Catch-Up Contribution/Off-calendar Year Plan

[BFree]

I've read that catch-up contributions are available in the first plan year beginning after 12/31/01. Is this correct, and is it correct that a 1/31/02 plan year end ADP test cannot use the catch-up rules?

Given the recent instructions regarding the reporting of catch-up contributions on W-2s, do catch-up contribution amounts need to be determined before W-2s are issued? (Whereas currently, ADP test results have no impact on what is reported on a W-2).

Thanks.

[Tom Poje]

yes, catch-uos are only available for plan years begining 1/1/2002 so you would not be able to use them for a plan year end 1/31/02.

I am not sure what the net effect of catch ups will be on the W-2.

In the case of someone who deferred 12,000, its obvious 1000 is catch up.

In the case of a failed ADP test...well lets say the guy deferred 10,000. now the test fails and the refund would normally be 500. Instead I am going to treat that as a catch up. I don't see how that changes things - 10000 in deferral is still 10000 -it only effects testing how it is treated- unless the govt wants to see an actual breakdown of the deferrals - and it will be awhile before we see the actual w-2 for 2002, wont it?

[MWeddell]

Tom,

We already have guidance on how catch-up contributions are reported on Form W-2: http://www.benefitslink.com/IRS/ann2001-93.shtml

I believe that one does not need to identify which elective deferrals constitute catch-up contributions prior to preparing Forms W-2.

[david shipp]

According to the catch-up regs., 414(v) applies to "contributions in taxable years beginning on or after 1/1/02." The reference is to taxable years (i.e., calendar year for individuals) and not plan years so it appears that catch-up contributions are available for plan years that end in 2002. To the extent an ADP test is failed for a plan year ending in 2002, it appears that catch-ups could be invoked.

[BFree]

That was my initial thought (hope). Is "Taxable Year" the plan year or the individual's taxable year?

I tried to read and understand the proprosed regs, can someone point out where the specific situation I mentioned is addressed, or where it is clear that Taxable Year refers to Plan Year beginning 1/1/02.

Thanks.

[MGB]

Taxable year is never the plan year. Taxable year refers to the individual's tax year, which is 99.99% of the time the calendar year.

A noncalendar-year plan can institute catchups on 1/1 for the plan year that began in 2001. Note, however, that it is very cumbersome to coordinate the catchups between the partial years within the calendar year. (No one should have noncalendar year 401(k) plans - they create too many major administrative headaches.)

Catchups are computed at the end of the plan year (it doesn't make any difference what you call the deferrals as they go in). Therefore, the only way to get a catchup in 2002 for a noncalendar year plan is to allow them in the 2001-2002 plan year.

[david shipp]

MGB -

If an off-calendar year plan is not amended to allow catch-ups until the 2002-2003 plan year, wouldn't the participant still have the capability of having catch-ups based on 402(g) excess for the 2002 calendar year even though the plan would not be able to invoke catch-ups for ADP or plan excesses for the 2001-2002 plan year?

At a more basic level, is the amendment allowing catch-ups something that has to be in place before a contribution is considered a catch-up or can the catch-up cabability simply be included in the EGTRRA good-faith amendment and be adopted by the appropriate deadine?

[MGB]

Yes and yes. But, if catchups are to be effective for the 2001-2002 plan year, the plan would need to be amended by the end of that plan year.

My reference to end of year calculations was with respect to ADP testing. A person contributing $12,000 in total in 2002 across two plan years could conceivably have catch up in the second plan year without the first plan year having a catch up provision in the plan yet.

[M R Bernardin]

I read the regulations to state that contributions in excess of the 402(g) limit would be treated as catch-ups as soon as they were contributed rather than at the end of the year. So, for a pye 1/31/02, an eligible employee could front/backload $12,000, and $1,000 would be treated as a catch-up for the pye 1/31/02. Am I missing something?

[John A]

My understanding of the off-calendar year plan issue is that deferrals made in 2002 not only can but MUST be considered age 50 catch-up deferrals if the plan adopts age 50 catch-up effective 1/1/02 and the 2002 deferrals exceed the ADP limit for a plan year ending during 2002.

For example, let's say the plan year ends 1/31/02, and the ADP test limits HCEs to $5,000. If Employee A contributed $6,000 during 2001 and nothing in January of 2002, none of Employee's A's deferrals through 1/31/02 may be treated as age 50 catch-up contributions.

However, if Employee B contributed $4,000 in 2001 and $2,000 in January of 2002, and the plan adopted age 50 catch-up contributions effective 1/1/02, then $1,000 of Employee B's deferrals MUST be reclassified as age 50 catch-up contributions whether Employee B wants them to be or not.

Agree? Disagree? Why?