Pick-up Only Plan and Excess Annual Additions

[DTH]

A governmental 401(a) plan has pick-up contributions only. Employees can elect different percentages to contribute based on the type of pay (e.g., up to 30% on payroll, up to 100% on bonus). If a participant goes over the 415 limit and has excess annual additions, does the plan distribute the excess to the participant?

 

Thanks.

[ETA Consulting LLC]

What does the plan say?  Typically, the plan will be written to cut the contributions off at the 415 limit.  In your case, the plan clearly made an excess annual addition consisting solely of Employer Contributions.  Your plan may reference EPCRS, which may prescribe holding the Excess Amounts unallocated in the participant's account until they can be exhausted.

I cannot see how this would be distributed to the participant; even though they are entitled to the amount and those amounts may not be reallocated to other participants. 

Good Luck!

[Luke Bailey]

How can the employee elect different contribution percentages without this being a prohibited CODA? (Maybe this is one of the old ones with a PLR and they're still relying on it? Or a grandfathered DC plan?)

Anyway, this is a DB plan, right?

[Carol V. Calhoun]

@Luke Bailey: You can still have picked up contributions subject to an election if the election is a one-time irrevocable election at the time the employee first participates in any plan of the employer.

@DTH: Employer (including picked up) contributions to a DB plan are not subject to the 415(c) annual additions limit.  Instead, the benefits generated by them are subject to the 415(b) limits.  So this problem could only exist if you have a defined contribution plan.

If you have a defined contribution plan, ideally the plan should preclude you from making contributions in excess of the annual additions limit in the first place.  If for some reason the plan did not include such language, or contributions were mistakenly made in excess of the limit, there is no provision as there would be in a 401(k) plan for returning the excess.  Instead, what we recommend is that the contributions continue to be treated as employer contributions, and put into a suspense account to be credited against future employer contributions.  The employer can then make a payment to the participant from its own assets (not plan assets) to compensate for the fact that money has been taken from the participant's wages but cannot be credited to the participant's account.

[Luke Bailey]

23 hours ago, Carol V. Calhoun said:

You can still have picked up contributions subject to an election if the election is a one-time irrevocable election at the time the employee first participates in any plan of the employer.

Right, but whether this is an annual election or one-time irrevocable when first eligible not stated in facts. Would still like to know from original questioner whether this is DB or DC plan, because cannot give clear answer without knowing.