Off Calendar PY - ADP catchup with no deferrals?

[Gilmore]

Revisiting my catchup issues with an off calendar year plan and ADP catchup.

Plan year ends 4/30/2020.  The only deferrals made to the plan for a participant are made in December, 2019, in the amount of $23,300.  No deferrals prior in 2019, and no deferrals in 2020 before 5/1/2020.

My admin system is treating $4300 of the deferrals as catchup for 2019, and using $19,000 in the 4/30/2020 ADP test.  So far so good.

Plan fails the 4/30/2020 ADP test and the participant needs a refund of $9,000.

The admin system is treating all of the $9,000 as a distribution.

The EOB has an example that says it is not directly from the regs but is an extrapolation of the rules.  (Ch 11, Section 11 Part C.1.e). 

This example has a plan year ending 10/31/2016.  Participant defers $22,000 from 11/1/2015 to 12/31/2015.  $0 from 1/1/2016 to 10/31/2016.  $18,000 used in the 10/31/2016 ADP test, with $4,000 catchup for 2015.  10/31/2016 ADP fails and participant needs an $1800 refund.  EOB says to treat the $1800 as catchup for 2016 even though no 2016 deferrals were made for the plan year.  This then reduces the total amount the participant can defer in 2016 after 10/31/2016 by $1800.  The EOB says the total would be $22,000 but I think it might be $22,200.

So going back to my 4/30/2020 plan, I'm thinking $6500 can be used to reduce the $9,000 refund and be treated as catchup for 2020?  And the participant could defer no more than $19,500 for the rest of 2020?

Has anyone treated catchups in this manner?

Thanks very much.

 

[Kevin C]

I had a similar situation a few years ago.  The conclusions I reached from the regs and code were that the refund does get reclassified as catch-up as of the end of the plan year, but that does not reduce the amount the participant can defer for the calendar year.  Our valuation system treated it the same way.  Using your numbers:

$6,500 of the refund is reclassified as catch-up as of 4/30/20.  The plan's determination of catch-up does not affect the participant's maximum deferrals [see 402(g)(1)(C)]. So, the catch-up eligible participant can still defer $26,000 for calendar year 2020.  If the catch-up eligible participant defers $26,000 from 5/1/20 - 12/31/20, all $26,000 of it counts in the 4/30/21 ADP test since the plan has already used the entire $6,500 of 2020 catch-up for that participant as of 4/30/2020.

Quote

 

402(g)(1)(C) Catch-up contributions

In addition to subparagraph (A), in the case of an eligible participant (as defined in section 414(v)), gross income shall not include elective deferrals in excess of the applicable dollar amount under subparagraph (B) to the extent that the amount of such elective deferrals does not exceed the applicable dollar amount under section 414(v)(2)(B)(i) for the taxable year (without regard to the treatment of the elective deferrals by an applicable employer plan under section 414(v)).

 

 

 

[Gilmore]

Interesting.   Thank you.