401K Deferral Question

Hi All,

My wife's employer caps her 401K deferrals at 15% of her salary. She gives the 15% max but it isn’t enough to reach the $18,000 max for annual deferrals. She is over 50 but also not allowed to make “catch up contributions” due to the fact that she hasn’t reached the $18,000 limit. She wants to put more money into her 401K but cannot do so due to these restrictions. It seems these restrictions are extremely unfair to those employees who cannot max out the $18,000 deferral limit with a strict 15% cap on deferrals. Are these restrictions allowed by law? Shouldn’t she be able to contribute more? It seems completely unfair to restrict her deferrals in this manner.

if the plan imposes a cap of 15% and she is age 50 or older she should be able for catch up

this is from the IRS website

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions.

Catch-up contributions up to $6,000 in 2015 - 2018 may be permitted by these plans:

• 401(k) (other than a SIMPLE 401(k))
• 403(b)
• SARSEP
• governmental 457(b)

Elective deferrals are not treated as catch-up contributions until they exceed the limit of $18,500 in 2018 ($18,000 in 2015 - 2017) or the ADP test limit of section 401(k)(3) or the plan limit (if any).

Doesn't the plan also have to allow participants to make catch-up contribution?  Mike

Jim - to answer your other question, yes, the plan is allowed by law to set a maximum percentage (in your case 15%, but it could be a different percentage) and a plan is not REQUIRED to allow catch-up deferrals.

But if they do allow catch-up deferrals, catch-up should kick in at the 15% maximum as well as the $18,000 limit.  

18 minutes ago, Tom Poje said:

if the plan imposes a cap of 15% and she is age 50 or older she should be able for catch up

this is from the IRS website

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-catch-up-contributions

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions.

Catch-up contributions up to $6,000 in 2015 - 2018 may be permitted by these plans:

• 401(k) (other than a SIMPLE 401(k))
• 403(b)
• SARSEP
• governmental 457(b)

Elective deferrals are not treated as catch-up contributions until they exceed the limit of $18,500 in 2018 ($18,000 in 2015 - 2017) or the ADP test limit of section 401(k)(3) or the plan limit (if any).

12 minutes ago, NJ Mike said:

Doesn't the plan also have to allow participants to make catch-up contribution?  Mike

Tom & NJ Mike, that's what I was led to believe as well. If they're going to cap the dollar amount of deferrals, the least they could do is allow make up contributions.

11 minutes ago, Belgarath said:

Jim - to answer your other question, yes, the plan is allowed by law to set a maximum percentage (in your case 15%, but it could be a different percentage) and a plan is not REQUIRED to allow catch-up deferrals.

Belgerath, This seems to fly in the face of everything I've read on the IRS website and is also completely different from the way my employer conducts their 401K program and any other 401K program I have seen. I would think that an employer would at the very least need to meet the requirements laid out on the IRS website which is 18K max deferrals and 6K catch up contributions. I don't see anything on the IRS site that says they can do either of these things. Can you link me to something that reinforces what you wrote?

2 minutes ago, RatherBeGolfing said:

But if they do allow catch-up deferrals, catch-up should kick in at the 15% maximum as well as the $18,000 limit.  

Yes I agree that it should. It states right in their plan summary under Catch Up Contributions that "additional amounts may be deferred REGARDLESS of any other limitations on the amount that you may defer to the plan".

To me the word regardless is the key here, because the way I read it is that it negates the 15% cap as far as catch up contributions are concerned. But they insist that my wife must reach the 18K max deferral limit before she can make any catch up contributions. And there is no way she can reach that limit with a 15% cap. It seems pretty ridiculous to me.

Here is the part of the plan summary that explains the deferral and catch up contributions.

There is also a universal availability requirement for catch-ups [1.414(v)-1(e)].  If they are going to allow catch-ups, all catch-up participants must have the effective opportunity to make the same dollar amount of catch-up contributions. 

Quote

 

1.414(v)-1(e) Universal availability requirement.

(1) General rule.

(i) Effective opportunity. An applicable employer plan that offers catch-up contributions and that is otherwise subject to section 401(a)(4) (including a plan that is subject to section 401(a)(4) pursuant to section 403(b)(12)) will not satisfy the requirements of section 401(a)(4) unless all catch-up eligible participants who participate under any applicable employer plan maintained by the employer are provided with an effective opportunity to make the same dollar amount of catch-up contributions. A plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit (e.g., an employer-provided limit) that applies to a catch-up eligible participant and does not permit the participant to make elective deferrals in excess of that limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants.

(ii) Certain practices permitted.

(A) Proration of limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because the plan allows participants to defer an amount equal to a specified percentage of compensation for each payroll period and for each payroll period permits each catch-up eligible participant to defer a pro-rata share of the applicable dollar catch-up limit in addition to that amount.

