401(k) Plans

[Guest Tennis]

May a 401(k) Plan retroactively amend its plan to provide that no catch-up contributions can be made? The plan is sponsored by a member of a controlled group and the other plans do not and will not provide a catch up contribution. If the Plan is retroactively amended, will the return of catch-up contributions be a violation of 411(d)(6)?

[Guest Pavlick]

Interesting....do you mean that the plan adopted the catch up provision in January, and already wants to back it up? Has the document already been EGTRRA amended?

My understanding is that a contribution is not a 'catch up' until you have exceeded some limit (either the 402(g), or a plan limit, or a ADP limit). Has that happened already this year (e.g. have participants already put in $12,000)? If they haven't, then it would seem that you just consider it a 'regular' contribution rather than thinking about a refund.

[Guest Tennis]

The Plan was EGTRRA amended and some participants have already put in $12,000. The issue is can the Plan be retroactively amended to 1/1/2002 and the extra $1,000 be returned to the participants without violating 411(d)(6)?

[Guest yukon]

First, if the non-catch-up plans are new plans acquired thru a merger or acquisition, then there is a 2-year transition period during which they do not have to allow catch-ups [transition period described in Sec. 410(B)(6)©]. Union plans have a slightly different transition period.

Second, if neither of the above is the case, I'd ask two questions:

1. In this case, does the catch-up provision have to be retroactively eliminated to satisfy universal availability rules? My opinion is the answer is "yes".

2. Once that provision is eliminated, wouldn't the amounts over the 402(g) limit be treated as excess deferrals? I think the answer here is also "yes".

Someone please correct me if I'm missing something.

[R. Butler]

I'd be leary of eliminating the catch-up provision in 2002, if people have already deferred the $12,000. If catch-up has been made it is difficult to argue that a benefit hasn't accrued.

I'd probably amend the other Plans to include a catch-up provision in 2002.

I may be missing something, but why doesn't the Plan Sponsor want to include a catch-up contribution?

[Guest yukon]

Couple examples:

I've had several small sponsors who don't want to allow catch-up. Primarily due to the administrative burden on their payroll departments, and the general confusion as to exactly how to administer it. Same thing could happen in a conrolled group with decentralized payroll.

In the case of a sponsor with a union and non-union plan, it's up the the CBA to determine whether or not catch-up will be allowed for union members. Another example of the possibility of a sponsor having to back out the catch-up provision if the union doesn't include it in the bargaining agreement.

[Mike Preston]

Submit amendment before end of 401(B) period. Tell IRS you fail universal availability but want an exception. After they stop laughing, they will say no. You will then be able to amend it out of the plan without violating any rules.

[mbozek]

You should consider the following issues:

1. What were the employees told about the catch up? Did the plan sponsor reserve the right to change or revoke the catch up election?

2. The catch up as I understand it is a maximum of $1000 above what the employee could otherwise put in under the ADP/ plan provisions. It may be that the employees will not be permitted to make 1000 catch up but something less and the catch up amt could be recharacterized as an excess contribution and returned to partaicpants under the plan provisions.

3. You should consider unwinding the provision/ canceling it asap and then trying fit the catch up contributions into the normal ADP/402(g) limits. By the way are all of the employers in the controlled group allowed to make their own decisions. Cant the parent require that all plans contain the catch up.

4. You may just have to figure out the lesser evil -- returning the the catch ups or risking disqualfication for failure to comply with universal availability. Years ago I advised a client to return employer contributions made under a 403(B) plan earlier in the year because they violated the nondiscrimination requirements limited accruals by HCEs. The employer provided a 204(h) notice on the reduction in contributions as and the excess was returned to the HCEs before the end of the year.