401k plan - annual Comp limits

Our CEO started in Feb of this year and was doing 401k % of 5%

He is at 500K annual base comp

He has now hit the 285K comp limit for 2020 in Sept 2020 and both his match and deferral stopped

Match is 14,500 which is ok 5% of 285K

But 401 k is capped at 14500 as well

He is over age 50

If he had done say 10% when he started he would have been able to do 26K in 401k contribution

Can we catch him up in 401k to 26K by suggesting he increase his 401k % from 5% t0 14% for final 2 months of plan year?

Or is it too late to do this since he has hit the 28

Thanks

Alexa

You don't stop deferring when someone hits the comp limit.  However, you will be using $285k when determining if a participant goes over any limits (like a % of pay for match).  And you use 285 cap when you are performing any testing.

I would suggest re-start the deferrals and allow then to continue until the YTD hits $26k.  Make sure the proper match is calculated along the way.  How is the match calculated--by payroll, annually?  (Don't confuse calculation with contribution.  Yiu can have an annually-calculated match deposited every pay period.)

Most plan documents should be interpreted so that elective deferrals do not cease when the participant's compensation reaches $285,000, the 401(a)(17) compensation limit.  Whether that is true of the original poster's plan document, I don't know.

If deferrals should not have ceased, then all you have to do is restart deferrals at the 5% level.  No QNECs are required because (1) Rev. Proc. 2019-19, Appendix A, Section .05(9)(a) allows for no correction of deferrals if the deferral error was corrected prospectively after the earlier of 3 months after failure began or, if the employee notified the plan sponsor, the first payroll after the end of the month after the month of notification.  This assumes that you will notify the employee within 45 days after the deferral rate has been corrected.  (2) The employee didn't lose out on any matching contributions, as you are aware.

If you want to suggest that the employee raise his deferral rate, that really has nothing to do with correcting the error.

The match is every monthly  payperiod

I we restart at the deferral limit he won't reach the 26K; he missed 2 months of 401k in Sept & Oct; he nly has nov & dec

Can we have payroll go back to ad the 2 months missed with Nov payroll?

That is a matter that is up to the participant.

Ask him how much you should (re)start withholding.  He should consider how much he wants to defer for the year (probably the $26k), see how much more is left to achieve that and divide that by he number of pay periods left in the year.

I would not unilaterally do that because you have a 5% instruction received from him.  I would not change that level of deferral without written instructions from the participant to change it.

Maybe it's just me, I would not do any of the above until I read the plan document to determine what it permits and/or requires.

4 minutes ago, david rigby said:

Maybe it's just me, I would not do any of the above until I read the plan document to determine what it permits and/or requires.

Just you Dave.  The Plan Document to me is merely a collection of suggestions and recommendations.

Similar to the Pirate Code - more like guidelines! LOL?

Quoted from Fall 2009 Employee Plan News  https://www.irs.gov/pub/irs-tege/fall09.pdf

Compensation limits vs. elective deferrals/§415 limits

Confusion may arise on how to reconcile the limits under §401(a)(17), §415(c) and §402(g) when an employee’s annual compensation exceeds the current §401(a)(17) limit. For example, can a 40-year-old employee earning $30,000 per month (annual compensation of $360,000) who elects to defer a flat dollar amount of $1,375 per month ($16,500 for the year) in 2009 to his or her 401(k) plan continue to make elective deferrals after September, at which time his or her yearto-date compensation exceeds $245,000? The answer is yes, because the plan is not required to determine a participant’s §401(a)(17) compensation based on the earliest payments of compensation during a year. Unless the plan’s terms provide otherwise, the $16,500 §402(g) elective deferral limit is applied uniformly to the $245,000 §401(a)(17) compensation that the employee receives throughout the year, regardless of whether deferrals are expressed as a dollar amount or a percentage of compensation in the employee’s salary reduction agreement.

Our 401k plan doc allows uniform deferral beyond the comp limit; nothin in adoption agreement limits this- why woudl one?!

Since the CEW, based on the 5% elected at beginning of employment  would have been close to the 26K except for our HRIS system stopped the deferral at same time stopped match which is 100% to 5% off pay

I agree with match stop but not deferral stop

we have erisa counsel looking into

If 401k should not have stopped some sort of selff correction program for missed deferral plus interest should occur correct?

thanks

Lexy

13 hours ago, alexa said:

If 401k should not have stopped some sort of selff correction program for missed deferral plus interest should occur correct?

This was answered by MWeddell above.

On 10/23/2020 at 9:41 AM, MWeddell said:

If deferrals should not have ceased, then all you have to do is restart deferrals at the 5% level.  No QNECs are required because (1) Rev. Proc. 2019-19, Appendix A, Section .05(9)(a) allows for no correction of deferrals if the deferral error was corrected prospectively after the earlier of 3 months after failure began or, if the employee notified the plan sponsor, the first payroll after the end of the month after the month of notification.  This assumes that you will notify the employee within 45 days after the deferral rate has been corrected.  (2) The employee didn't lose out on any matching contributions, as you are aware.

13 hours ago, alexa said:

we have erisa counsel looking into

If you get a different answer from ERISA counsel please let us know; I think everything you have raised has been answered right here.