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Catchup only


ombskid
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deferrals are treated as a catch-up if they violate one of the limits -

402(g)

415 limit

or plan imposed limit.

in addition, a plan that fails ADP testing can treat those amounts as catch-up.

so you don't really 'make' a catch-up - if you haven't violated one of the limits, then you have no catch up.

If I understand things correctly you could have a plan limit of 0% deferrals by key employees and that would get around the issue

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Oooh, I don't know. This doesn't smell so good. Depending upon facts and circumstances, there might not be effective availablity for the NHC, depending upon the limits that apply to them. I'd look really, really hard at this before giving a go-ahead. Although non-uniform plan limits are permitted under 1.414(v)-1(e), I don't feel comfortable with pushing the edge of the envelope to this extent. This could be an end run around proper ADP testing. I'm also conservative by nature on these questions, however, and perhaps unnecessarily so.

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I've done this. I can't see how limiting the HCE's to zero discriminates in their favor. LEt's say he/she was not limited to zero and the ADP test was failed--the HCE would be able to retain AT LEAST the catch-up amount in the Plan, if not more. Okay, I suppose it might help another HCE keep money in the Plan, because of the ordering of refunds, etc. but I fall back on my original comment (i.e., limiting HCE's to zero discriminates against the HCE's).

Austin Powers, CPA, QPA, ERPA

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Under reg. 1.416-1 M-20 any elective contributions by key employees are taken into account for determining the minimum required contributions for non key employees. Since catch up contributions are elective contributions they will be counted in determining the amount of the minimum required contribution for a top heavy plan. (5K contribution by key ee earning 165k =3% TH contribution) I dont understand how a 0% deferral limit would not trigger the need for a TH minimum contribution if the key ee makes only catch up contributions.

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Under reg. 1.416-1 M-20 any elective contributions by key employees are taken into account for determining the minimum required contributions for non key employees. Since catch up contributions are elective contributions they will be counted in determining the amount of the minimum required contribution for a top heavy plan. (5K contribution by key ee earning 165k =3% TH contribution) I dont understand how a 0% deferral limit would not trigger the need for a TH minimum contribution if the key ee makes only catch up contributions.

Better take that up with Mr. Tripodi.

Just looked at the Outline Book and he says the catchup contributions are disregarded. He cites authority as 414(v)(3)(b) which says that making of such contributions will not cause a plan to fail to satisfy IRC 416. He also sources the proposed Treas Regs. 1.414(v)-1(2)(iv).

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Guest mjb

While I agree that catch ups for the current yr are exempt from 416, the cite is 1.414(v)-1(d)(3). The proposed regs were replaced by final regs in 2003

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  • 2 months later...

I'd like to briefly resurrect this topic, as a similar question came up again today.

I think that the last sentence in 1.414(v)-1(e)(1)(i) would prevent a plan from having an employer provided limit of 0% for the HC (who are over 50 and catch-up eligible) while providing a higher deferral limit for the NHC. That final sentence, which must of course be read in conjunction with the rest of the section, says, "However, a plan may not provide lower employer-provided limits for catch-up eligible participants."

If you disagree, could you discuss your reasoning, as I don't quite see how you get around this section. Additionally, is anyone aware of any discussion from the podium at any conferences? Thanks!

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Guest fender5150

"I think that the last sentence in 1.414(v)-1(e)(1)(i) would prevent a plan from having an employer provided limit of 0% for the HC (who are over 50 and catch-up eligible) while providing a higher deferral limit for the NHC. That final sentence, which must of course be read in conjunction with the rest of the section, says, "However, a plan may not provide lower employer-provided limits for catch-up eligible participants."

If you disagree, could you discuss your reasoning, as I don't quite see how you get around this section. Additionally, is anyone aware of any discussion from the podium at any conferences? Thanks!"

I think the proposal was to limit Key employees to 0% (not catch-up eligable participants).

The last sentence doesn't address limiting contributions of key employees. I don't read it as a free pass for key employees who happen to be over 49 - though I see how it could be interpreted that way.

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Let's assume that the only HC/Key employees are 50+, and are, by sheer coincidence of course, the only employees who are 50+ and therefore the only employees eligible for catch-up. I think you are agreeing that you can't provide a deferral limit of 0% for them, and a higher limit for all the NHC?

