Catch-Up Contribution Question for Employees Eligible Mid Year

[Guest wwc870]

To make catch-up contributions for 2002, eligible participants must anticipate exceeding one of the following annual limits:

1.) Before-tax contribution limit of $11,000,

2.) Aggregate contribution limit of $40,000, or

3.) Plan A's contribution limit of 25%(max plan limit) of participant's eligible earnings in any combination of before-tax and/or after-tax contributions.

Plan A's main concern is that a participant who becomes eligible mid-year and then sets his contribution limit at 25% could potentially claim that they were not given the opportunity to meet the plan imposed limit for making a catch-up contribution because they were not given the full year to meet requirement.

Plan A's has the following questions: If a participant becomes eligible mid-year how does the plan year limit apply in terms of satisfying a plan imposed limit? Does any regulation or provision require a full plan year for allowing participants to make a catch-up? Is the catch-up determined from eligibility or for a full year? Do you pro-rate the limit? Do you need to measure the catch-up to allow a full year?

Please let me know if there is guidance available from your resources.

[Guest timeout]

BenfitsLink home page key word search catch-up should provide an excellent start.

[Mike Preston]

The IRS regulations on catch-up contributions make the answer to your questions quite simple. Simply put, you look to the provisions of the plan without the catch-up rules. Whatever the participant would be limited to under those rules defines the floor. Then if the plan is amended to allow catch-up contributions, and the payroll system is therefore modified to allow a participant to make contributions in excess of what they otherwise would have been allowed to contribute in the absence of the catch-up rules, then and only then you count contributions in excess of the otherwise plan limit as catch-up contributions, and hopefully change your payroll system so that the catch-up contributions aren't allowed to exceed $1,000 in 2002.

The key to all of this, when dealing with a plan imposed limit, is to have the payroll system appropriately modified/monitored so that the participant is allowed to contribute $1,000 more (in 2002) but no more than $1,000 more than the plan imposed limit.

So, you asked about whether you count full year compensation in the plan imposed limit, and I will turn it around and ask you: does the plan imposed limit apply to full year compensation or not? If yes, then so does the rule on catch-up contributions.