ADP Contribution amount used for testing

Can the deferral amount used for ADP test be reduced by the available catch up for the year on the front end?  For example, have a catch-up eligible participant that deferred $27,000 during 2024.  The deferral amount used for the ADP test was $23,000 (401(a)(30) limit for 2024).  Since the participant is catch-up eligible can $7,500 of the $23000 be classified as catch-up reducing the amount used for the ADP test to $15,500 ($23000-$7500)?   

No

If they deferred $27K and the limit was $23K, $4K recharaterized as catch-up and not in the ADP test, $23K is in the ADP test.

If they fail the ADP, up to an additional $3,500 will be recharetreized as cacth-up reducing the refund they otherwise would receive and be retained by the plan because they had not used their full catch-up.

If they need a refund larger than the recharaterization amount, they will need refunds. Unless you are over an applicable limit, plan or statutory, the amount goes in the test.

5 minutes ago, Lou S. said:

No

Thank you, I've never done this or seen this done, but I have an advisor that is convinced it can be done and has advised the plan sponsor that it can be done to reduce the percentages.  

18 hours ago, Lou S. said:

No

If they deferred $27K and the limit was $23K, $4K recharaterized as catch-up and not in the ADP test, $23K is in the ADP test.

If they fail the ADP, up to an additional $3,500 will be recharetreized as cacth-up reducing the refund they otherwise would receive and be retained by the plan because they had not used their full catch-up.

If they need a refund larger than the recharaterization amount, they will need refunds. Unless you are over an applicable limit, plan or statutory, the amount goes in the test.

 

 

 

Thank you, I've never done this or seen this done, but I have an advisor that is convinced it can be done and has advised the plan sponsor that it can be done to reduce the percentages.  

Great ask the advisor for an IRS citation or letter stating he will pay any IRS penalties if the IRS takes a position different from his.

While recognizing Lou S.’s observation’s put-up-or-shut-up wisdom, consider this too:

Unless the adviser is admitted to law practice, recognize that a promise might be legally unenforceable. While the details vary, a State’s law of contracts might not enforce a promise that calls the promisor to commit a crime—the unlawful practice of law.

Likewise, an insurance or investment adviser’s errors-and-omissions insurance won’t respond to a claim that the insured gave faulty legal advice. One or more exclusions would remove that from the potential scope of the e&o coverage.

This is not advice to anyone.