Thanks!

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We're discussing providing limits on owners, and not catch-up eligible participants. The fact that they are also catch-up eligible is a coincidence.

Based on your interpretation of the reg, the employer wouldn't be able to restrict catch-up contributions of HCE's in order to avoid failing the ADP test. I think we would all agree that is not the case.

It appears to me that the intent of this provision is that the sponsor should not be able to negate the catch-up contribution provisions simply by imposing additional limitations. AS an example, assume the sponsor said "catch-up eligible particpants may only contribute $10,500 for 2007." Therefore, after catch-ups, they still contribute the regular $15,500. Why might they do this? Perhaps to reduce matching contributions? Nevertheless, that's how I interpret the provision.

Austin Powers, CPA, QPA, ERPA

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From the preamble to 414v regs TD 9073 7/7/03:

"Thus for example a plan could provide for an employer provided limit that applies to HCEs even though no employer provided limit applies to non HCEs. However, the final regulations retain the rule that an applicable employer plan is not permitted to provide lower employer provided limits for catch up participants. Furthermore, a plan fails to provide an effective opportunity to make catch up contributions if it has an applicable limit (e.g. an employer provided limit) and does not permit all catch up eligible participants to make elective deferrals in excess of that limit."

How can a plan permit Key/HC ees to make catch up contributions with the first $ of their elective deferrals but require non key/HC employees to max out on their 402g limit before making a cath up contributions without violating the universal availability requirement of 414v?

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Universal availability means providing the same opportunity for all participants under plan imposed terms. If you disagree with the IRS please feel free to do so and provide a cite. The reason the IRS regs require the same limit for all catch up eligible employees is to prevent a TH plan from avoiding the contribution required under 416 by manupulating the limits for making a catch up contributions to favor HCE/key ees. I dont understand why there is a need to do this in a 401k plan when catch up eligible HC/Key ees can contribute 5k to an IRA and then roll it over to the plan in the following yr.

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Thanks, mjb, for the quote from the preamble; I was concerned about Belgarath's cite but I think that the preamble explains what it means - "you can't limit catch-up opportunities for catch-up eligible participants by imposing an employer limit."

I disagree with your conclusion that "forcing" NHCEs to use up their 402(g) limit before making catchups is a problem. Is there a scenario where NHCEs could contribute less because of it? I don't think that imposing an employer limit on HCEs, which allows (or requires) them to start using catch-ups sooner than an NHCE, means that catch-ups are not universally available. The NHCE can still do catch-ups if s/he exceeds the 402(g) limit or some other limit.

Ed Snyder

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The EOB clearly indicates in Chapter 11, Section XII, Part E2 (2006 version) that having plan imposed limits apply to different groups of participants does NOT affect the universal availability requirement. It then goes on to say that HCE's could be limited to a lower percentage of pay.

In Chapter 3, Section IV, Part C.1.b.3, he also indicates that catch-up contributions are excluded from the determination of a key employee's contriubtion rate.

So the only conclusion (if you trust Sal ;) is that you can limit a key employee to 0, let them make their catch-up contributions only, and no THM is required.

Austin Powers, CPA, QPA, ERPA

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Austin:

Q1: What provision of the regs does Sal cite as authority?

Q2: If the plan is audited who has more authority Sal or the IRS?

Q3: anyone gotten a 401k plan approved with 0% contribution/ 5000k catch up for keys HCEs?

My problem with his conclusion is that it is inconsistent with the universal availiablity rule of 414(v). I see no reason to risk a plans qualified status of this kind of trivial issue.

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Q1a: With respect to the catch-ups not requiring top-heavy contributions, he sites whereever it says that a plan shall not fail to satisfy top-heavy by reason of making a catch-up contribution 1.414(v)-1(d)(3)(i), which states:

Contributions not taken into account for other nondiscrimination purposes -- (i) Application for top- heavy. Catch-up contributions with respect to the current plan year are not taken into account for purposes of section 416. However, catch-up contributions for prior years are taken into account for purposes of section 416. Thus, catch-up contributions for prior years are included in the account balances that are used in determining whether the plan is top-heavy under section 416(g).

Q1b: With respect to the ability to limit HCE's to a given percentage, he sites 1.414(v)-1(e)(1)(i), which states:

An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants.

