Excess Salary Deferral Contributions

Suppose you have a traditional 401(k) plan with about 20 participants.

The plan document specifically states that salary deferral contributions in excess of 40% of Compensation are not permitted.

In 2023 they had a participant with lower salary that funded salary deferrals of 70% of compensation.

Since this is a violation of the plan I would think the extra 30% needs to be removed from the plan and refunded to the participant.

Would the full 70% be included in the ADP test? I would think not because the plan specifically prohibits salary deferrals in excess of 40%.

Does anyone agree / disagree?

Thanks.

NHCE? Why is there even a limit? What about a retro amendment to remove the limit (for NHCEs)? If you refund I think you exclude from ADP test if NHCE but not if HCE, but don't know that part for sure.

18 hours ago, CuseFan said:

NHCE? Why is there even a limit? What about a retro amendment to remove the limit (for NHCEs)? If you refund I think you exclude from ADP test if NHCE but not if HCE, but don't know that part for sure.

Yeah, I kinda feel like this has to be enforced at the front end. If not...shrug.

@Dougsbpc perchance, is the participant catch-up eligible (and does the plan allow catch-up contributions)? 

Grasping at straws, I ask because catch-up contributions have a universal availability requirement.  Employees must have the effective opportunity to make the same dollar amount of catch-up contributions 1.414(v)-1(e)(1)(i), and the employer can only restrict the amount of compensation considered in calculating the catch-up contributions to the employee's compensation available after withholding for income and withholding taxes (where a limit of 75% of compensation is deemed to satisfy this requirement).

If the participant is catch-up eligible, then the deferrals above the 40% limit (a plan limit) up to the catch-up dollar limit could be considered catch-up contributions.

That would leave a chunk of cash in the participant's account.  The catch-up amount would excluded in calculating the participant's ADP as would any excess that may be refunded.