Compensation Limit- Contributions Post Tax

Hi,

The payroll system for this client capped the compensation at the annual of $285,000 for 2020. Instead of contributions stopping because the compensation limit was met, the contributions are still be deducted but as after-tax. Wouldn't the client had to have something in the document allowing for after-tax contributions in order for this to happen?

Thankls!

What does the deferral election say?

IRS unofficial guidance from https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit says that 

Quote

Unless your plan terms provide otherwise, the salary (elective) deferral limit is applied uniformly to the compensation that the employee receives throughout the year.

So the contributions -- all contributions regardless of the type in my view -- should continue to be made even after the cap ($285,000 in 2020 or $290,000 in 2021) was reached unless the plan document expressly states otherwise.  One can enforce the compensation limit indirectly by capping the amount of elective deferrals (Code Section 402(g) usually is more restrictive anyway), the amount of match and the amount of traditional non-Roth after-tax contributions.

Let me try to put the two above comments, which both seem correct to me, together. I certainly wouldn't make them after-tax unless the plan and deferral election form specifically provide for that, which is extremely unlikely. And also, if the 402(g) limit has not yet been hit, then unless the plan specifically provides otherwise, you should probably continue to treat as pre-tax, even if the person's compensation already "taken into account" under the plan exceeds the 401(a)(17) limit. True up at the end of the year, at least for deferrals, which is essentially what the IRS says on its website, as MWeddell points out. Match is a creature again of plan language.

FYI, I have seen one preapproved plan of a very large provider a few years ago that did not explicitly provide for this, but had a very round-about way of dealing with it. Another plan of a similarly large provider that I just reviewed had language specifically along the lines of the IRS website comments that MWeddell points out, addressing and neutralizing the technical problem to the benefit of the participant. The problem has been around for years and is somewhat baffling when first encountered, if the plan document does not address it.

22 hours ago, coleboy said:

The payroll system for this client capped the compensation at the annual of $285,000 for 2020. Instead of contributions stopping because the compensation limit was met, the contributions are still be deducted but as after-tax.

You switched tenses; is this (after-tax) something that actually happened?

15 hours ago, Luke Bailey said:

True up at the end of the year, at least for deferrals

Come again?  I don't know what a true up for deferrals means.

Anyway, aside from my nit-picking above, I agree with the prior posts, which essentially say this boils down to a mistake by the payroll company.  I suppose there are plans out there that somehow limit deferrals on comp above $285K, but I've never seen them and am not sure what that language looks like or why someone would take pains to do something so stupid.  I don't think it is too late to fix it and it should be fixed.

I think we need to organize a Reddit mob to teach these idiot payroll companies a lesson.  

7 hours ago, Bird said:

Come again?  I don't know what a true up for deferrals means.

Bird, I was speaking loosely. Catach-up eligible person, say, is paid $60k per month, and defers, say, 11.15384615% of each paycheck. You don't stop them in May, when they have not deferred the full annual  (get it, "of or pertaining to a period of a year") amount permitted, but rather let them keep deferring until they hit the 402(g) max for the year, then say that what they contributed, for the year (you get the idea) is 11.15384615% of $290,000, or $26,000.

Sorry, didn't mean to change tenses. On the payroll system, the compensation was capped at the $285k and the contributions were then being deducted by the payroll system as after-tax contributions.

1 minute ago, coleboy said:

Sorry, didn't mean to change tenses. On the payroll system, the compensation was capped at the $285k and the contributions were then being deducted by the payroll system as after-tax contributions.

Yeah. Almost certainly that is wrong, as explained in prior posts, coleboy.