Catch up Election and Reporting

[Guest wolfman]

Is anyone planning to post catch-up contributions to a separate source for recordkeeping (for testing purposes)? What about an election form (at least for those whose applicable limit is a plan level limit)? Lastly, many documents give plan administrators the power to limit HCEs to a lower deferral rate (determined by the plan administrator)- 5-6% or whatever rate they feel appropriate to help pass nondiscrimination. Would'nt this become a plan limit allowing catch-up?

Thanks

[Tom Poje]

Wolfy:

My understanding would be the same as yours. A plan limit (even if different for hces than nhces) is still a limit, and therefore catch ups are amounts above this limit.

You are either going to have to show in separate source so you you can test properly. Ha. I dont think the software I use will do that yet.

or

for example ee defers 12,000 (includes 1000 in catch up)

I run at 11000, do my testing and when all is said and done, Irun the extra 1000 to the same source.

oh heck, I just check on the box that says plan automatically passes test and then I dont have to worry about it.

[John A]

wolfman and Tom, I believe practioners are using election forms for age 50 catch-up. However, the forms probably have to contain a caveat that the age 50 catch-up may have to be "recharacterized" to "regular" 401(k) deferrals. If you don't provide an age 50 catch-up election form, then how is a participant allowed to defer above the plan-document provided limit?

For a plan document with an employer-provided limit (say 10%), can an employer limit the age 50 catch-up that a participant is allowed to defer? [Ridiculous example to make a point: Participant, age 51, is on unpaid leave and so gets no compensation from 1/1/02-3/31/02. Participant gets a $20,000 paycheck on 4/15/02 for work from 4/1/02 through 4/15/02, and terminated employment 4/16/02. Participant chose to defer the plan document maximum limit of 10% of comp. - $2,000. Does this participant have to be allowed to make a $1,000 age 50 catch-up (over and above his $2,000 "regular" deferral) from the 4/15/02 paycheck? How much does he have to be allowed to make as an age 50 catch-up? If you say 0, then you have a participant that was eligible for age 50 catch-up and has not been allowed to make an age 50 catch-up contribution, so you may fail the universal availability requirement.)

[Guest dmj1998]

John A - no forms, please. its a paperless world and the trees will thank you.

our plan has a similar "old rules" limit of 16%. our recordkeeper "requires" us to add a new source if we want to allow catch-up contribs. participants over the age of 50 will have to make two elections for contribution rates. after the plan year is over, we should still have the discretion to "recharacterize" pretax contribs that did not go over the plan or 402g limit.

on a participant level, i don't think it matters how the contribs are treated. as for w2 reporting, i thought the irs will allow companies to just report "$12,000" in 2002 for someone who contributes the allowable limits, regardless of how it comes out of the paycheck.

in your example, i would say that yes, an additional contribution of up to $1K needs to be allowed.

[david shipp]

Since a plan will have catch-up language that will, in effect override plan limits, I have assumed that no special catch-up election is required. The participant elects to defer an amount. At year end, the various limits are applied, including catch-up if available and appropriate action is taken.

This assumes that the recordkeeping system will first run through the various limits for catch-up eligible participants to determine if there are catch-ups. If an amount is a catch-up, the system "flags" it in a manner that indicates it is not tested (i.e. the deferral amount of the participant is reduced for testing purposes). If the catch-up is not to be matched, any attributable match has to be handled. Testing then proceeds.

Anybody have any thoughts on this course of action? The big question mark at this point is what the system will actually do. So many choices!

[MGB]

I disagree with Wolfman's and Tom's original statements that a discretionary administrative limit on HCEs triggers an allowable catch up.

The preamble to the proposed regulations addressed this and stated only limitations expressly in the plan count. In conversations with Drigotas and Sweeney at the Treasury, their internal discussions centered on the idea that they believe the administrative limitations are illegal because they are not definitely determinable benefits within the plan. But, rather than broach that subject in general (and really upset a lot of administration), they side-stepped it and just made the remarks in the preamble to the catch up regulations.

"An employer-provided limit is a limit on the elective deferrals ian employee can make under the plan that is contained in the terms of the plan, but that is not a statutory limit. ... The condition that an employer-provided limit be contained in the terms of the plan is intended to correspond with the requirements of section 1.401-1 that a qualified plan have a definite written program and provide for a definite predetermined formula for allocating contributions made to the plan."

[Tom Poje]

my comments on limit were meant to be interpreted as found in the document...

e.g. HCEs max deferrals is 10%

this is clearly allowed under the proposed regs (page 53556, section B provides an example...an employer provided limit...for example, a limit on elective deferrlas of HCEs to 10%...The condition that a employer-provided limit be contained in the terms of the plan is intended ...that a qualified plan have a definite predetermined formula.

I would agree, a 'discretionary' limit sounds illegal to me.

what would be interesting is whether the document could state

the limit as 2 points plus last years NHCE average. That would change every year, but it sounds definitely determinable.