Hello,

Question for you all that perhaps you can help me with...

I have a plan that has a non-calendar plan year end (September 30) and due to their allocation of a fairly high profit sharing contribution several participants are exceeding the 415 limit for 2008 of $51,000 (for participants age 50 and over).

My question is this -

I have a participant who has a 2007 calendar year deferral of $16,200 (of which $700 is considered to be catchup). Their Year to date 2008 calendar year deferral is $12,500.

The total amount of allocated contributions for the plan year is $56,479.54, which is $10,479.54 over the 415 limit of $46,000. Do we claim $5000 (from 2007) as his catchup amount (even though he only contributed $700 towards the catchup amount) or do we use the $5000 for 2008 due to a 415 limit failure (even though he has not yet contributed this amount) ? I am assuming we only use the $5000 for 2008 since this is the last amount in that caused the 415 limit failure.

Any thoughts are appreciated. Thank you!

In general, you may not use the "left on the table" catch up from 2007 to increase the 2008 catch up above $5,000.

There are a number of items you need to provide if someone is to answer the inquiry completely, though.

Is this an HCE or NHCE?

Can you break the deferrals down between the following periods:

1/1/2007 - 9/30/2007
10/1/2007 - 12/31/2007
1/1/2008 - 9/30/2008
10/1/2008 - today

You mention that the 2008 "year to date" deferral is $12,500. Is that 1/1/2008 through 9/30/2008? Or is it really from 1/1/2008 through today?

Sorry about the confusion.

This participant is indeed a Highly Compensated Employee. Their deferrals for January 1, 2008 - September 30, 2008 are $12,500. The other deferrals are as follows:

January 1, 2007 - September 30, 2007 are $12,450.00
October 1, 2007 - December 31, 2007 are $3,750.00

I am unsure what the deferral amount is for this participant from October 1, 2008 to today.

I realize I am only able to use a "catchup" for up to the amount actually contributed. Meaning that since this participant only contributed $3750 in the last quarter of 2007 this would be the only amount to be used as a catchup if allowable. However you mention that one may not use the "left side of the table" to increase for catchup. Which would mean that only the last amounts contributed would be classified as the catchup - thus the amount contributed in 2008, correct?

Apparently, we are not coming together. I say "left ON the table", you say "left SIDE OF the table". The meanings are not the same. Are they?

No matter.

I completely disagree with your new assertion about only being able to use $3,750. Again, however, in this particular case it doesn't seem to matter.

The good news is that the result is pretty simple.

The bad news is that you have stumbled across a dirty little secret of catch-up deferrals: despite the somewhat exhaustive regulations, the IRS has not given definitive guidance on how to treat the circumstance that you describe.

More on that later.

Your HCE deferred $700 more than the 2007 Calendar year limit as of 12/31/2007 and therefore uses $700 as catchup from the available 2007 limit of $5,000. It is generally understood that a calendar year catchup comes out of the last amounts deferred so, for all practical purposes, you just modify the amount deferred between 10/1/2007 and 12/31/2007 from $3,750 to $3,050. This assumes, of course, that you had no issues at all with respect to the plan year ending 9/30/2007. He or she was well below the limits at that point, right? If not (that is, if a limitation was exceeded at that point), then all of this analysis means very little and would have to be redone, after considering how much of the 2007 catch up limit was used at 9/30/2007. Maybe that overstates it a bit. Basically, as long as he had at least $700 left from his 2007 catch up limitation, then nothing would actually change. It also assumes that the limitation year is the plan year. If not, then all of this does change.

Going forward, considering only the non-catchup deferrals of $3,050 during the last quarter of 2007 and the $12,500 deferred during the first 9 months of 2008 we find that the maximum annual additions from employer contributions is $46,000 less $15,550, which is $30,450.

You say that the actual annual additions from employer contributions totaled $40,229.54. This exceeds the 415 limit by $9,779.54. Therefore $5,000 of his deferrals should LOGICALLY be treated as catchups and the remaining $4,779.54 must be returned as excess allocations under IRC section 415. As with all plan corrections, you need to review EPCRS to determine what your course of action should be. I believe there is a required filing. That is, I don't think you can self correct a 415 violation.

Back to the dirty little secret. There are some people that work at the IRS who have a problem with the circumstance you describe: an employer contribution being made to a plan which causes a deferral to become a catchup. I won't get into the gory details, but suffice it to say that unless the $16,250 in non-catch up deferrals made during the 2007-2008 plan year violated some other provision of the plan, there are some at the IRS who would consider this individual potentially ineligible for any catch up of any kind. Hence, your correction would not be $4,779.54, but instead $9,779.54.

You need to check with somebody (ERISA counsel for the plan, etc.) to see how the plan wants to go forward.

I would agree with everything Mike said.

I have not heard about the "dirty little secret" he brings up. This is interesting (disturbing). I don't see anything in the Code or Regs that would support the IRS possition that he puts forth but that hasn't stopped them from taking odd positions in the past. I know on several non-cal plans we have used that technique to maximize contribuions w/o exceeding 415. In the past we have self corrected 415 errors due to deferral and large ER contrib but since finalization of 415 regs I agree an EPCRS submission is required to fix.