USA Today Article

[Guest Fuzzy]

In Tuesday's USA Today is says: "In 2002 you can contribute up to $11,000.00 to a 401(k). If you're 50 or older, you can contribute up to $12,000.00, as long as your company allows catch-up contributions. If you earned more than $85,000 in 2001, you may not be able to contribute the maximum."

I am trying to think of an example of WHY making $85,000.00 in 2001 would impede your ability to max out you deferral in 2002, or even 2001 for that matter.

Please provide examples!

[Guest Richard Scheer]

Someone who earned more than $85,000 in 2001 may be considered a Highly Compensated Employee for 2002. In order to pass teh annual discrimination tests, the deferrals for HCES may have to be limited.

[2muchstress]

The amounts that highly compensated employees can contribute is limited by the amounts that the non-highly compensated employees contribute.

If you have a 401k plan with poor participation, then it is very likely that somebody who earned >85k in 2001 will not be able to max out in 2002.

[mbozek]

The IRC imposes limitations on deferrals of persons who are deemed Highly Compensated Employees (i.e. employees who made over 85k in 01 and owners of more than 5% of the employer) based upon the % of deferrals contributed by employees who are not HCEs. A non HCE can contribute 11k +1k if over 50 without any restriction. Non HCE some time become HCE because of raises or bonus by the end of the plan year resulting in the reduction of the deferral amount and a refund to the participant. By the way the over 50 catch up is 1K above the max deferral under the plan for the HCE.

[Guest Rosemary Raymer]

Those making over $85,000 (HCEs) may not be able to contribute the entire $11,000 but the $1,000 catch-up is untouchable. The catch-up amount is not subject to the ADP test.

[E as in ERISA]

You have to be careful with catchups and the impact on the ADP test.

If the plan imposes a limit on HCEs, then the HCEs over 50 might all be able to make catchups without impacting any other HCEs contributions. Catchups that are a result of an employer provided limit are not considered in the ADP test.

However, if the plan does not specifically limit the HCEs, then lower paid HCEs who contribute an extra $1,000 over the "suggested" HCE percentage might actually impact the ADP test. The extra $1,000 might end up getting distributed from a higher paid HCEs account as an excess contribution, due to the dollar leveling method.

[Guest hpaine]

It was my understanding that a participant over age 50 had to contribute the full $11k before being allowed to put in the extra $1,000 as a catch-up contribution. So even if an HCE (over age 50) was to put in the full 12,000 it's possible that the plan would fail testing and he would be refunded the excess amount. At that point, what would happen to the catch-up contribution?

[R. Butler]

An over 50 participant doesn't necessarily have to defer $11k to have catch up contrib. Catch up eligibility can be triggered by statutory Limits (i.e. 402(g), 415), plan imposed limits as well as ADP failures.

[2muchstress]

If an HCE contributes 12K, the catch up will be excluded from the ADP test, thus only the 11k is used for ADP. If a participant reaches a statutory limit or plan limit, the amount in excess of that limit (up to 1k) will be treated as catch-up and excluded from ADP.

However, if the HCE did not contribute beyond any plan limit or statutory limit, say 8k, and it is not know until after the ADP test is run if there will be a failure - then the full 8k is considered for ADP and the catchup will reduce any refund that the HCE may be entitled to.

[Guest hpaine]

That makes sense to me. So it's possible that an HCE who can't contribute the full 11K due to testing, won't be able to make the catch up contribution as well?

[2muchstress]

Possibly. If an HCE (over 50) contributes 8k, the plan fails ADP and a return is calculated at 2k. Then you could return only 1k and classify the other 1k as catch-up. So then the HCE does receive a catch-up contribution.

However, if you have an old HCE who only contributes 2k, and a young HCE who contributes 11K, and the plan fails, then the return of excess would go to the younger HCE and the older HCE would not be able to receive a catch-up because the full 2k had to be considered for ADP.

I don't like it, but that is the way it works.

[david rigby]

Think of it this way. The catch-up applies only if the participant reaches the least of:

- the 402(g) limit, currently $11K,

- the limit imposed by the ADP test,

- a limit imposed by the plan, for example, max. 10% for HCEs.