(B) Cash availability. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because it restricts the elective deferrals of any employee (including a catch-up eligible participant) to amounts available after other withholding from the employee's pay (e.g., after deduction of all applicable income and employment taxes). For this purpose, an employer limit of 75% of compensation or higher will be treated as limiting employees to amounts available after other withholdings.

(2) Certain employees disregarded. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because employees described in section 410(b)(3) (e.g., collectively bargained employees) are not provided the opportunity to make catch-up contributions.

...

 

19 minutes ago, JimW58 said:

Yes I agree that it should. It states right in their plan summary under Catch Up Contributions that "additional amounts may be deferred REGARDLESS of any other limitations on the amount that you may defer to the plan".

To me the word regardless is the key here, because the way I read it is that it negates the 15% cap as far as catch up contributions are concerned. But they insist that my wife must reach the 18K max deferral limit before she can make any catch up contributions. And there is no way she can reach that limit with a 15% cap. It seems pretty ridiculous to me.

The plan can allow a cap of 15%.

Since the Plan does allow for catch-up, they must allow for the catch-up in addition to the 15%.

Based on the SPD, she should be able to defer 15% of pay PLUS $6,000 in catch-up deferrals, the $18,000 limit is irrelevant to her since 15% of pay is less than $18,000. Not allowing is an operational defect for the plan.

4 minutes ago, Kevin C said:

There is also a universal availability requirement for catch-ups [1.414(v)-1(e)].  If they are going to allow catch-ups, all catch-up participants must have the effective opportunity to make the same dollar amount of catch-up contributions. 

 

 

  

Thanks Kevin. Can you provide a link for the statute you posted please?

2 minutes ago, CuseFan said:

Based on the SPD, she should be able to defer 15% of pay PLUS $6,000 in catch-up deferrals, the $18,000 limit is irrelevant to her since 15% of pay is less than $18,000. Not allowing is an operational defect for the plan.

That's exactly what I said to the people running the plan, but they insist otherwise. The way they have it set up is a catch 22 situation, she's screwed either way. The company that runs the 401K for my wife's company is ADP, both my wife and myself have had a number of heated phone calls with them and gotten nowhere.

I guess our next step is to deal with her company directly, that's what ADP suggested as well, but I wanted to make sure we were right before we initiated any conversation with them.

1 hour ago, JimW58 said:

That's exactly what I said to the people running the plan, but they insist otherwise. The way they have it set up is a catch 22 situation, she's screwed either way. The company that runs the 401K for my wife's company is ADP, both my wife and myself have had a number of heated phone calls with them and gotten nowhere.

I guess our next step is to deal with her company directly, that's what ADP suggested as well, but I wanted to make sure we were right before we initiated any conversation with them.

I very rarely suggest calling the DOL because it is almost always avoidable , but this may be one of those instances where it is appropriate. The way they are operating the plan effectively restricts catch-up contributions to highly compensated participants who can hit the $18,000 limit while still restricted to 15% of pay per payroll.  That is just wrong and needs to be fixed.  If you are getting nowhere with them, call the DOL.  When they get a participant complaint, they have to look into it.  When the DOL comes knocking, things like this will get fixed real quick.

https://www.gpo.gov/fdsys/pkg/CFR-2014-title26-vol5/pdf/CFR-2014-title26-vol5-sec1-414v-1.pdf

Try this. Section (e) starts at the bottom of page 1004 (4th page of the pdf)

The cite I posted was copied from our on-line reference source. 

17 hours ago, JimW58 said:

Belgerath, This seems to fly in the face of everything I've read on the IRS website and is also completely different from the way my employer conducts their 401K program and any other 401K program I have seen. I would think that an employer would at the very least need to meet the requirements laid out on the IRS website which is 18K max deferrals and 6K catch up contributions. I don't see anything on the IRS site that says they can do either of these things. Can you link me to something that reinforces what you wrote?

Jim - I don't know what you have read, and the fact that any other 401(k) plan you have seen allows catch-ups is immaterial. Most plans these days do in fact allow catch-up contributions, but the simple fact is that they are not REQUIRED to allow them. IRC 414(v) was added to the IRC by EGTRRA. It PERMITS a plan to offer catch-ups - it does not REQUIRE it.

Now, IF the plan offers catch-ups, which yours does, then there are requirements that must be followed, and the folks here have already provided you with appropriate commentary on that issue, so you should be able to now discuss this with the benefits/human resources folks at your wife's employer. My experience with ADP is that their compliance knowledge/procedures is, shall we say, less than stellar, and I expect the benefits department at the employer should be able to clear this up. Good luck!

2 minutes ago, Belgarath said:

Jim - I don't know what you have read, and the fact that any other 401(k) plan you have seen allows catch-ups is immaterial. Most plans these days do in fact allow catch-up contributions, but the simple fact is that they are not REQUIRED to allow them. IRC 414(v) was added to the IRC by EGTRRA. It PERMITS a plan to offer catch-ups - it does not REQUIRE it.

