fiscal year and catchup

Plan year is 7/1/19 - 6/30/20

hce defers on pay date 12/15/2019 $25,000.00  nothing else deferred in the 2019 calendar year

hce defers on pay date 1/15/2020 $26,000.00  nothing else deferred in the 2020 calendar year

is my adp test for plan year ending 6/30/2020 going to show deferrals of $51,000.00 of deferrals?  or will it show $38,500.00 deferrals because 2019 is less $6000 catchup and 2020 is less $6500 catchup?

thank you

$38,500 in ADP test as as he exceed his 402(g) limit for the 2019 and 2020 calendar years during the single plan year ending 6/30/2020 and catch-up contributions are not included in the ADP test. He has also used all of his catch-up for 2019 and 2020 so if the plan fails the ADP test there in nothing left to recharacterize.

Yup.  That would be positively awful advice.  But probably a good example to demonstrate how it works.  It actually gets quite a bit more complicated than that if you have prior year ADP refunds offset by catch-ups.  It is a pain.

Would it work if you made the Plan a Safe Harbor for the year with the $38,500 + catchup, then had year without Safe harbor and no HCE contribution, then turn SH back on. etc. etc? Seems like it would and could be strategy to save money every other year. 

1) Good luck with your employees on that one!

2) Isn't there some regulation or other that basically says if you exploit the rules your plan is disqualified?  That's the rule I would be afraid of.  The switching on and off and the coordination of the owners contribution to contribute all 401k during the Safe Harbor Plan Years would not pass the smell test.

An interesting analogy though is that I know some S-Corps do something similar with the timing of comp on a fiscal year end entity to only pay Social Security taxes every other year. But I was always equally suspicious of that approach even though it has nothing to do with me.

I think technically you could do a 3% safe harbor with maybe notice very other year but as austin notes, good luck with the employee communication and I guess there is a possibility the IRS could rule it abusive.

Though it doesn't seem you would not be violating the letter of the law so I'm not sure the IRS would have a leg to stand on, especially if you made sure to dot every i and cross every t with respect to timing of notices, plan amendments and deferral elections.