EGTRRA: Catch-up Contrib Eligibility

[Guest cole stevenson]

Some of the early analysis of the "catch-up contribution" in EGTRRA indicates participants must first hit the 402(g) limit ($11,000 in 2002) in order to be eligible. However, this would seem inconsistent with the spirit of the law which is to allow *all* employees who are nearing retirement to make additional deferrals.

Take for example an "average" participants who makes $60,000/yr and is deferring at his plan's maximum rate of 15%. If the early analysis is right, this participant will never be able to make the catch-up contributions. Can this be right? Are the catch-up provisions going to end up being a de facto bonus for the higher paid folks only? Or will a plan limit that results in the above circumstance serve as an alternate eligibility trigger?

Thanks in advance for all insights and inputs.

Cole Stevenson

[MWeddell]

It's clear from the text of the law and the examples in the committee report that one is eligible for catch-up contributions when one reaches a plan limit such as the 15% maximum. Pending further IRS guidance, it looks like if one offers catch-up contributions at all that one must offer it to all employees, not just those who reach the 402(g) limit. This is a significant complication for plan sponsors, recordkeepers, and payroll systems.

[MGB]

The law is very clear that ANY restriction will trigger the catch-up contributions. So, in your example, as long as the person puts in 15%, then they can also put in a catch-up on top of that. However, the plan must allow it.

Once a plan allows it, ALL plans of the controlled group must also allow it. That is ALL plans, not just 401(k)'s. This seems a little absurd, because it includes defined benefit plans. Discussions with Treasury indicate that they will give guidance that it should only apply to plans that can have elective deferrals (note that the catch-up contributions are not elective deferrals under 402, they are a new 414 section).

Here's a hypothetical: A plan only allows 2% elective deferrals. Anyone that puts in 2% and is age 50 or over is now eligible for catch ups.

Note that other restrictions can also apply, such as ADP testing or 415 limits. Hitting either one of these will also trigger the eligibility for catch ups.

Some of the messier issues are with regard to new participants or participants with two or more jobs. If the person hits the 402(g) limit in aggregate, they are eligible for the catch ups. However, any one of the plans wouldn't know that. There will have to be some type of verification/substantiation from the participant that they are eligible.

[Guest JimD]

Plan sponsors will likely consider eliminating salary deferral limits such as 15%. Because of the increase in the 415 limits and change in the deductible limits there may not be any reason to have a deferral limit. As MGB indicates an ADP failure will also trigger the catch-up contribution availability. At this time this scenario also seems messy. If a plan uses the prior year testing method it is used to avoid failures and the $11,000 may not reached and unless you closely coordinate HCE deferrals they may not reach the maximum allowed. Under the current year method does an HCE have to defer $11,000 first even though its clear a refund will be necessary because of NHCE participation simply to allow catch-up contributions?

[Bob R]

As you can see, there are numerous issues that need to be resolved regarding catch-up contributions.

In addition to the issue with multiple plans and the402(g) limit, it's not even clear whether the catch-up is a calendar year or plan year limit (as pointed out, the catch-up is in IRC 414, not 402). Or, whether someone gets two catch-ups if in 2 plans of unrelated employers. I wouldn't think so, but it's not clear from the statute.

It is clear that you can have a catch-up when you reach 402(g), a plan limit, or a limit resulting from an ADP test. Other than the multiple plan issue, the 402(g) is easy to apply. Also, a plan limit is also easy to apply. But, contrary to the prior posted message, I'm wondering if people will put very low plan limits in rather than no limit. For example, an HCE earning 200,000 can defer $11,000 (a little over 5%). Put that limit in for HCEs so that any HCE who wants to defer over the limit can only do so as a catch-up. That way the catch-up for the HCE won't be in the ADP test.

But, the toughest issues are how to determine when someone has reached an ADP limit. It's difficult when there are more than one HCEs. I'll spare you the number crunching but you get some strange results due to the SBJPA methodology of giving refunds to the person with the highest dollar deferrals. An HCE under age 50 could be impacted by whether deferrals of an HCE over 50 are catch-up contributions.

