Catch-up Guidance

[Guest T-BONE]

The proposed regulations on catch-up contributions released this week do not require that a participant have made elective deferrals in excess of an otherwise applicable limit in order to be a catch-up eligible participant. They give an example where a participant is allowed to make elective deferrals in an amount PROJECTED to exceed the otherwise applicable limit.

There is also a "universal availability" requirement where participants must be given the same "effective opportunity" to make catch-up contributions. An example is given where the plan provides participants with an opportunity to make catch-up contributions on a payroll-to-payroll basis.

Additionally, there is a provision stating that the amount of the elective deferrals in excess of an applicable limit is generally determined as of the end of a plan year.

Do all of these provisions, read together, allow an employer to make catch up contributions at the participant's election without having to determine if they are currently exceeding a limit, and without having to project if they will exceed the limit, so long as at year end the catch-up contributions that do not exceed an applicable limit are included in the ADP test?

There is no guidance in terms of having to obtain a specific catch-up election by the participant. If a participant elects 20% of comepensation, can the employer automatically contribute an extra $1,000 as a catch-up once the employee hits the 402(g) limit??

[Guest JimD]

If the plan has no deferral percentage limit I think the catch-up can be made automatically. Maybe the deferral form should say that or you could give the participant another election. Let me change your example a little and ask another question. What if the plan has a 20% deferral limit and the participant earns $40,000. In this situation I think you need another election by the participant to have the catch-up made. Do you?

[MWeddell]

Yes to Jim D's question. Even if the plan allows any catch-up contributions, then the employee earning $40,000 and who contributes $8,000 under a 20% maximum election must also be allowed to make catch-up contributions.

T-BONE, I didn't read the regulations the way you propose. It sounds like the plan administrator or payroll makes an initial determination of what is a catch-up contribution that seems reasonable based on that payroll period and what is projected to happen and then the final determination is made at the end of the year. I don't believe that one could accept the participants' word for what constitutes catch-up contributions initially without doing any checking. I agree this isn't clear though.

[Guest T-BONE]

Is there any harm in accepting the participant's word for what portion of the deferrals are catch-up contributions if at year end you will inevitably include the correct amount in the ADP test at year end?

If the plan administrator has a duty to check to see if the participant is projected to exceed the limit, this could be a real administrative headache.

Using the payroll-to-payroll example in the regs, where a participant's current election is the maximum deferral percentage allowable under the plan, it appears you can permit a catch-up. This raises two questions: (1) Is the administrator also required to determine if the participant has exceeded 20% YTD, or is it OK to accept a catch-up based on that particular payroll election? (2) Assuming that a per-payroll limit one of the "employer provided limits", does it matter if at year end the participant has contributed less than 20% in regular deferrals (I would think you would still need to include the catch up contributions in the ADP test using this example)?

[MWeddell]

The harm might be disqualification depending on how the IRS views the matter. If the IRS doesn't really care about the during the plan year projections and only cares that at the end of the year the catch-ups are corrected computed and limited, then this may be a case of "no harm, no foul."

[Tom Poje]

hopefully this will be discussed further at the ASPA conference and we can get a better idea.

The ADP failure is an interesting one. The proposed regs say the ADP limit is set after figuring corrections.

This is different than saying plan fails, I will treat some of the deferrals as catch up and then retest.

for example, suppose i have 2 hces, one age 55 and the other age 45. plan fails, I have to refund $, and the only refund is due the 45 year old. so the catch up option doesn't help under the proposed regs.

But suppose I had treated part of the age 55's deferral as a catch up initially. Now plan passes (or fails by a smaller amount), so no refund required (or certainly a smaller refund would be necessary) This does not appear to be permitted.

[Guest JimD]

It seems clear that you determine a catch-up at year end. The deferral is not identified in two pieces during the year. But it also seems that the participant has an election. So my thought for a plan that has no deferral limit is to include on the deferral election a staement that says if you are over 50 the catch-up will be made after the $11,000 is reached unless you advise not to. For a plan with a deferral limit I think a separate election by the participant needs to be made. For example, on the deferral form say "after the plan limit is exceeded ($6,000) in my example above advise Yes or No if you want the $1,000 catch-up deferred. The employer can then tell payroll what the deferral limit is for the participants over 50. Anyone have any thoughts on how employers and payroll will deal with these questions?

Tom: My thought on your example is that if the ADP fails and the 45 year old is to get the refund no catch-up would attributed to 55 unless 55 exceeded $11,000 or a salary deferral plan limit. In those two cases there would be a catch-up.

[Tom Poje]

I'm not disagreeing with the proposed regs, merely pointing out what they seem to say.

suppose you have the following:

comp def

45 year old 170,000 3% $5100

55 year old 100,000 4% $4000

nhce rate = 1.5%

so plan must average 3%

so 55 year old (old rules) would be at 3% and refund $1000

but the refund goes to the 45 year old.

proposed regs say that the ADP limit is the highest $ amount after application of the test.

Now, you now darn well someone is going to argue

hold on. in effect, for the current year the plan has a limit of 3% to pass testing. therefore cap the 55 year old at 3% and treat the remainder as catch up.

If last year's ADP for the NHCE was 1.5% and you use prior testing, then you are penalizing the 45 year old. He deferred what he should have to pass testing. it is just interesting what can happen when you look at what might happen.

[Guest JimD]

Tom: You raise another area of questions-prior year testing. Do you think there is any argument that " this is a limit contained in the terms of the plan not required by the IRC"?. Therefore 55 reached an employer-provided limit. As you point out it is fairer at least in your example.

[Guest ndt123]

Three points:

The regs seem to require that employer provided limts be specifically spelled out in the plan. For plans with administrative caps that limit HCEs, this would be a huge hurdle for them in setting up the catch-up. I think we need to get more insight on their intention, but if that's how it works, it's a huge negative for mid and large size plans.

There is no transitional relief worth shouting about in the regs. If I am a plan sponsor that is part of a controlled group, I risk disqualifying my plan if I adopt the catch-up and one related employer's plan does not. Very common issue with mid and large plans, and enough to make a sponsor reconsider offering the catch-up at all (until it can be sure of what the entire controlled group is doing).

Finally, monitoring the affect of adding additional deferral opportunities for employeees to contribute the catch up (assuming the plan limit is less than 100%) is difficult, if not impossible to do. Payroll vendors and plan sponsors can not do it, and I think most recordkeepers will have issues with it.

Comments?