415 Limit and the 100% of Comp Limitation

A 50-year-old participant had comp of $24,000 for the 2017 plan year, and he deferred all $24,000 of it.  Since catch-up contributions can be disregarded for the 415 dollar limit, can the participant be allocated up to another $6,000 in employer contributions, bringing his annual addition to over 100% of comp?

Yes.

Actually, he should not have been able to defer his entire $24,000 of compensation, as fica is supposed to be taken out of compensation before deferrals.

Ignoring the obvious FICA issue,

What timing for this question. the benefits newsletter for 5/29 included the IRS comments on

snapshot treatment on 415 dollar limitation, and the opening paragraph has

Total annual additions to a participant’s defined contribution plan account are limited to the dollar amount imposed by IRC Section 415(c). Annual cost-of-living adjustments apply to this dollar limit. If the participant’s compensation is less than the dollar limit, annual additions during a limitation year must not exceed 100% of compensation.

The limit applies to the total of:

• elective deferrals (but not catch-up contributions within the meaning of IRC Section 414(v)),

• employee contributions,

• employer matching and nonelective contributions, (but not restorative payments under Section 1.415(c)-1(b)(2)(ii)(C)), and

• allocations of forfeitures. See generally IRC Section 401(a)(16) and 415(c) and Treas. Reg. Section 1.415(c)-1.

  For 2018, the dollar limit on annual additions to a participant’s accounts for all defined contribution plans maintained by an employer is $55,000.

https://www.irs.gov/retirement-plans/issue-snapshot-treatment-of-415c-dollar-limitations-in-a-short-limitation-year

or on this website look under News/Newsletter back issues

I look at it first thing every morning.

I had this question posed to me today.  A partner over the Age of 50 deferred $8,000 into the plan, and their Self Employment Compensation is $6,500.  Can the 401(K) deferral that exceeds the eligible compensation be considered catch up?  I am using round numbers here, but if the reduced comp is $6,040, can the additional $1,960 stay in the plan as catch-up? 

the preamble to the 401k regs had

The preamble to the 401(k) Regulations describes it as follows:

One commentator asked for clarification of the interaction between these timing rules and the rule under the regulations that treats a self-employed individual's earned income as being currently available on the last day of the individual's taxable year and whether this last day rule precludes a partner from making elective contributions during the year through a reduction in the partner's draw. The restriction on the timing of contributions is not intended to prevent a partner from deferring amounts that are paid to the partner throughout the year on account of services performed by the partner during the year, and the final regulations have been modified to clarify this point. However, self-employed individuals who take advantage of this opportunity to defer amounts during the year must make sure that the amount contributed during the year will not exceed the limits (such as the limits of section 415) that will apply to the individual, based on the individual's actual earned income for the relevant period.

......

let's make the question even easier. suppose you deferred $6000. by the time the self employment income is figure he is at 0.

you can't have any catch-up because you have 0 income to put into the plan in the first place. in other words, the $ deferred into the plan, based on a draw don't exist and have to be removed and returned to the company.

The catchup limit definition includes a reference to 415 wages, I believe, where you still can't have your regular deferrals + catchup deferrals exceed your wages.

So if it's going to stay in the plan, it would have to be re-categorized as a profit sharing allocation.  Then as his annual additions exceed his wages, some of the 401(k) being re-categorized as catchups.  (But now the total 401k amounts are not greater than wages.)

As Bri stated, I think people are confusing two different limitations.

Catch-up contributions are not included in the 415c 100% of compensation limit, but all employee and employer contributions including catch-up contributions can not exceed net earnings from self-employment.

For some examples let's use 2017 employee elective deferral limit of $18K because it is easier:

• With $18K in net earnings from self-employment, someone < and >= age 50 are limited to an $18K employee deferral, because total contributions can not exceed $18K.
• With $24K in net earnings from self-employment:
  • Someone < age 50 is limited to an $18K employee deferral +  $3K in employer contributions, because the employer contributions themselves reduce compensation.
  • Someone >= age 50 is limited to an $18K employee deferral  +  $6K catch-up contribution. Any employer contributions would reduce the catch-up contribution dollar for dollar, because total contributions can not exceed $24K.
• With $30K in net earnings from self-employment:
  • Someone < age 50 is limited to an $18K employee deferral +  $6K in employer contributions, because the employer contributions themselves reduce compensation.
  • Someone >= age 50 is limited to an $18K employee deferral  +  $6K catch-up contribution +  $6K in employer contributions.  Any reduction in catch-up contributions would not increase employer contributions, because the employer contributions themselves reduce compensation.