Catch up contributions for owners?

[Guest Michael Anderson]

Can a 52 year old owner who is only allowed to put in 7% due to testing still put in an extra $1,000 with the catch up provision? I would have to say yes, but would like some confirmation! Thanks!

[jaemmons]

Yes. The catchup contribution can be elected to be put into the plan because of a plan limitation, either due to document terms or compliance testing, or an IRS mandated limit (402(g)).

[Guest stryan]

I would agree that the answer is "yes". Age 50+ participants can contribute $1,000 over and above any IRS or plan imposed limit.

I am still trying to grasp the mechanics of the salary deferral election being made by the participant: 7% of compensation plus $1,000 divided by the remaining pay periods in the year.

Any payroll folks got an answer or comments on that?

[Cathy from Chicago]

I have the same query as Mike and since it appears the catch-up is fine if testing limits amount of deferral, can anyone cite an area here or some other link where it officially states that anyone over 50 can do the catch-up even if the plan allows maximum deferral but the testing prevents the max deferral? I'd like to be certain on this before I advise all our owners who are limited in deferral amount due to ADP testing. Thanks!

[Guest TrustMe401k]

I think the question is whether or not the EE is limited to 7% by the document or administratively limited because you "know" what deferral % will pass ADP tests?

If there is no limitation in the document, then I don't believe you can classify the extra 1,000 as catch-up until there is a test failure and then recharacterize the amount as a catch-up. Someone feel free to correct me. I just don't believe that administratively limiting deferrals for testing purposes is sufficient to allow for the catch-up.

If I'm right, you could calculate 7% + 1000 and figure out hsi deferral percentage. Contribute this "new" amount and when the test fails, just do what I mention above and recharacterize.

If it is a 7% limit set within the document then I guess Stryan has it about right.

More comment welcome!

[Cathy from Chicago]

I spoke to someone 'in the know' and he referenced 414 v 3-5, which I did not check out but it apparently states that catch-up contributions may be made by any participant (50+) who defers the maximum allowable, whether due to IRS limitation ($11,000), plan document (10%, etc.) or regulatory testing. This explanation seems really logical to me so, of course, I'm leary since when is the IRS logical! Now what I don't know is: 1)how or if catch-up contributions are reported on W-2? and 2) can these contributions be mixed with actual deferrals in the investment (I realize from an admin point of view they'll be separated) since we have a few plans where all contribution types (deferrals, match, etc.) are lumped together in one vehicle and, we separate them for our reports. I'd like to know if there's a problem if they're not separated with the investment firm. thanks

[wmyer]

Cathy, regarding reporting on the W-2, see IRS Announcement 2001-93: "For employees' qualified catch-up distributions after 2001, employers must report the elective deferral catch-up contributions in the totals reported for Codes D through H and S." So the aggregate amount of deferrals (including 414(v) contributions) will be in box 13 of the W-2. As a side note, my company is not separately sourcing catch-up and regular 401(k) deferrals.

[Guest Michael Anderson]

The 7% is not a document limitation. It is for testing purposes and of course can change as participant deferral percentages change. I agree that it sounds as though the IRS is allowing for the catch up in this case - how messy will the recharacterization be? - thanks for the insight!

[actuarysmith]

If you read the law, HR 1836, it clearly states that catch up contributions do not count against 402(g), 415 limits, 404 limits. It also states that Catch-up contributions will not cause a plan to fail the ADP and ACP tests.

Late last year, or early this year the service came out and provided guidance that if an HCE was affected by ADP/ACP testing and was over age 50, contributions would first be characterized as catch-up (up to limits) and any amount left over would have to be refunded.

[Guest 401kproman]

If a limit is written into the plan, SPD, forms, etc., the catch-up will be anything over that limit. If you change the plan, forms, etc. to state that there is no limit, 402(g) becomes the limit. Just be careful that some HC doesn't contribute it all up front and then leave the company. Also, if you have a match based on an upper limit like 6% of pay, watch out that the NHCs don't contribute up front and lose their match because each payroll has too much above 6%.

The payroll services have a problem since most catch-up will be dollar amounts and regular 401(k) percent. When next year comes around, the dollar amount won't get deleted and next year's catch-up will start off at the $1,000 level until changed.

[Guest TrustMe401k]

I agree with everything that has been added after my previous post. What I was trying to say ( I guess I did it rather poorly) was that you don't have a failure of ADP/ACP until the plan year is over and the numbers are complete.

