Catch-up Contributions

[Guest t936]

I have recently been presented with some unsettling information concerning the requirement that all plans be treated as one plan for purposes of catch-up contributions under the new legislation. For example, an employer maintains a 401(k) plan and makes certain employee groups ineligible for the plan. Some of the ineligible employees participate in a defined benefit plan. An ineligbile participant's benefit in the defined benefit plan is limited by Section 415. It appears that the new legislation can be read to require that the participant be allowed to make catch-up contributions in the 401(k) plan even though the participant is not eligible to participate in the 401(k) plan.

Does anyone have an opinion on this example? Also, it would appear that if one subsidiary adopts the catch-up provisions all other subsidiaries in the controlled group will be required to implement the catch-up provisions. This could be a problem for American subsidiaries of foreign companies that operate independently here in the U.S.

Are there other issues and problems that you have noted with catch-up contributions?

[MGB]

Treasury is aware of these and other problems with the catch-up rules (e.g., people with multiple employers - how do you know they hit the 402(g) limit?).

One possibility that they are looking at is to apply 410 rules. For example, disaggregation and separate lines of business. Those in union-negotiated wouldn't need to be included in the "everyone must" requirement. This would also disregard the DB issue that you state.

Under the current language, the DB people you refer to would need to be allowed to do the catch up in the DB plan (ALL plans can have catch ups, not just 401(k)). Note that participants in the DB have a 0% deferral limit in the plan. Therefore, everyone over age 50 is eligible for catch up. This may be overridden with the 410 approach that Treasury is considering.