402(g) Limits

I recently reviewed a VCP submission where the attorney stated in the application that the Participant exceeded both the 402(g) limits and the 415 limits for five years. 

Basic facts: Schedule C Employer who sponsored both a defined benefit plan and a 401(k) Plan.  The Participant, who was over age 50, deferred up to the 402(g) limit each of the five years in question.  This individual made contributions to his defined benefit plan each of the years in the amount of his Schedule C Income less the Self Employment Taxes.   The net affect is that he deferred more than 100% of his Earned Income.

He obviously exceeded 415 limits and has excess contributions in his 401(k) Plan.  However, I did not think that 402(g) was limited by wages.  I always thought it was a straight dollar limit.  The 1099-R instructions state that Excess Deferrals not distributed by 4/15 of the following year are subject to double taxation.  This same language is not included when you are dealing with excess Excess Contributions.  

I realize that the only contributions to the 401(k) Plan were employee deferrals.  However, if they did not exceed the 402(g) limit are they still considered Excess Deferrals or can they be considered Excess Contributions.

Thanks for any insight.

Sounds as though they're excess annual additions, rather than either deferrals (402g) or contributions (401k3).

402(g) is merely the dollar cap.  Isn't there a code section that also caps it at 100% of income?

22 minutes ago, BG5150 said:

Isn't there a code section that also caps it at 100% of income?

§415(c)(1)(B)

5 hours ago, BG5150 said:

402(g) is merely the dollar cap.  Isn't there a code section that also caps it at 100% of income?

I checked the Code language and I think as others said above it's just a dollar cap. 

So would you all agree that the attorney should have argued that the deferrals were excess annual additions and not subject to the double taxation rules?

16 hours ago, Lou S. said:

§415(c)(1)(B)

Catchups are excluded.

So, where does it say that if my earned income is $19,500 I cannot put in $26,000 including catch-up.  Assuming no other contributions, my 415 comp is $19,500 and my annual additions under 415 are $19,500.

I haven't violated 402(g) as that is merely a dollar figure.

(Not that I would allow this, but now I'm curious as to what reg is involved.)

23 minutes ago, BG5150 said:

Catchups are excluded.

So, where does it say that if my earned income is $19,500 I cannot put in $26,000 including catch-up.  Assuming no other contributions, my 415 comp is $19,500 and my annual additions under 415 are $19,500.

I haven't violated 402(g) as that is merely a dollar figure.

(Not that I would allow this, but now I'm curious as to what reg is involved.)

I don't think you're going to find it in black and white anywhere, but it comes from the definition of deferrals. Only deferrals can be classified as catchup. In order to be a deferral, the amount has to have been payable to the employee as cash, if not for the deferral election. If the amount exceeds your earned income, then it wouldn't have been payable to you in cash, hence it couldn't be a deferral.

Great points..... thank you all.

4 hours ago, BG5150 said:

Catchups are excluded.

So, where does it say that if my earned income is $19,500 I cannot put in $26,000 including catch-up.  Assuming no other contributions, my 415 comp is $19,500 and my annual additions under 415 are $19,500.

I haven't violated 402(g) as that is merely a dollar figure.

(Not that I would allow this, but now I'm curious as to what reg is involved.)

There are a couple of places.  Deferrals can only be made from Section 415(c) compensation and deferrals including catch-up can't exceed Section 415(c) compensation.

Quote

1.401(k)-1(e)(8) Section 415 compensation required. With respect to compensation that is paid (or would have been paid but for a cash or deferred election) in plan years beginning on or after July 1, 2007, a cash or deferred arrangement satisfies this paragraph (e) only if cash or deferred elections can only be made with respect to amounts that are compensation within the meaning of section 415(c)(3) and §1.415(c)-2. Thus, for example, the arrangement is not a qualified cash or deferred arrangement if an eligible employee who is not in qualified military service (as that term is defined in section 414(u)) and who is not permanently and totally disabled (as defined in section 22(e)(3)) can make a cash or deferred election with respect to an amount paid after severance from employment, unless the amount is paid by the later of 21⁄2 months after severance from employment or the end of the year that includes the date of severance from employment and is described in §1.415(c)-2(e)(3)(ii) or (iii).

And 

Quote

 

1.414(v)-1(c) Catch-up contribution limit—(1) General rule. Elective deferrals with respect to a catch-up eligible participant in excess of an applicable limit under paragraph (b) of this section are treated as catch-up contributions under this section as of a date within a taxable year only to the extent that such elective deferrals do not exceed the catch-up contribution limit described in paragraphs (c)(1) and (2) of this section, reduced by elective deferrals previously treated as catch-up contributions for the taxable year, determined in accordance with paragraph (c)(3) of this section. The catch-up contribution limit for a taxable year is generally the applicable dollar catch-up limit for such taxable year, as set forth in paragraph (c)(2) of this section. However, an elective deferral is not treated as a catch-up contribution to the extent that the elective deferral, when added to all other elective deferrals for the taxable year under any applicable employer plan of the employer, exceeds the participant's compensation (determined in accordance with section 415(c)(3)) for the taxable year. See also paragraph (f) of this section for special rules for employees who participate in more than one applicable employer plan maintained by the employer.

 

6 hours ago, BG5150 said:

Catchups are excluded.

So, where does it say that if my earned income is $19,500 I cannot put in $26,000 including catch-up.  Assuming no other contributions, my 415 comp is $19,500 and my annual additions under 415 are $19,500.

I haven't violated 402(g) as that is merely a dollar figure.

(Not that I would allow this, but now I'm curious as to what reg is involved.)

You can't defer what you don't make and 401(k) deferral (including catch-up) have to be deferred from your current year income. You can be allocated 100% + catch-up but it requires a combination of having enough deferral to reach at least the catch-up and then employer contributions that push you over 100% of pay but below the 415(c)(1)(A) limit.

In your scenario you could defer 100% of your $19,500. You can't defer more than 100% of your income. If the employer then made a $6,500 employer contribution on your behalf than $6,500 of your deferral would be recharacterized as catch-up since it otherwise would put you over the 415(c)(1)(B) limit.

5 hours ago, Lou S. said:

You can't defer what you don't make and 401(k) deferral (including catch-up) have to be deferred from your current year income.

Absolutely correct! In this case the Defined Benefit Plan takes all the available SE Income and Plan Compensation equals zero. Since contributions to his defined benefit plan in each of the five years equaled his Schedule C Income less the Self Employment Taxes, there is no Compensation to defer in those five years.