Suspensions and Catch-up Contributions

[MWeddell]

General question under the new proposed catch-up contributions regulations: can a participant who is suspended from making elective deferrals choose to make catch-up contributions? (Let's assume the plan in general permits catch-up contributions).

My own vote is that a suspension is not a limit, and therefore a suspended participant cannot make catch-up contributions. It's unclear enough that I wanted to collect others' opinions.

Follow-up question is does it matter whether the limit is required by law (where it doesn't seem to have made the list in the regulation) or an employer limit? 4 specific examples designed to explore this:

a) Plan follows hardship withdrawal safe harbor rules and suspends future elective deferrals for 6 months for distributions taken after 12/31/2001. Can participant make catch-up contributions during that suspension?

b) Plan follows old hardship withdrawal safe harbor rules and isn't changed for EGTRRA so the suspension period is 12 months. Can participant make catch-up contributions during the first half and/or second half of the suspension?

c) Plan uses more than one resources test. Let's say it uses the general test relying on the employee's representation but also uses the safe harbor test with the 6-month suspension. Arguably the suspension is not legally required but a matter of cautious plan design. Can suspended participant make catch-up contributions?

d) Suspension is clearly a matter of plan design only. For example, employer contributions may be withdrawn by those with 5 years of plan participation but only if participant is suspended for 6 or 12 months. Can a participant with that type of suspension make catch-up contributions?

[MGB]

My first impression is that a suspension is an allowable limit, but I'd be interested in hearing other's insights.

However, if the suspension is less than a year, there are technical difficulties involved. To be eligible, the entire calendar year is counted in the regulations (note the examples of beginning to make catch-ups in the beginning of the year, and then stop making elective deferrals altogether - if the total deferred does not reach a limit, then it is all deferral; no catch-up). They do address this in the regulation by allowing a time weighted-average of the limits in place during the year if all of the limits are employer-provided. If the only employer-provided limit is during the suspension period, I am not sure how you would dovetail that in with a statutory limit for the remainder of the year in order to see if the actual deferrals for the nonsuspension period exceeded the weighted average limit.

Good question! Certainly needs more said on it by the IRS.

[Tom Poje]

I vote no, thumbs down.

The proposed regs that just came out say

"a participant is a catch up eligible participant....if the participant is otherwise eligible to make elective deferrals under the plan."

Thus, I would argue the participant is not otherwise eligible to defer, since his right has been suspended, not because he hit a limit.

the participant certainly doesn't fall under the ADP limit.

IT is not an employer provided limit (e.g. can only defer up to 10%)

so that leaves you with arguing statutory limit. My understanding these limits would only include the 402(g) limit ($11,000) or annual addition limit, not that a participant is limited to 0 since he had a hardship. There is nothing in the proposed regs addressing hardships.

[MGB]

I would consider the hardship suspension an employer-provided limit. This is not mandatory, it is only a safe harbor to exhibit financial need (except in the case of a safe harbor 401(k) plan).

The twist here is that the person is eligible to defer during part of the year.

I am not convinced the answer is yes, but I wouldn't count it out yet.