EGTRRA - Catchup contributions -- ADP / ACP

[Guest Factster]

Can anyone explain how catch up contributions will impact the ADP / ACP test. Is it included in the tests, can you make a corresponding match for the contribution? Is there a good reference for this question?

[R. Butler]

Pursuant to §631(3)(B) of the Act, it does not look like the catch up contributions factor in the ADP test.

A match is not required on the catch-up contributions. If a match is made, it looks like it would factor in the ACP test. I don't see anything that states otherwise.

[MGB]

Although the catch up is not subject to the testing, it can impact it. This will all depend on how the Treasury decides in its guidance as to how to signify catch up contributions.

For example, let's say that an HCE defers $10,000. Knowing that their plan regularly fails an ADP test, an election is made (assuming Treasury says this method is an allowable one) that any amount that may not be recognized as a elective deferral be automatically treated as a catch up contribution. In the test, let's say that this HCE is limited to $8,500, and gets a $500 catch up.

That seems all clean, except: There is an effect on the under-50 HCEs by doing this. There are ways to construct this example further that hurt the under-50 people. Let's say that because the test failed, some others had their deferrals limited, too. However, they are not allowed catch ups, so their deferrals are returned (or recharacterized as after-tax).

If, on the other hand, this HCE had elected an $8,000 deferral and a $1,000 catch up from the start, it may be that the under-50 people no longer need a return of their deferrals and the test passes. Of course, our HCE now has not hit the limit in the test, so they are not eligible for a deferral. Naturally, a procedure may be in place (assuming Treasury allows this), to shift some of the $1,000 catch up to a deferral because our HCE is not at the limit. In this case, it may only take $100 or $200 to "max out" the ADP test without affecting other HCEs.

So, depending on the procedures in place to determine which money is elective deferral and which is catch up, there can be adverse consequences in the ADP test. These are the issues that Treasury is struggling with in coming up with guidance on how to establish procedures for signifiying what is deferral and what is catch up.

Another example: Assume an HCE designates maximum deferral plus some catch up from the beginning of the year and it is withheld ratably during the year. The HCE terminates late in the year. Now, all of the money may need to kick down to deferral because the person is not eligible for the catch up (did not hit any limit). This could affect the ADP just like the first example.

For a general discussion of the law (no examples like this, though), see:

http://www.milliman.com/empl_ben/publicati...eginfobulletins

[R. Butler]

Does §631(5)(B) allow the participant to elect a "catch-up" contribution if he/she hasn't deferred the maximum available under 402(g) and the doument? My initial understanding is that the participant cannot make a catch-up deferral until he has maxed his deferral out under the plan doument or code limit specified in §631(3)(A)(i).

[MGB]

That is exactly what Treasury is struggling with for their upcoming guidance...when does the participant designate the catch up?

One of the main problems is with plans that do not "true up" matching contributions. I.e., if a high paid person defers a high percentage of their compensation, and get cut off by 402(g) part way through the year, the employer only matches until the cutoff. The participant loses a possible match. Because of this, participants in these plans spread out their percentage so that they have a deferral in every pay period (try to hit the 402(g) limit exactly by the end of December) to get the maximum match. When can this person make a catch up? If they can't designate a catch up until they actually reach a limit, people like this would need to scramble in December to come up with their catch up instead of designating it during the year.

Similar problem as above: What about eligibility for catch ups under ADP testing? All an HCE needs to have is a restriction on the amount deferred due to ADP testing, and they are eligible for a catch up. How can they do this before the end of the year? The only way is to allow the catch up during the year and then decide after the ADP test as to whether it was OK.

I could write out about 20 pages of examples of problems with this that have been discussed over and over with Treasury. They really have a mess on their hands as do programmers of systems and administrators that need to handle catch ups next year.

The bottom line is that a person needs to have the flexibility to elect a catch up at the beginning of the year. One proposal that has been floated to the Treasury that has merit is to base eligibility for a catch up on the PRIOR year's elective deferrals. Then all of these problems would go away.

[R. Butler]

I guess my questions then is, does a failed ADP test restrict deferrals? I don't really see it as restricting deferrals in the same way that 402(g), plan doc. limit, etc. restricts. Particularly since you don't have to refund deferrals to fix the test; the sponsor could correct with QNEC's.

[MGB]

Language of the new law:

"414(v)(5) Eligible Participant...

(B) 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 described in paragraph (3) or comparable limitation or restriction contained in the terms of the plan."

Paragraph 3 includes a reference to 401(k)(3), ADP test.

That was always the Congressional intent in enacting this provision.

[R. Butler]

I hope your right. I just don't read it that way. All of the limits are referred to in (3)(A). The reference to 401(k)(3) is in (3)(B) and it appears to be there only to state that the catch up is not included in the ADP test.

I have my J.D. I am more of a textualist. I don't like to try and find the collective intent of 535 members of Congress unless the law leads to an unconstitutional result otherwise.

[stephen]

Suppose Susan, age 60, earns in excess of $200,000 during 2002 and defers $12,000 ($11,000 in deferrals and $1,000 catch-up). The company match is 50% up to 6%. What is Susan's match?

$5,500 (50% of $11,000) or $6,000 (50% of $12,000)

Is this a document specific question?

[Mike Preston]

Document specific provision. But almost all sponsors I'm aware of are choosing $6,000. Given that the IRS has been very generous in their determination of catch-up contribution timing, it is almost impossible to administer a match any other way.

[mbozek]

IRS position on catch ups appears to be as follows

(1) catch up contributions are excluded from 415/ADP/402(g) tests

(2) matching er contributions which are attirbutable to catch ups are counted for ACP test

(3) plans can either require that catch ups be made at same time as regular contributions (e.g. $20 a week) or only after regular contributions have been maxed out. Presumably creating a parallel track of catch ups makes it easy for record keepers to refund excess catch ups.

(4) excess catchups can be used to increase regular sal reduction by recharacerizaton or refunded.

(5) All the IRS cares about is that ADC/ACP test is met at end of yr.

IRS has issued notices on catch ups which are are the web site.

[stephen]

Thank you for your responses.

Is there a specific cite for this? I went to the IRS website and searched for "matching catch-up contributions acp test" and didn't get any hits.

Wouldn't matching the catch-up lead to a non-discriminatory match? HCE defers $12,000 (only $11,000 counts for deferral purposes) and gets a $6,000 match. This is more than 50% up to 6%.

[Mike Preston]

http://www.benefitslink.com/taxregs/1.414v...-proposed.shtml

are the regs.

For non-discrimination purposes, the catch-up contribution is treated just like a regular deferral except that the contribution itself is exempt from the ADP test. Hence, the individual you describe is not getting a match of $6,000 on a "deferral" of $11,000, but a match of $6,000 on a "deferral" of $12,000.

Hence, it is non-discriminatory.

[stephen]

Thank You

[Guest ndt123]

In my experience, less than 10% of plans are matching the catch-up. I work primarily with plans that have > 1,000 participants (up to 200k+), so I can't speak for small companies.