FAQ 803: 402g--Off calendar year catchup with ADP excess

Problem: The attached plan has a 7/31/08 fiscal plan year end. When I run the ADP test, it overstates the only HCE participant's deferrals and does not use the amount that is on the Contribution screen. The deferral on the Contributions screen is $19,249.60, yet the deferral on the ADP test is $24,249.60. It also thinks that I have a 402(g) excess in the amount of $9,547.60. I've backed up the contributions in case you need to recalculate 402(g). Also, this is the first year that we are administering plan if that makes a difference.

Solution: I do not see any 402(g) excess, but there is an excess contribution due to failing the ADP test. I also believe that the 402(g) test was not run a second time for 2008 with saved calculated results. I am assuming this because the original file you sent showed the 2008 catchup amount under the ADP catchup vs. 402(g), which is incorrect since there would have been an excess deferral for 2008 without the catchup. What the system is doing after the numbers are input to the CATOFFYR screen and you run 402(g) the first time it does the first calculation for the 2007 402(g) limit then when you run it the second time it looks at the 2008 402(g) limit and moves any catchup. First it looks at the Catchup Limits (LIMITCAT) screen to see what is listed in the Prior Plan YearCcatchup field, which in the case of an off calendar plan year this would still be a 2007 catchup. In this plan, this was zero for this participant. Next, it looks at the deposits on the CATOFFYR screen for 2007. 0+11750.40 + 8249.60 =20000.00, this total amount would exceed the 402(g) limit for 2007 so the system determines the difference [20000-15500=4500]. Then the system determines that this 4500 is within the catchup limitations and inserts this number to the right under 2007 Calendar Year Catchups on the Catchup Off Year (CATOFFYR) screen and it reduces the deposit in the second field (8-1-07 to 12/31/07) to 3749.60. Therefore, the deposit within 402(g) is listed as 11750.40+3749.60 = 15500.00 plus a catchup of 4500 and this equals the total deposit for 2007 of $20000.00. The system also reduces the Contributions (CONTRIB) screen for this catchup amount. When applying the 2008 402(g) limit, the system looks at the next field labeled (1/1/08 to 7/31/08) this shows 20500.00. If you run 402(g) routine, the system should now see that the limit is being exceeded [20500-15500 = 5000] and move the entire 5000 to the Catchup Limits screen under 402(g) and this is using the entire 2008 catchup limit. When the ADP test is run, the system will show the deposits for the plan year which in this plan year [8/1/07 - 7/31/08] there is a deposit of $28749.60 then it will show the 9500 catchup for both years. The net contribution 19249.60 which is now shown on the Contributions screen is the testing contribution for ADP. The system comes up with his ADR 19249.60/209999.92 = .0916648 or 9.17%. The test calculates that the plan is failing and the HCE must be cut back to 4.62%. This is where the correction comes in. The system must reduce the contribution to a point of passing. It shows the original 9.17% and illustrates the total reduction of 4.62% * 209999.92 = 9701.99 ----- 19249.60 - 9701.99 = 9547.60 corrective excess distribution. My recommendation is to start over so that the employee's record is correct. Restore the contributions to their original state, run 402(g) for 2007 and then again for 2008, then run the ADP test.