Catch-up Contributions and 401(a)(17) Limit

[rocknrolls2]

Let's assume that an employer has a high plan-imposed limit on how much highly compensated employees can make as elective deferrals. Also assume that the plan almost never fails the ADP test. The plan has historically stopped ALL contributions once the participant's compensation exceeds the 401(a)(17) limit (i.e., $200,000 for 2002). Most top execs max out on the 401(a)(17) limit by mid-March when a bonus is paid. The question is: if the plan introduces catch-up contributions mid-year, can an exec who has contributed the maximum $11,000 elective deferral and reached the $200,000 limit on compensation before the catch-up contribution is introduced to the plan, be permitted to contribute the $1,000 catch-up contribution shortly after it is introduced under the plan?

[Guest JEP]

Assuming the exec is a catch up eligible participant (i.e. attains age 50 or older by the end of the plan year) I don't see why he couldn't make the catch up contribution. As I understand the catch up contributions, they are not dependant on the 401(a)(17) limit, but rather a plan imposed limit, section 415 limit, or 402(g) limit. As you have stated in your post, he has already met the 402(g) limit and could therefore defer an additional $1,000 in catch up for the 2002 plan year.

[QDROphile]

Let's ask another question. Who should be shot for running the plan the way it has been run -- curtailing elective contributions when compensation reached the 401(a) (17) limit? And has that practice disqualified the plan?

[rocknrolls2]

QDROphile,

I raised the point in the past and was told it was a systems limitations. They have poetic license, this should today be called systemic license.

JEP,

While your point is well taken, I did not see anything in the EGTRRA language or the proposed reg language permitting people to get around 401(a)(17).

[Guest JEP]

sborrow,

I may be missing something, but how does having compensation in excess of the 401(a)(17) limit relate to deferrals, whether they are catch up or normal k deferrals? You said in your original post that the plan set a high deferral limit, so in theory a HCE earning $200,000 or more could defer upto 6% and hit the 402(g) limit. Then assuming they are catch up eligible, they could defer another $1,000.

If I have interpretted something wrong, please let me know.

[QDROphile]

I think you need poetic license to permit an interpretaion of the plan that justifies what was done.

Kidding aside, a system limitation does not excuse an operational error. But who cares, it's only the rich who were harmed.

[rocknrolls2]

Further clarifying a point I intended for JEP, Code Section 414(v) and the proposed regs allow catch-up contributions to ignore many qualification requirements, such as 415. 401(a)(17) is not enumerated in the list of qualification requirements that can be ignored. Thus unless the plan were redesigned to permit participants to make deferrals at a lower percentage throughout the year (e.g., a participant earning $300,000 makes deferrals at the rate of 4% of pay up to the 402(g) limit), those eligible participants who had earned more than $200,000 before catch-up contributions were introduced would be out of luck.

[Disco Stu]

To reiterate points made by previous posts in this thread and ad nauseum in other threads on these boards in past years...the 401(a)(17) limit has nothing to do with allowing or disallowing salary deferral contributions at different points during a plan year for those individuals earning more than the limit.

The reason 401(a)(17) is not mentioned as one of the limits that ketchup contributions are allowed to exceed, is that it does not limit salary deferrals in the first place.

[david rigby]

In JEP's first comment above, it is stated that the catch-up can be made if the EE reaches one of three limits: 402(g), 415, or a plan-imposed limit. I belive the correct interpretation would be: if the EE reaches the least of the 402(g) limit, a plan-imposed limit (if any), or a limit imposed by the ADP test. IRC 415 does not figure in this test.

[rocknrolls2]

In reply to Pax, I would agree with your interpretation. In fact the Code as amended specifically exempts catch-up contributions from 415. Thus, it would be possible for a participant in 2002 to have a total allocation of $41,000 (the $40,000 in annual additions) plus the $1,000 catch-up for age 50 and over.

