Catch-up Contributions

[Guest xgn7t]

How are people implementing catch-up contributions?

Our plan provides a limit of 10% of compensation for HCEs and 15% of compensation for non-HCEs. Our plan administrator advises that most are simply raising their limits and once the participant reaches the 402(g) limit they are converted to catch-up. However, it seems to be that this would create nondicrimination testing problems. I wanted to set up a separate catch-up contribution election (e.g. 0-20%) for those 50 and over who had already hit the 10% or 15% limits mentioned above. Any comments or other methods?

[MGB]

Why would this create nondiscrimination testing problems? The only people that can contribute a catch-up are those that hit a limit. So, what they are doing is exactly what the regulations expect. They cannot designate monies to be a catch-up without having hit a limit first.

[Guest Tbrown]

I think the point may have been that increasing the limits on deferrals (from 10% to unlimited) may cause non-discrimination issues. So raising it to 100% is not an option. Therefore they want to have a 10% deferral limit and allow catchups on contributions about that limit.

Is that what the issue is?

Tim

[Guest xgn7t]

Tim is right about why we cannot increase the plan limit above 10%.

[Blinky the 3-eyed Fish]

I am confused why raising the plan limit above 10% will cause a nondiscrimination problem.

[Guest Tbrown]

If you had a several lower paid HCE's that might defer a large percentage of their wages and foul up the test.

[Blinky the 3-eyed Fish]

I am with you now. It's right after lunch and my brain is not engaged. I was originally thinking more in line with BRF.

[Guest JimD]

We are implementing the catch-up as you describe. If a participant elects the maximum % then they are given an additional election for the catch-up. One other thought if you have HCE's earning say $200,000. We often suggest they defer each payroll an amount to get them to the 402(g) limit by year end and give them an additional catch-up election which is contributed each payroll. Its better planning especially if there is a payroll match.

[Guest xgn7t]

JimD thanks for your comment. We have the same issue with our employees earning high $ and advise them to spread it out over the year. However, my concern is that if these employee discontinue contributions say mid-way through the year then they have neither exceeded the plan limit nor the 402(g) limit and, accordingly, at least some of their catch-up contributions might have to be recharacterized as pre-tax contributions subject to nondiscrimination testing. It would be difficult to adminster this for testing purposes (we are a pretty large plan). I'm thinking about imposing a plan limit equal to payroll period equivalent of the 402(g) limit; however, this takes some options away from those earning high $.

[JanetM]

We have the same issues with HCEs. We limit HCEs to 6% - all others can do 50%. We run preliminary ADP/ACP test in August and have (for the last 7 or 8 years) stopped HCE deferrals effective 8/31. We realize that this in not fair to the lower paid HCE's - but refunds do not make anyone happy.

Since we stop deferrals for HCEs- we are planning to just turn on the HCEs who want the catch up.