get unintended results.)  What they need is a system that allows $24k if age 50+, and $18k if under, and not worry about whether they are catch-up or not b/c it is someone else's job to do that.  But it's not gonna happen so as always, it falls on us to fix the mistakes/errors/systems flaws of others.

[chc93]

Recently, we have seen/heard of some payroll providers that have this "regular" deferral and "catch-up" deferral elections/buckets.

[RatherBeGolfing]

39 minutes ago, chc93 said:

Recently, we have seen/heard of some payroll providers that have this "regular" deferral and "catch-up" deferral elections/buckets.

Yep.  It annoys me to no end.  And try having this conversation with one of their screen readers in "customer service" and see if you have any hair left on your head when the call is over...

[NJ Mike]

15 hours ago, RatherBeGolfing said:

Yep.  It annoys me to no end.  And try having this conversation with one of their screen readers in "customer service" and see if you have any hair left on your head when the call is over...

and the little you have left turns gray.

 

Mike