In reply to Disco Stu, I would disagree. The IRS Regulations at Section 1.401(a)(17)-1(B) clearly provide that the compensation limit is used to determine plan allocations. Since elective deferrals are allocations, I fail to understand how you could say that 401(a)(17) restricts deferrals, unless the method I described in a previous post is used.

[Disco Stu]

There are a lot of issues that get beaten to death on these boards, but this one has got to be the deadest of the dead. Instead of rehashing old arguments and using up more space on Dave's servers, I'll respectfully suggest that you use the search engine to review what's been discussed in the past.

[QDROphile]

sborrow:

Sorry to be so aggressive, but a notion so wrong as the one you hold needs to be wiped out like a disease. There are many threads that discusss this issue and the answer is certain. The 401(a)(17) limit does not require anyone to be cut back from a full $10, 500 elective deferral (the one possible exception is not worth discussing). Anyone who designs a plan to provide otherwise is incompetent and anyone who adminsters a plan otherwise is probably violating plan terms.

[Guest shafter]

Is no one concerned that the 20 or so states with income tax laws that don't conform to IRC may chose not to conform (I have been unable to confirm that California already refused to conform.) For example, catch up contributions might be taxable income in a given state (worse yet, earnings on catch contributions might be taxable income). Any of the rollovers that are tax deferred at the federal level because of EGTRRA may be taxable at the state level.

[Guest Jennifer Reid]

401(a)(17) provides the limit on the compensation amount used to calculate percentages for plan purposes, but absolutely does not provide that salary deferrals must be made from the first $170,000 (or whatever the limit is for a particular year) paid. An HCE earning $100,000 per month can defer nothing for 11 months and defer $10,500 from his last month's salary, and his deferral percentage for the plan year will still be 6.176% because the 401(a)(17) limit is applied to calculate the percentage. Any plan that allows deferrals to be made only from the first $170,000 earned is not doing so because of 401(a)(17) but is doing so because its payroll provider has incorrectly interpreted 401(a)(17) to make its job easier and convinced the employer that the law requires it. I agree with QDROPhile that this practice jeopardizes the plan.

[Guest JB2]

Can I clarify the compensation issue with an example. I'm trying to determine how the salary deferral election is handled. Disregarding payroll systems issues....

2002 deferral election is 3%. In 2002 I earn $300,000. To determine if the actual dollar contribution is in line with my election, is my salary deferral amount 5% of $200,000 or 5% of $300,000?

I think it is 5% of $200,000 ($10,000). If I use $300,000 then I effectively have deferred 3.67%.

[Guest Jennifer Reid]

You should determine the dollar amount you want to defer and convert that dollar amount to a percentage of your periodic compensation. You make $20,000 per month and wish to defer the full 402(g) limit of $11,000. If your employer computes your match on a per payroll rather than annual basis, you want to spread your $11,000 over the full 12 months. Your election, for payroll deduction purposes, should be for $916.66 per month, or 4.58% of your $20,000 per month compensation. Your deferral percentage for matching calculations and testing purposes, however, will be 5.5% based on the 401(a)(17) limit of $200,000.

[Guest asire2002]

Ignoring whether and how 401(a)(17) impacts regular deferrals, am I alone in thinking 401(a)(17) does not apply to catch-up contributions? I recognize that there is no specific exemption from 401(a)(17) in new Code Section 414(v), but the intro language in 414(v) states a plan will not be treated as failing ANY provision of this title (and "this title" includes 401(a)(17)) solely because catch-up contributions are permitted.

[mbozek]

Isnt the a17 limit a limit on the amount of aggregate comp which can be used to determine benefits in a plan year. It is not a limit on the source of the funds that are used to make contributions. For example if a plan participant makes 400,000 year and elects to commence salary reduction on July 1 why cant that person defer 12k including catch up on comp paid in the last half of the year?. Many plan participants make 401(k) contributions from comp paid in the last month or two of a plan year. I have never seen a plan provision which restricts this practice for persons who have exceeded the a17 limit.