“For plans that match only on regular pre-tax contributions and not catch-up contributions, is it best practice to have payroll separately monitor the ‘lower limits’ of $17,500 and $5,500 if contributing to catch-up or does payroll typically only monitor and cut-off contributions only at the upper limit of $23,000? What is the best correction if payroll misses a ‘lower limit’ and lets the employee contribute too much to a ‘lower limit’?”
Michael A. Webb, Vice President, Retirement Plan Services, Cammack LaRhette Consulting, answers:
Good question! Obviously this is more of a best practices issue rather than a procedure that is mandated by regulatory language. The Experts have found that best practice is to set up the payroll or other operating system limits, if practical, to cut off all participants at the general 402(g) limit ($17,500 in 2013, as you point out), but with an automated override so that individuals who are age 50 or older by the end of the calendar year (12/31/13 in this case) have a higher limit in the operating system that is automatically cut off at $23,000.
Setting up a limit for everyone of $23,000 would allow for possible excess deferrals for individuals who are less than 50 years of age, and automating a $17,500 limit for everyone would require a manual override (if the automate limit even permits such an override) for individuals who qualify for and wish to take advantage of the age-50 catch-up election. However if it is not possible to automate two separate system limits, it would be preferable to provide for an automatic cut off at the lower $17,500 limit, assuming that the limit could be overridden.
As for the best correction if the payroll misses the “lower limit” of $17,500 for someone who does not qualify for the use of the age-50 catch-up election (and 15-year catch-up election, for plans of qualifying employers who permit that option), your inquiry is especially timely. Presuming the deferrals have already been withheld from pay and remitted to the plan vendor, the deferral in excess of $17,500 would be treated as an excess deferral that would be corrected in accordance with our Ask the Expert Q&A from last week (see “Ask the Experts: Correcting Excess 2012 Deferrals”). Though the limits change from year to year, it is likely that the general correction principles for excess deferrals in 2012 will remain the same for correction of excess deferrals in 2013.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.