Catchup provisions and contribution limits?

[Guest Jeff Salisbury]

Greetings,

For people 50 and older who can make an additional $1,000 contribution to their 401k or 403b next year: can they contribute the extra $1,000 regardless of their income (even if they are only eligible to contribute say $2,000 to their account)?

Regards,

Jeff Salisbury

[Guest Yanikoski]

The $1,000 extra amount is an increase to the elective deferral limit (Section 402(g)). Any contributions must still meet any other applicable limits, e.g., the 100% (formerly 25%) of includible compensation limit, the $40,000 (formerly $35,000) total limit on employer + employee contributions, and the practical limitation that you can't defer more than 100% of your actual compensation, even if your "includible" compensation is higher (as it easily can be for part-time employees).

[MGB]

You can contribute the extra provided you have hit any kind of limitation. Those limitations can be legal limitations (e.g., $11,000), or limitations within the plan (e.g., 10% of pay).

However, the plan will need to be amended to allow such catch-up contributions. The employee cannot force the plan to allow catch-up contributions on their own. The employer needs to make the decision to allow them.

[Guest shafter]

If, as has been suggested, plans change the deferral limits to 50%, outside of HCE's limited by ADP/ACp limits, how many people are really going to hit the plan limits?

[Guest Yanikoski]

That's a very good question, and it remains to be seen. Personally, I think that the biggest risk of hitting the limits will be for LOW-paid, part-time people. These often are non-breadwinners in a family, and a lot of them, especially those in their 50s and 60s, would probably want to put 100% of this "extra" family income into their retirement plan, if they could. But generally, these people won't be hitting the elective deferral limit, though some of them will.

[Guest RJT]

As a strictly technical matter, the age 50 catch is not really an increase in the 402(g) limit. It is a new 414(v) limit, which actually has little relation to 402(g). Even its defintion of elective deferrals is different from 402(g), as it includes deferrals into 457(B) plans.

I think this is more than just a minor technical difference, particularly when you get to plan drafting. You'll need to be be careful not to incorporate all of the 402(g) rules when amending your plans. It may be best just to create a new 414(v) contribution.

Even when testing, it may be best just to establish a separate 414(v) routine.

[MGB]

Yanikowski,

The $40,000 limit on all employer and employee contributions does not apply to catch up amounts. With a $1,000 catch up in 2002, the total maximum is $41,000.

[Guest Yanikoski]

I guess you could read the legislation that way, though I don't, and I don't really think that is what was intended. Does anyone else have any insight on this?

[Guest RJT]

414(v)(3)(A) states that the catch "shall not be subject to....415". The $40,000 cap does not apply, but 414(v)(2)(A)does cap it to the lesser of the catch up limit or the difference between 415 comp and the total elective deferrals (as defined by 414(u)(2)©.

[Guest Yanikoski]

I gladly concede the point. Thanks to both MGD and RJT for straightening me out on it. (RJT, this is not the first time you've had to set me straight. Thanks again!!)

[Guest Yanikoski]

In reviewing the brand new regulation (1.414(v)-1) on this subject, it is clear that only elective deferrals are eligible for the age-50 catchup. I think that we therefore need to specify that if the $40,000 limit can be bumped to $41,000, this can happen only where the contributions consist of both employer contributions and salary deferrals. An employer could not contribute $41,000 to a plan on behalf of a participant who is 50 years old in 2002. Right?

[MGB]

Correct. I thought that was clear in the law.