fixing excess contribution in EZ plan

401(k) plan, husband and wife only participants - both over age 50, both deferred $25,500 (not $26,000) for 2020; ER contribution is $75,000 (as deducted on 1120S return)

plan document (McKay Hochman) says allocate PS pro rata;

husband's W-2 wages more than wife's W-2 wages, due to SH health added to his comp

When I allocate $75K pro rata between the two of them, then add his regular deferrals of $19,500, he is over $57,000 annual addition limit.  Can $500 of his deferrals be recharacterized as catch-up (making his total catch-up $6,500) to reduce the excess?  Then reduce his PS allocation by enough to get him down to $57,000 + $6,500 catchup?  The wife's original PS contribution plus deferrals, plus the excess from spouse, will still be under the 415 limit.

Or do you skip the part where $500 of his deferrals are recharacterized, which makes his excess $500 higher and the give all the excess to her?  There is room to do that, also.

Which is the preferred or prescribed method?

Thanks.

Yes, you can recharacterize deferrals as catch-up due to an excess of the 415 limit.

Check the plan document, hopefully it says that even with the pro rata allocation, you can limit contributions to the participant's 415 limit. Assuming that it does, then you should be fine. If not, allocate as much as you can under the current formula and do the rest with an -11(g) amendment. Either way I would recommend changing the formula to individual groups going forward.

His profit sharing can be $38,000 (63,500 - 25,500).  This will result in $19k "regular" deferrals,$ 6,500 catch-up.  Add $38k in PS, and you are at the max of $63.5k.  (As long as the income allows it)

$37,000 can be allocated to the wife, as long as the income allows it.  Pro-rata doesn't matter since the first owner is at 415 max.