ADP and Catch-up

an advisor called me today and asked about how catch-up contributions are treated when an ADP failure occurs. Teh participant in question always has deferrals returned due to failed testing.  However, since Catch-up is not included in the ADP test, how is it treated when there is an excess deferral due to a failed test? My guess is that they would not be able to use the catch-up, so all  of the catch-up would come out along with whatever excess was determined.  Am I correct in this?

To use a numerical example, assume you have 2 participants over the age of 50, both over the 401(a)(17) limit of $305,000 for 2022.

Part#1 defers $27,000 (the 402(g) limit + the catchup limit)

Part #2 defers $20,500 (just the 402(g) limit)

For 2022 they both have an ADP of 6.72% ($20,500 / $305,000 - since the catchup is ignored)

Now suppose that after running the ADP test it is determined that they each need a refund of $3,000 to pass the testing.

Part#1 has already used up all of his catchup limit and would receive a $3,000 (+/- earnings) refund.

Part#2 has not used any catchup. Since the $3,000 refund is less that the $6,500 limit, all $3,000 would be recharactherized as catchup and he would receive no refund.

The Plan does not rerun the ADP test after these corrections.

Contributor Zeller is spot on!  Another way to think about this is that one does not even know if money has to be returned until the Catch-Up (if the P is eligible for one and it is in the document) is utilized.