I think the best you can do right now is wait for the IRS to issue guidance. They know this is a high priority item.

[Jed Macy]

Can a 2001 mppp be convert as of 1/1/2002 to be 401(k) plan and take advantage of the catch-up contribution in the following case: Plan sponsor is an over 50 sole proprietor, 2002 compensation = $200,000; employer contribution is 20% (i.e., $40,000).

Can he make the $1,000 catch contribution (for a total of $41,000) for 2002? First assume he has no employees. Then assume that he does have employees who do not defer any amount since they are also getting an employer contribution of 20% and are eligible to make a catch-up contribution.

[MGB]

A 401(k) plan in 2002 can do what you describe (I am not an expert in conversions, so I won't comment on that).

No matter if he has other employees or not, the hitting the 415 limit of $40,000 makes him eligible for the catch up contribution. The catch-up is not subject to 415.

[Guest Ralph]

Can safe harbor plans match catch-up contributions?

As many individuals age 50 or older are HCE's, wouldn't they be deemed as receiving a greater rate of match?

[R. Butler]

We haven't considered matching catch-up contributions in a safe harbor plan because it seems like the plan wouldn't automatically meet top heavy pursuant to §613(d) of the Act.

I am still trying to determine if allowing just the catch-up contribution in a safe harbor plan prevents it from automatically satisfying top heavy. I don't think it would because the catch-up is still just a deferral, but I am not positive.

[Guest ERISAweasel]

Originally posted by MWeddell

It's clear from the text of the law and the examples in the committee report that one is eligible for catch-up contributions when one reaches a plan limit such as the 15% maximum.  Pending further IRS guidance, it looks like if one offers catch-up contributions at all that one must offer it to all employees, not just those who reach the 402(g) limit.  This is a significant complication for plan sponsors, recordkeepers, and payroll systems.

I wish that the catch-up rules were as clear to me as they seem to be to you -- at least when applying them to "plan limits" as opposed to Code limits.

Can you give me a citation to the committee report examples you mentioned (or a quote therefrom)? The version of the conference report I have merely says that "Additional contributions may be made by an individual who has attained age 50 before the end of the plan year and with respect to whom no other elective deferrals may otherwise be made to the plan for the year because of the application of any limitation of the Code (e.g., the annual limit on elective deferrals) or of the plan."

Code section 414(v)(5)(B) provides that someone eligible to make additional elective deferrals must -- with respect to a plan year -- be a participant "with respect to whom no other elective deferrals may ... be made to the plan for the plan year by reason of the application of any limitation or other restriction [under 402(g), 402(h), 403(B), 404(a), 404(h), 408(k), 408(p), 415 or 457] or comparable limitation or restriction contained in the terms of the plan."

I guess I'm unconvinced that a plan-based restriction on deferrals (like a 15% maximum deferral election) is, with certainty, a limitation or restriction which is "comparable" to the restrictions under 402(g), 402(h), etc.. The referenced Code limits all affect deductibility of the contributions and ultimately the plan's qualified status ... a 15% restriction is merely in place at the employer's will -- it is a plan design element and not necessary for the continued qualification of the plan.

As has been indicated, the payroll system operation implications of this question are somewhat daunting. Unless & until IRS gives clear guidance on this, do you think a Plan could -- in good faith -- comply with the spirit of 414(v) by only allowing catch-up contributions in the event a participant hits one of the enumerated limits (402(g), 402(h), etc) but not simply because the participant hits a plan-design feature like a 15% max deferral limit? In other words, what are you telling clients to do?

[Guest ERISAweasel]

Originally posted by Ralph

Can safe harbor plans match catch-up contributions?  

As many individuals age 50 or older are HCE's, wouldn't they be deemed as receiving a greater rate of match?

The Conference Report provides that "An employer is permitted to make matching contributions with respect to catch-up contributions. Any such matching contributions are subject to the normally applicable rules. "

[R. Butler]

ERISAweasel,

In response to your initial post where you question whether plan based deferral limits could trigger a catch-up. See 631(5)(B) of the Act. The last sentence of that section talks to plan based limits.