So, during the year, you can't just say you are limited due to adp testing and the extra 1000 is catch-up. There has been nothing to trigger the availability of the catch-up because you have not reached the 402(g) limit or a plan imposed limit.

I hope this clears up what I meant to say.

[Alf]

jehmig's point is very important and does not appear to be as easy to deal with as it seems.

If an employer knows in advance what the HCE's limit will be for a year (it uses prior year testing, for example), it can't just treat any deferrals above that percentage as catch up contributions beacause of the way the new (post 1996) rules for return of excess contributions work. If the HCEs will be limited to 7%, but those over age 50 put in more to try and make a catch up, the money will be returned (or characterized as a catch up) through the ADP test not to those who deferred more than 7%, but to those who deferred the most money. The only way I can think of to deal with it is to prior year test and amend the plan each year to state the actual HCE limit so that the ADP limit becomes a plan limit. Even then, the numbers probably won't match up perfectly because of demographic changes, compensation changes, etc. during the current testing year.

[actuarysmith]

JEHMIG-

again, the service came out with something in the last few months that clarified all of this. I wish I could remember the actual site. I think it may have been a revenue ruling.

You don't need anything to "TRIGGER" the availablitiliy of the catch-ups. The service stated that if an HCE was 50 or over, you could first deem any deferrals made for the year as catch-up contributions up to the catch up limit.

It is not as though you have to contribute to some magic number first, and then count anything after that as catchup. Again, there is nothing that triggers catch up contributions.

The easiest way to look at it is to say that the first dollars in are always catch up contributions until the limit is reached. Then they become regular 401(k) deferrals subject to all ADP and ACP tests.

Find this revenue ruling and read it. you are making this harder than it is..................

[Guest 401kproman]

The last thing you want to do is assume catch-up is first. The IRS regs only assume a contribution is catch-up if you have reached the plan, administrative or deferral limit depending on how you have your documents set-up. You can contribute catch-up at the same time as regular 401(k) and hope you and payroll can control the totals or you can review payroll and onyl start catch-up when a limit has been reached.

Quite frankly, most plans may be better off not starting catch-up until the IRS and the industry figures out how to handle them. The most important benefit for most employees, expecially those under 50, is to be able to contribute up to the $11,000 limit. If you have to start catch-up, you are better off removing all limits from documents and you will be left with the 402(g) $11,000 limit. At least payroll can show you when a participant reaches this limit.

[MGB]

Actuarysmith,

You have the proposed regulations exactly backwards. Nothing is deemed a catch-up contribution until you are eligible (have hit a limit or subject to ADP). You may not designate deferrals as catch ups ahead of time.

[actuarysmith]

Sorry gang- you are correct. I had it exactly bass akwards..........

I found the proposed regs issued last fall and re-read them.

[Guest 401kproman]

Sorry to say that I am right. You can make contributions, in dollar amounts to equal $1,000, you think will be catch-up at the same time as regular 401(k). At the end of the year you add up everything and take away what the plan or IRS limit would be for regular deferrals. If you figured right, your catch-up will be correct. If not, catch-up may become regular or some catch-up may be in excess.

That is why I suggest doing away with plan limits. That is why I suggest waiting until a limit is reached. Then you will have a real number ($11,000) to hit instead of a moving target like a plan limit of 40%.

[Guest Robin Vatalaro]

Just to clarify, if the prior year method is used, and therefore I calculate that Mr. Participant who is over 50, can only defer $9,000 to have a passing ADP test, I cannot have Mr. P actually defer $10,000 and only test $9,000 on the ADP test. I must test the full $10,000 and if his ADP refund happens to be less than the amount of the catch up contribution, we simply recharacterize?

This is an interesting question because it could potentially cause some <50 HCE's to have to take refunds when they otherwise wouldn't have had to. In other words, if I tell Mr. P that he should defer $10,000 because his refund will be less than the catch up, then potentially I create a failed test for the other HCE's which they wouldn't necessarily be happy about, but Mr. P is home free. Am I making any sense? This seems unfair, yet allowable based on my interpretation of this thread.

A side question: If Mr. P defers $12,000 for 2002, I only test $11,000 though?

Thanks for any help.

[MGB]

Robin,

I totally agree with your "unfair" conclusion. Catch-up contributions by a person over 50 can and will affect the ability of HCEs under 50 to defer.

Examples like this were drawn up and shown to Treasury when they were putting together the proposed regulations last year. (I saw the first such examples within a week of EGTRRA passing.) There were many people requesting that they come up with a way to prevent this from happening. However, they ignored this and the "unfair" result is now just "the way it is."