Playing fast and loose with Catch-up?

An owner-participant who has W-2 income defers $18,000 in 2017.  He wants to max his contributions for the year.  

Is it permissible to recharacterize $6,000 of the $18,000 as catch-up so the owner-employee can receive $60,000 in aggregate, or is he limited to $54,000 because he failed to make an additional $6,000 in catch-up?

I read through 414(v) and I don't see anything that discusses recharacterization except in the event of ADP test failure.  I don't see anything that says you can recharacterize a portion of your deferrals as catch-up so that you can get more Profit Sharing.

Any thoughts?

Wouldn't you just do a $42,000 profit sharing contribution... then total additions for the year is $60,000... then since over the $54,000 limit, $6,000 of the 401k deferrals are now catch-up.  In other words, none of the $18,000 is re-characterized as catch-up until the $54,000 limit is exceeded.   Hope I got this right.

401k deferrals can be re-characterized as catch-up upon ADP failure, statutory limits, or plan limits.

It's not like "oops, we are making a $42,000 Profit Sharing contribution and we've bumped into the 415 limit" . . . It's a choice.  The guy owns the business.

If they had an example of this chicken and egg logic in 414(v) I would feel more comfortable about it.  But it seems this interpretation is widely accepted, so I guess I just need to stop stewing about it.

Thanks for your input!

3 hours ago, Towanda said:

Is it permissible to recharacterize $6,000 of the $18,000 as catch-up so the owner-employee can receive $60,000 in aggregate?

Yes.  From the IRS web site:

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Example - IRC Section 415(c) limit. Susan is a participant in a 401(k) plan that permits catch-up contributions. She is age 54 and is a catch-up eligible participant. Elective deferrals to the plan are permitted up to the IRC Section 401(a)(30) limit ($18,500 for 2018). The plan provides for a matching contribution equal to 25% of her elective deferrals. The plan also permits discretionary profit sharing contributions that are allocated pursuant to a predetermined formula set forth in the plan. Susan’s compensation for 2018 is $200,000. She deferred $18,500 to the plan. Her matching contribution is $4,625. She receives a discretionary profit sharing contribution in the amount of $35,000. Susan’s total allocation ($18,500 plus $4,625 plus $35,000) exceeds the dollar limitation on annual additions under IRC Section 415(c) by $3,125 ($58,125 less $55,000 is $3,125). The plan treats $3,125 of Susan’s elective deferrals as catch-up contributions.  

4 hours ago, Towanda said:

I read through 414(v) and I don't see anything that discusses recharacterization except in the event of ADP test failure.  I don't see anything that says you can recharacterize a portion of your deferrals as catch-up so that you can get more Profit Sharing.

Any thoughts?

 

From § 1.414(v)-1(b)

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An applicable limit for purposes of determining catch-up contributions for a catch-up eligible participant is any of the following:

(i)Statutory limit. A statutory limit is a limit on elective deferrals or annual additions permitted to be made (without regard to section 414(v) and this section) with respect to an employee for a year provided in section 401(a)(30), 402(h), 403(b), 408, 415(c), or 457(b)(2) (without regard to section 457(b)(3)), as applicable.

 

I'm going to throw out one last argument.  I accept defeat, but in my scenario I I don't really buy the argument that, oh my goodness, we've encountered a statutory limit:

• The business owner chose not to defer $24,000
• The Profit Sharing amount is discretionary, not mandatory
• It is the business owner, not a higher power, who determines the Profit Sharing amount
•  Therefore, he's not a victim of circumstances
• So, we've bumped into 415(c) on purpose

If I were an IRS auditor I wouldn't buy it.  I think it's playing fast and loose with Catch-up.

Again, I accept defeat, but I'm not comfortable in this particular scenario.

Start a little before the section PensionPro quoted:

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1.414(v)-1 (a) Catch-up contributions—(1) General rule. An applicable employer plan shall not be treated as failing to meet any requirement of the Internal Revenue Code solely because the plan permits a catch-up eligible participant to make catch-up contributions in accordance with section 414(v) and this section. With respect to an applicable employer plan, catch-up contributions are elective deferrals made by a catch-up eligible participant that exceed any of the applicable limits set forth in paragraph (b) of this section and that are treated under the applicable employer plan as catch-up contributions, but only to the extent they do not exceed the catch-up contribution limit described in paragraph (c) of this section (determined in accordance with the special rules for employers that maintain multiple applicable employer plans in paragraph (f) of this section, if applicable). To the extent provided under paragraph (d) of this section, catch-up contributions are disregarded for purposes of various statutory limits. In addition, unless otherwise provided in paragraph (e) of this section, all catch-up eligible participants of the employer must be provided the opportunity to make catch-up contributions in order for an applicable employer plan to comply with the universal availability requirement of section 414(v)(4). The definitions in paragraph (g) of this section apply for purposes of this section and §1.402(g)-2.

Put the two together and hitting the 415 limit triggers catch-ups.  If the owner is catch-up eligible, there is nothing fast and loose about it.  That's how it works. 

Catch-ups can also be triggered by a plan imposed limit [1.414(v)-1(b)(1)(ii)]. That could be a deferral limit that only applies to HCEs. 

Thank you all for your detailed responses.  This has been a helpful exchange.

I had a 2 person plan (husband & wife) that was randomly audited by the IRS many years ago. I think the limits at the time were $50K (415) and $5K (catch-up) bu I may be off on the limits but whatever they were they deferred catch up and made max 415 limit PS. We had them each make $5K deferral and $50K PS. There was no problem on audit supporting it.