Catch-up Contributions and the "Employer Provided Limit"

[Guest wolfman]

I understand the issue where age 50+ participants that are contributing at the maximum deferral % allowed under the plan are allowed to make catch-up contributions over this amount. Say you have a situation where the plan administrator is holding HCEs to a 4% cap due to testing problems as allowed under the plan (but this specific limit is not stated). It seems that these HCEs will not be able to make catch-up contributions since they are not at the prescribed limits. Other opinions? Thanks

[MGB]

I agree.

In a phone conference with Elizabeth Drigotas (one of the lead Treasury attorneys on the proposed regulations), she stated that administrative limitations that are not in the plan document do not qualify.

An even bigger issue is that she stated that the Treasury believes that these kind of restrictions are illegal because they are not definitely determinable benefits. But, rather than broaching that subject, they left it cloudy in the preamble to the proposed regs. However, expect them to issue something in the future that says this practice is no longer allowed.

[Guest JimD]

The IRS is concerned about the HCE's!!! Seriously, I think the limits need to be put in the plan in cases like this where for example only one is 50+ and they want to plan on making the catch-up. Because of the way corrective refunds work its hard to plan otherwise. In regard to the "administrative cap" some employers determine what the allowable percentages will be to pass ADP, not necessarily limit each HCE to 4%, but have higher % HCE's cut back so ADP is passed. This also prevents a refund to an HCE at a lower % level. Isn't that what the prior year testing method is all about although catch-ups may be another reason not to use that method and use deferral limits only for HCE's.

[MWeddell]

If the 4% limit on HCEs is illegal, then it can't be enforced and a plan that imposes the 4% limit anyway violates ERISA and probably has a disqualification error. That has nothing to do with catch-up contributions.

If the 4% limit is legal, then it is a plan limit and plans that offer catch-up contributions must offer them to HCEs who want to contribution > 4% of pay.

So is the 4% limit legal? Many plan documents will give the plan administrator discretion to set a lower limit for HCEs as is considered necessary or desireable to pass the ADP test. By analogy to the administrative discretion allowed in the 411(d)(6) regulations, that's probably specific enough to constitute a definite allocation formula so that the 4% limit might be legally enforceable. There is some language in the proposed catch-up regulations that bears on this issue, but I don't read that language as intending to change what constitutes a definite allocation formula.

[Tom Poje]

interesting, rather than 4%, why not a cap of 2 plus last years NHCE avg. It would change each year, but would be definitely determinable.

[Guest wolfman]

Thanks for all of the comments and suggestions. Is the consensus that an administrative election to limit the HCEs at a lower level to help ADP, does not qualify as an "Employer Provided" limit and therefore is not a catch-up threshold for HCEs?

Thanks!

[MWeddell]

No, wolfman, that's not what I'm saying.

The 4% limit on HCEs is either illegal and shouldn't be there at all or else it is a plan limit for which HCEs should be eligible to make catch-up contributions in excess of it. There's no way you can have the 4% limit and not allow catch-up contributions for amounts over it (unless the plan doesn't allow any catch-up contributions at all).

[Belgarath]

I agree - can't do it if no specific plan limit. Trying to think of a workable solution off the top of my head - how about this? The plan administrator performs the testing at some poiont during the year based upon assumed salaries, and determines that the HCE should be limited to 4%. Checks with those HCE to find out if they want catch-up, (or already knows this from checking with them at beginning of year)

Based upon this information, the plan administrator calculates the percentage for each HCE that would enable them to have deferred the full amount, plus catchup, by the end of the year. Then the HCE makes a NEW election to have that percentage deferred for the remainder of the year. Of course, you can't force the HCE to do this...

Assuming the testing assumptions were accurate enough, the HCE will have run up against the ADP limit, and the contributions over and above that will be valid catch-up contributions. If they don't run up against the ADP, then they will simply be valid elective deferrals. The only danger I see here is that the testing assumptions may be so far off that they don't end up getting a full catch-up.

Having said that, I should hasten to add that I'm not involved in the nuts and bolts of daily 401(k) administration. Those of you who are can probably point out all sorts of reasons why this won't work!

[Guest PAL100759]

I'm totally confused! It was my understanding that a reduction in the HCE's deferral %'s for ADP/ACP testing:

(1) Is a valid limit - my plan document provides authority to reduce the deferral percent of the HCE based on projected test results and I have a current determination letter on the plan, and

(2) Will qualify as a plan limit for purposes of the catch-up contribution.

However, the actual amount of contributions that are regular vs. catch-up (due to the HCE limit) can't be determined until after the ADP/ACP testing has been completed at the end of the plan year. Basically making it a nightmare to administer for those of us (with non-calendar year plans) who try to be a little proactive and prevent refunds.

I'm sure that Elizabeth Drigotas was a speaker on at least one of the conference calls I've participated in. I don't remember her saying anything about the practice being illegal even though there was a detailed discussion around how some employers test and limit monthly (as we do). Can you tell me when this call took place and if it was with an industry group such as ERIC or ABC?

Thanks.

[Belgarath]

I think your situation is different. You hit the nail on the head when you say that your document contains the authority to reduce based upon projected test results. In this case, I believe you are ok. Many documents don't contain this language, however, and those are the ones that I'm talking about. I'll be interested to see what folks think on this.

[Guest ndt123]

I participated in the ABC call, and Elizabeth speicifcally stated that they were not intending to do away with the ability to impose a discretionary limit on HCEs. If the plan allows for it, it can be applied, and will be considered a limit for catch-up purposes.

We have verified this multiple times with Treasury since the resulation were issued.

If your document does not provide the ability to impose a limit on HCEs, you do noit have a plan limit for catch-up purposes.

[Dawn Hafner]

I would like to re-open this thread re whether an ER provided cap must be in the plan document or not. I find the preamble to the final regulations a little confusing in this area. Below is what is mentioned in the final regs:

"An employer-provided limit is a limit on the elective deferrals an employee can make under the plan (without regard to section 414(v)) that is contained in the terms of the plan, but is not a statutory limit or the ADP limit. A number of commentators suggested that the regulations specifically provide that a limitation on elective deferrals set by the plan administrator in accordance with plan terms is a limit contained in the terms of the plan. As noted in the preamble to the proposed regulations, the condition that an employer-provided limit be contained in the terms of the plan is intended to correspond with the requirements of §1.401-1 that a qualified plan be a definite written program and provide for a definite predetermined formula for allocating contributions made to the plan. Accordingly, if a limit is otherwise permissible under a section 401(k) plan, the limit will also satisfy the requirement in section 414(v)(5) that the limit be contained in the terms of the plan."

I read this to basically say that if the limit is considered definite under Treas. Reg. 1.401-1 then it will be an ER provided limit for catch up purposes. Can a limit in the plan that gives the ER authority to set an annual limit on deferrals meet be considered definite? This is an ER set limit that applies to HCEs only. Do we need to actually amend the plan to provide for this limit to aliviate any question as to whether amounts in excess of this limit qualify as catch-up?