As I had mentioned before, my intepretation of this last sentence is that a limit cannot apply solely to catch-up eligible participants. IF that is not the interpretation then the immediately preceding sentence has no meaning whatsoever.

Q2: The real question is who is a better judge of what the regulations mean - you or Sal? I mean, Sal very literally wrote the book on this stuff.

Q3: Corbel's prototype has a field to apply a separate 401k contribution limit on the HCE's and I don't recall anything in any amendment that indicated such a restriction violated the universal availability requirements.

I see no reaosn not to use a very effective and very legal plan design...

Austin Powers, CPA, QPA, ERPA

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A: While the sentence cited in bold in Q1b permits an employer to allow different limits between different groups of employees, as noted in both the (e) reg and the preamble to the 414(v) regs, each empployer limit on universal availalility of catch ups for plan participants is subject to the BRF regs of 1.401(a)(4)-4. The preamble pointly notes as an example that a plan could permit an employer provided limit for catch ups by HCEs (e.g.,no catchup allowed) even though no similar employer provided limit applies to NHCEs. Allowing only HCEs/key employees to make only catch ups with a 0% employer contribution would violate the BRF rules and would disqualfiy a plan that had adopted such a provision as an operational failure, regardless of whether a determination letter had been issued. In otherwords a plan cannot distinguish the effective opportunity to make catch up contributions among different groups of participants in a way that would violate the BRF regs. I see nothing in the EOB that contradicts this premise.

In addition, the preamble to the 414v regs would require that an employer provided limit apply to all catch up eligible participants.

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Q1: why do you believe is Sal is advising employers that they can ignore the application of the BRF rules required for universial availability under 1.414-1(e) which explicitly require compliance with the BRF rules?

I will leave it to other posters to answer the Q of whether they think the EOB is advising plan sponsors to ignore the BRF rules when applying the universal availaiblity rules for catch up contributions.

Q2: Are you informing you clients of the application of the BRF rules to universal availability when proposing 0% catch option for HCEs/Key employees or are you not disclosing the potential risk of disqualfication?

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mjb, your argument seems to hinge on the presumption that allowing HCEs to use catchups before NHCEs might otherwise use them somehow violates universal availability.

I see nothing in the regs that supports that. The fact is that the NHCEs can still use catchups if they "need" them, e.g. by exceeding the 402(g) limit.

As I noted earlier, if you can come up with a scenario where an NHCE won't be able to use catchups if they are needed because of an employer-imposed limit on HCEs, then you might have something.

But I don't think anyone except you cares if an NHCE's $10,000 contribution doesn't consist of any catchups, while a similarly-situated HCE has $1,000 of catchups.

Ed Snyder

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I think the IRS cares whether a Q plan complies with requirements for universal availability under IRC 414(v) in both written form as well as operation. If plans were only required to meet the substantive requirements of the IRC instead complying with formalities of the myraid provisions of the IRC, regulations and rulings there would be lot less VCP filings and audit issues. Allowing HCEs/Key ees to make catch up contributons under a 0% contribution plan not available to other ees is a questionable practice under two separate regulations affecting qualification under 401(a) :

1. BRF rules. As noted in the preamble to 414(v) regs, the catch up option must comply separately with the BRF rules. There is nothing in the regs that permits a plan to HCEs/Key ees to make a catch up contribution with the first dollar of their elective contributions to comply with the BRF rules as long as the the plan allows Non HCEs/key ees to contribute a larger amount overall to the plan. There is nothing in the quoted provision of the EOB that provides an exemption under the BRF regs for this provision.

2. 414(v) regs. The regs expessly prohibit a plan from providing a lower employer provided limits for catch up eligible participants which rules out a 0% catch up option. The EOB specificaly notes that this provision is an exception to the prior sentence which permits differentiation in catch up limits between different groups of employees (but not participants).

Failure to comply with either of the above provisions will result in DQing the plan. I can't understand why an advisor would recommend a provision which provides trivial benefits to HCE/Key ees at the risk of the loss of qualfied status when the same tax benefit is available without risk if the HCEs/ key ees contribute 5K to an IRA and rollover the proceeds to the plan.

What none of the posters have been willing to answer is whether they would inform a client of the D Q risk of adopting such a provision and recommend that the client consult a tax advisor or obtain a determination letter for such a provision.

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