Now, IF the plan offers catch-ups, which yours does, then there are requirements that must be followed, and the folks here have already provided you with appropriate commentary on that issue, so you should be able to now discuss this with the benefits/human resources folks at your wife's employer. My experience with ADP is that their compliance knowledge/procedures is, shall we say, less than stellar, and I expect the benefits department at the employer should be able to clear this up. Good luck!

The part of your original post I was referring to was that an employer can cap deferrals and also not permit catch up contributions. I don't believe that is legal. Everything I've read and what's been posted here is that once they cap deferrals at an amount below the legal limit of 18K, they have to allow catch up contributions after the cap is reached.  To not allow the catch up contributions for someone that cannot reach the 18K with the 15% cap in place is discriminatory. We are going to take this to the company plan administrator asap. Thanks for your help.

2 minutes ago, JimW58 said:

The part of your original post I was referring to was that an employer can cap deferrals and also not permit catch up contributions. I don't believe that is legal.

Jim, a plan document may have a deferral cap as your wife's plan has AND a plan is not legally required to permit catch-up deferrals, but your wife's plan happens to allow. It's not a legal right, it is a "privilege"  if you will, granted by the terms of the plan. BUT, the plan's record keeper and/or administrator are not following the Plan Document - that is your argument, not that they are doing something illegal.

3 minutes ago, CuseFan said:

Jim, a plan document may have a deferral cap as your wife's plan has AND a plan is not legally required to permit catch-up deferrals, but your wife's plan happens to allow. It's not a legal right, it is a "privilege"  if you will, granted by the terms of the plan. BUT, the plan's record keeper and/or administrator are not following the Plan Document - that is your argument, not that they are doing something illegal.

Okay, thanks for the clarification.

What's really puzzling to me and other people I've spoken to about this is why would the employer ever cap the deferral amount in the first place? They only match up to 6%, so how do they benefit from a 15% cap?

35 minutes ago, JimW58 said:

What's really puzzling to me and other people I've spoken to about this is why would the employer ever cap the deferral amount in the first place? They only match up to 6%, so how do they benefit from a 15% cap?

It was either left over from a very, very long time ago when deferrals were included in an overall contribution % limit, or somebody just checked the wrong box.  You are probably beginning to see that, while you might assume that everything in this field is done carefully and by experts, that's not the case.  Looooong story short on this, you are right and they are wrong.  The hard part is getting a company like ADP to concede that because they consider themselves to be the final authority and most people cave in.  Probably going through your wife's employer is the best thing, but they are likely to simply rely on ADP for the "final" answer, so spell it all out like you did here with the SPD text etc etc, and I don't think anyone would mind including their responses as backup.  Good luck! 

4 minutes ago, Bird said:

It was either left over from a very, very long time ago when deferrals were included in an overall contribution % limit, or somebody just checked the wrong box.  You are probably beginning to see that, while you might assume that everything in this field is done carefully and by experts, that's not the case.  Looooong story short on this, you are right and they are wrong.  The hard part is getting a company like ADP to concede that because they consider themselves to be the final authority and most people cave in.  Probably going through your wife's employer is the best thing, but they are likely to simply rely on ADP for the "final" answer, so spell it all out like you did here with the SPD text etc etc, and I don't think anyone would mind including their responses as backup.  Good luck! 

Thanks Bird! And you're right about the final authority attitude from the folks at ADP, they basically told me and my wife that we were wrong and to go pound sand. I am finding more and more as I grow older just how many people have no clue about what they are doing. It amazes me how some people even manage to get out of bed in the morning.

27 minutes ago, JimW58 said:

Thanks Bird! And you're right about the final authority attitude from the folks at ADP, they basically told me and my wife that we were wrong and to go pound sand. I am finding more and more as I grow older just how many people have no clue about what they are doing. It amazes me how some people even manage to get out of bed in the morning.

Unfortunately, this is almost entirely cost related.  Mega companies like ADP and others offer "low cost" plans staffed by people with zero experience and education in qualified plans.  What you are facing is not an uncommon result.  When you race to the bottom on fees, you end up at the bottom for quality.  

Does the 15% deferral limit apply to everyone?  Or, just to Highly Compensated Employees?  If it only applies to HCEs, it could be to help with their discrimination testing.  If it applies to everyone, it is likely a hold-over from a long time ago.  

Internal Revenue Code Section 414(v) has the rules that allow catch-up contributions.  It is not required, but I can't think of any reason why plans wouldn't want to allow it.   Once catch-ups are allowed, the universal availability rule I cited becomes a qualification requirement.  

