Catchups ADP & PS (academic exercise)

[BG5150]

HCE defers $6,000 for 2018. He's over 50.

Employer makes a $55,000 profit sharing for him.  Total Annual Additions $61,000. $6,000 is catch-up.

What do I put in the ADP test?  $6,000 or $0.

[Mr Bagwell]

I'm going to say the 6,000 goes into the ADP test.  I'd say the 6k deferred had no failure to make it be catch-up.  I'd say the failure occurred with the 55k profit sharing.

[Tom Poje]

I'd lean toward zero. he failed 415 limit so all deferrals are treated as catch-up.

the IRS has indicated (somewhere) that yes you can allocate a  larger profit sharing thus creating a 415 violation if you have catch up room to spare.

[BG5150]

Who's gonna break the tie?

I will be adding the twist a little later....

[Mr Bagwell]

I will. 

Tommy steps up and wins the game.

His analysis is correct.

My flaw was somehow thinking that part of the PS was recharacterized.....  Deferrals get recharacterized.   I knew the participant could get to 61k, but I didn't show my work... (algebraic joke)

[BG5150]

Ok, here is the twist. 

The ADP test is run with the 6,000 in it and it fails in January and there are refunds.

In August they decide to allocate a profit sharing as mentioned above.  Now, if those deferrals are not in the ADP test, it passes.

Do I have to get those refunds back from people?

[justanotheradmin]

I'm guessing the refunds were to people other than the person with the $6,000 eligible for catch-up?

Otherwise if if failed in January, and that person was the one allocated the refund, it would have been reclassified as catch-up at that point and not actually distributed. 

I would say yes, to try to get the refunds back, unless those participants are otherwise eligible for distributions and want to keep the money. 

[Kevin C]

Catch-ups triggered by the 415 limit are not included in the ADP test.

Quote

1.414(v)-1(d)(2) Contributions not taken into account in application of ADP test—(i) Calculation of ADR. Elective deferrals that are treated as catch-up contributions pursuant to paragraph (c) of this section with respect to a section 401(k) plan because they exceed a statutory or employer-provided limit described in paragraph (b)(1)(i) or (ii) of this section, respectively, are subtracted from the catch-up eligible participant's elective deferrals for the plan year for purposes of determining the actual deferral ratio (ADR) (as defined in regulations under section 401(k)) of a catch-up eligible participant. Similarly, elective deferrals that are treated as catch-up contributions pursuant to paragraph (c) of this section with respect to a SEP because they exceed a statutory or employer-provided limit described in paragraph (b)(1)(i) or (ii) of this section, respectively, are subtracted from the catch-up eligible participant's elective deferrals for the plan year for purposes of determining the deferral percentage under section 408(k)(6)(D) of a catch-up eligible participant.

If that means the ADP test now passes, the refunds previously paid are overpayments and need to be corrected under EPCRS.

[Luke Bailey]

I agree with Kevin C.

[Below Ground]

There are 2 type of Catch-up Contributions.  Values related to exceeding plan or statutory limits, and amounts used to recharacterize excess amounts.  The former are removed from testing.  The latter are created by testing.

[austin3515]

Ha!  No good deed goes unpunished.  Too bad your client didn't procrastinate like mine do.  Sometimes it works out!