catch-ups and the 100% salary limit

[himt4]

I know that catch-ups are disregarded when establishing the $41,000 (for 2004) annual additon limit (i.e a 50+ person who made $100,000 and deferred $13,000 and an additional $3,000 catch-up in 2004, can get a $28,000 profit sharing contribution for 2004) but I am pretty sure I heard that you cannot disregard the catch-up when testing the 100% of salary limit. I cant find the cite, does anyone know it?

a 50+ person has salary of $41,000 in 2004. he defers 13,000 and an additional $3,000 catch-up. Can he get a profit sharing contribution of $28,000. It all depends on whether the catch-up is ignored for the 100% limit test. does anyone know the cite either way?

ps. its a cross-tested plan where there are other employees and this guy could get the full $44,000 without the plan failing the 25% deduction limit.

pss. I tried using the search to find a previous similar question.

[Lori Friedman]

You're looking for I.R.C. Sec. 414(v)(3) -- catch-up contributions aren't subject to the 415 ceiling on annual additions to a defined contribution plan ($42,000 in 2005).

[himt4]

are you saying that a person who earned $41,000 in 2004, can get $44,000 in 2004 (via a $13,000 deferral, $3,000 catch-up and $28,000 profit sharing)?

Yes, I see that 414v3 says to disregard the catch-up for annual additons and in such case the above person only has 41,000 of annual additions, and all looks well. But I've found a couple of articles (without cites) that seem to indicate that you cannot disregard the catch-up for the 100% of salary limitation, and the above person could not get the full $44,000 but only $41,000(of a mixture of deferal, catch-up and profit sharing.)

[Blinky the 3-eyed Fish]

I'd be curious to see those articles as I too disagree with them. Care to share where they are? If a catch-up is not an annual addition, how can catch-ups affect the annual addition limitation?

[Bird]

414(v)(3) refers to 415© which definitely covers both the $ and % limits. I think you can wind up with more than 100% of pay.

[himt4]

I'm still trying to refind a better article we saw, but here's something we saw that's not too clear, but it throws in "but the 100% of compensation limit does apply".

http://www.tiaa-cref.org/bpc/winter2003sr/page2.html

"402(g) and 415 Limits. It is not difficult to determine how catch-up contributions relate to the 402(g) and 415 limits. The catch-up contributions are in addition to the normal 402(g) limit. They are also excluded when applying the 415 dollar limit ($40,000 in 2003), but the 100% of compensation limit does apply."

[Lori Friedman]

Agreeing with Blinky and Bird.

Sec. 414(v)(3) states that catch-up contributions are not "subject to any...applicable limitation contained in section...415©". Sec. 415© cuts annual additions at the lesser of $42,000 or 100% compensation, so neither ceiling should capture over-50 catch-up deferrals.

TIAA-CREF clearly advises otherwise. I wonder how the company came up with its interpretation?

[himt4]

Thank you. I am switching to your side. From now on I'll believe that someone who earned 41,000 in 2004 can get 44,000.

I believe in the power of this message board: since there is no one on the message board who took the side of my original thought, my original thought must have just been based on a misinterpretation of something I read or heard.

[jquazza]

The deferral 100% limit of pay is one limit you cannot exceed even with catch up. If you are over 50 and make 13k, you could get an allocation of 16k, but at least 3k must come from contributions other than deferrals (and at least 3k must come from deferrals.)

[Blinky the 3-eyed Fish]

But that is obvious since you can't defer what you don't have.

[SoCalActuary]

If you have company contributions, they do not cause the contribution by the employee to exceed 100%. The annual addition can exceed 100%, which is separate from the problems with 402g. In the example given, the $28,000 profit sharing is an annual addition, but not a salary deferral. TIAA is concerned with 402g limits, because the employer contribution is not at issue in most 403b plans.