5 minutes ago, RatherBeGolfing said:

Unfortunately, this is almost entirely cost related.  Mega companies like ADP and others offer "low cost" plans staffed by people with zero experience and education in qualified plans.  What you are facing is not an uncommon result.  When you race to the bottom on fees, you end up at the bottom for quality.  

It is very common. So much time and money are wasted attempting to fix their mistakes, not to mention the stress one endures through something like this.

4 minutes ago, Kevin C said:

Does the 15% deferral limit apply to everyone?  Or, just to Highly Compensated Employees?  If it only applies to HCEs, it could be to help with their discrimination testing.  If it applies to everyone, it is likely a hold-over from a long time ago.  

Internal Revenue Code Section 414(v) has the rules that allow catch-up contributions.  It is not required, but I can't think of any reason why plans wouldn't want to allow it.   Once catch-ups are allowed, the universal availability rule I cited becomes a qualification requirement.  

The 15% cap is across the board. My wife is not an HCE at her company, if she was and was able to satisfy the 18K deferral limit with just 15% of her pay, this problem wouldn't exist. The incorrect way they are implementing the plan is discriminatory to the non HCE's and prevents the non HCE's from contributing an equal amount in make up contributions.

so send them the info from the IRS website and tell them gently and kindly they need to change their understanding of how catch ups work.

the idea is avoid 'stepping on toes' in an angry manner or anything like that

good luck and much success.

12 minutes ago, Tom Poje said:

so send them the info from the IRS website and tell them gently and kindly they need to change their understanding of how catch ups work.

the idea is avoid 'stepping on toes' in an angry manner or anything like that

 

good luck and much success.

I hopefully won't need to go any further than their own plan summary. The wording is in there, they're simply not implementing it properly. Thank You!

4 hours ago, Tom Poje said:

so send them the info from the IRS website and tell them gently and kindly they need to change their understanding of how catch ups work.

the idea is avoid 'stepping on toes' in an angry manner or anything like that

Echoing Tom, you might approach this as an "opportunity to clear up a confusion".  If the ER has been operating the plan incorrectly, your role is helping educate them. 

Not sure how big the employer is, but perhaps they will just change the plan to at least increase 15% up to 80% or even 60% or 70%.

Lots of posts, but I'm just not sure if anyone suggested that yet or not.  Such a limit has been MOOT since 2001.  Perhaps the voice of reason will prevail.

http://www.wiggin.com/5512

Higher Employee Contribution Limits as a Percentage of Pay. The maximum total allocation (the "annual additions limit") permitted for participants in a defined contribution plan is increased by EGTRRA from the lesser of $35,000 or 25% of pay, to $40,000 or 100% of pay. Previously, in order to stay within the overall limit, employers have typically limited employee contributions to 401(k) plans to, for example, 15% of pay. With the EGTRRA change, employers may want to allow employees to contribute 50% or more of their pay to a plan, on a non-matched basis (subject to the rule that pre-tax contributions must still be limited to $11,000 annually, as adjusted as described above). Allowing greater contributions as a percentage of pay typically benefits lower paid employees, and can help in passing nondiscrimination tests.

So, given that the employer of JimW58's wife has been (through ADP) administering the plan improperly, anybody want to comment on what the plan SHOULD do to correct?  Seems to me that there is a clear qualification failure of the universal availability requirement.  The first question to ask is how long this failure has been going on?  If more than two years I can't see how it could possibly be corrected without a VCP filing.  Even if less than two years I can see the value in a VCP filing to ensure the correction maintains the qualification of the plan.

Anybody know a gentle way that JimW58 can suggest that his wife's employer engage an ERISA attorney to suggest a course of action?

Quick update:

My wife has taken this to the company HR dept (along with a copy of the plan summary that shows that catch up contributions are allowed in their plan), who in turn has taken it to the 401K plan administrator. The 401K plan admin has realized (thanks to our efforts), that there is a deficit in the way the plan is being implemented. He did mention perhaps raising the 15% percent limit so all employees would be able to reach the 18K annual max or simply allowing the 6K in catch up contributions as remedies. As of this posting nothing has been done but hopefully we will hear something soon. 

The woman in HR did mention to my wife that no one has ever questioned the current plan or wanted to make catch up contributions in the past, which we found hard to believe. At least the ball appears to be rolling in our favor.

Thanks to everyone for your input and help with this situation. I will update again when warranted.

Glad to hear it you finally found someone who can champion the right answer and are getting results. 

If they want to set a new % limit and not worry about allowing catch-up eligible to exceed that limit, the limit needs to be at least 75% of pay.  See 1.414(v)-1(e)(1)(ii)(B). 

Quote

 

(B) Cash availability. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) merely because it restricts the elective deferrals of any employee (including a catch-up eligible participant) to amounts available after other withholding from the employee's pay (e.g., after deduction of all applicable income and employment taxes). For this purpose, an employer limit of 75% of compensation or higher will be treated as limiting employees to amounts available after other withholdings.