Now many of our plans are likely going to eliminate any plan-based deferral limits. The need for the limit just isn't there anymore.

[Guest ERISAweasel]

Originally posted by R. Butler

ERISAweasel,

In response to your initial post where you question whether plan based deferral limits could trigger a catch-up.  See 631(5)(B) of the Act.  The last sentence of that section talks to plan based limits.

Now many of our plans are likely going to eliminate any plan-based deferral limits.  The need for the limit just isn't there anymore.

EGTRRA 631(5)(B) is codified as 414(v)(5)(B) of the Internal Revenue Code -- as amended by EGTRRA. It addresses the limitations in 414(v)(3) (a/k/a 631(3)) (e.g., 402(g), 403(B), 404(a), 415) and "comparable limitation or restriction contained in the terms of the plan."

The first phrase of 631(5)(B) says you qualify if you hit *any* limitation described in 631(3)... the second phrase says you qualify if you hit a limitation or restriction *comparable* to 631(3).

Perhaps I've had too much law school, but the term "comparable" is not exactly clear to me. If the first part of the provision expressly allows a participant to make catch-up deferrals if he or she hits *any* of the referenced Code-based limits, then why doesn't the second part expressly say that such participant can also make catch-up deferrals if he or she hits *any* other plan-imposed limitation on the ability to make elective deferrals -- instead using the term "comparable" plan limit? Using canons of statutory construction, you can't simply ignore the fact that Congress may have meant for the term "comparable" to have significance -- it might not be mere surplusage.

Riddle me this, Batman: if you apply this 641(5)(B) literally, does it mean that a participant qualifies for catch-up deferrals if such participant takes a hardship withdrawal and the plan follows the regulatory safe-harbor provisions requiring such participant to suspend his deferrals for 6 months? Isn't this a plan-imposed limitation on elective deferrals? How does the "comparable" qualifier affect the answer? (Keep in mind that the 6 month suspension is not a direct qualification requirement -- it is merely regulatory guidance to help plans avoid making in-service withdrawals which the IRS might conclude don't qualify has "hardship" distributions, the consequence of which might be plan disqualification).

Lastly, you say that the "need for [a plan based percentage] limit just isn't there anymore." I agree that one way around this is to eliminate the plan-imposed percentage limitation on elective deferrals --> but this could create a problem that I, as a non-HR or payroll person, am not sure how a company's payroll department would handle. To wit, what happens if the participant elects to defer 100% of his/her compensation? Doesn't this create a problem since elective deferrals only escape income taxation, not FICA/FUTA obligations? As a practical matter, it seems that plans should be able to restrict participants to deferring a certain percentage -- and that these self-imposed restrictions are not necessarily what Congress was aiming at when it addressed catch-up deferrals.

I don't pretend to know the answer to any of the above questions -- EGTRRA just seems ambiguous as to what Congress intended to trigger the availability of these catch-up deferrals. I am anxiously awaiting some Treasury Regulations explaining the IRS's view.

[R. Butler]

Interesting point about FICA/FUTA, hadn't really considered the possibility.

In regards to hardships, 636(a)(1) provides that ....an employee is prohibited from making elective and employee contributions....Wouldn't the catch-up contribution be an employee contribution?

In regards to the term "comparable", it seems pretty clear to me, but I could be missing something. I am pretty much a textualist. Unless the law leads to an unconstitutional result on its face, I don't try to determine the collective intent of 535 members of Congress.

I agree that more guidance is needed. My biggest concern with the catch-up, is still whether a failed ADP test is a deferral limitation. I don't see it that way, since you can correct the test without refunds.

[Guest ERISAweasel]

Originally posted by R. Butler

In regards to hardships, 636(a)(1) provides that ....an employee is prohibited from making elective and employee contributions....Wouldn't the catch-up contribution be an employee contribution?

In regards to the term "comparable", it seems pretty clear to me, but I could be missing something.  I am pretty much a textualist.  Unless the law leads to an unconstitutional result on its face, I don't try to determine the collective intent of 535 members of Congress.

I agree that more guidance is needed.  My biggest concern with the catch-up, is still whether a failed ADP test is a deferral limitation.  I don't see it that way, since you can correct the test without refunds.

1) Hardships: Excellent point. So, does 636 trump 631, or vice-versa? Also, 636(a) merely commands IRS to change its regulations... are the regulations being given 'force of law'? It seems that it could be argued that 631 should trump 636 because the suspension of deferrals is merely a "plan limit" and isn't required by the Code (depending, I suppose, on whether it is a "comparable" plan limit... but I've already flogged that horse).

2) Divining Congressional Intent. What, exactly did Congress mean by "comparable"? It could mean "any limit" on elective deferrals contained within the plan, or it could mean "a limit comparable to 402(g), 404 or 415" which limits elective deferrals. To me, this creates a latent ambiguity. In order for a law to be valid, it must be enforceable. How can you enforce an ambiguous law? Someone has to figure out what the law means -- and if Congress can't write the statute clearly, then they are in effect punting to the judicial branch who are put in the unenviable position of trying to figure out what Congress meant (assuming Congress thought this stuff through). Constitutionality is an entirely different matter.

3) ADP Tests. 631(a)(3)(B) specifically references 401(k)(3)... 631(a)(3)(A)(i) does not. Again, applying canons of statutory construction: the inclusion of the 401(k)(3) ADP-test reference in one section of EGTRRA makes the exclusion of such reference in another section significant -- so there's a good argument that EGTRRA does not say that an ADP failure invokes a participant's ability to make catch-up deferrals. If it did, wouldn't it be an end-run on the ADP rules?

Hopefully someone from IRS is reading this and will clarify things.

[Belgarath]

Wow! I had already read the law, committee reports, etc., and reached the conclusion that if the plan limits the participant's deferrals, the catch-up provisions apply. Even after reading the somewhat philosophical discussion on this thread, I remain convinced that is true. I'm not going to rehash my reasoning, because most points of view have been hashed and rehashed, but I'm not losing any sleep over this, because I agree with Bob R. - I could work myself into a frenzy and get nowhere, because IRS guidance is needed, and I believe they will provide it soon - they recognize that folks are grappling with this issue. But this has been interesting reading.

[Guest ERISAweasel]

Belgarath:

As you are apparently a fellow David Eddings fan, I'll hopefully, mercifully end this thread by agreeing with you that IRS guidance is needed.

P.S. Say 'hi' to Aldur for me.

[Belgarath]

ERISAweasel - will do. And for all folks reading this thread - I was just speaking with one of my cohorts, who has a friend in a big Washington law firm with "inside" contacts at Treasury. This is now at least third hand, but evidently Treasury said they would have guidance on this by the end of October. Let's hope it's true.

[MGB]

By "end of October"???? I don't know who this person talks to on the inside, but Sweetnam (Treasury Counsel) keeps saying before the 15th, and may be tomorrow or early next week.

[Belgarath]

Even better! Thanks for passing this along.

[stephen]

Or in other words there should be plenty of time for the speakers at the ASPA conference to comprehend and be able to pass along to us some understanding of "the catch up" and how it is to work.

Maybe Treasury will say the first $1,000 is catch up...

[Guest Keith N]

I know the way the IRS works, and sometimes when they say "by the 15th", they mean 15 months, but it's now the 17th and I just wanted to make sure I didn't miss any releases since I have a meeting tomorrow with a client who is very interested in this.

Has anything been released?

[MGB]

The proposed regs have not been released.

Last Friday they released guidance that catch-up should be included in the total for elective deferrals on a W-2, but that is all.

I was on a conference call with Sweetnam and Drigotas (lead attorney on the catch up guidance) on Monday (it was set up for that time because they were sure that it would have already been released), and they kept saying "really, really, REALLY shortly." That is a step up from "very soon." The way they talked, they are obviously done, and it is just the bureaucracy of getting it rubberstamped enough times in getting it out.