Catch-up contributions in safe-harbor 401(k) plans

[JDuns]

I am still struggling with whether a safe-harbor 401(k) plan that wants to allow participants to make catch-up contributions may or must provide matches on those contributions.

For purposes of this question, assume that the plan matches deferrals on with each payroll period (and does not make a year-end gross up) and that the plan matches 100% of the first 3% and 50% of the next 2%.

If the catch-up contributions are not matched, how contributions are categorized during the year becomes critical. The IRS requires that all NHCEs be able to obtain the match to retain the safe harbor and if contributions are not deemed to be catch-ups until after a limit has been reached (generally the 402(g) limit), by definition the NHCE would not be eligible to receive the full match.

If the catch up contributions are matched (to avoid the administrative issues alluded to above) and the catch-up contributions are disregarded for purposes of testing but the match is not, does that mean that an electing HCE has a higher rate of match than under 50 NHCEs (blowing the safe-harbor by violating 401(m)(11)(B)(iii)).

Thank you for clarification.

[Tom Poje]

In a safe harbor plan you described (Basic Match provided) the max match would be 4%.

Under what conditions would the match on a catch up be needed or come into play?

There can't be a plan imposed limit on deferral % preventing someone from obtaining the 4%.

You can't fail ADP test, so no need for catch-ups involving excess contributions.

That really only leaves excess deferrals as a possibility for needing catch-ups.

But an HCE who defers 10,000 with 200,000 in comp has deferred 5%, so he can't be matched on any amount above the 10,000, so no issue there.

I suppose if an employee defers 96% you might run into a 415 limit and need the catch up for that ee. I have yet to see that happen, but I guess it could.

Maybe I am still half asleep, under what other conditions could it even make a difference?

[Guest Amanda Davis]

We have a safe harbor plan with a 5% match which is 100% vested. We also do a bi-weekly match. For what it's worth, our plan doc says that CUCs are unmatched

We struggled last year when we implemented catch-ups for the same reasons. We allow CUCs to be made alongside regular deferrals and do not apply the match to them.

As far as the bi-weekly contributions/match are concerned, it was unlikely to be an issue because of the reasons Tom Poje gave--it would be very unlikely that someone who was contributing less than 5% would also be contributing CUCs.

However, I ran a report of all CUCs at the end of the year and came up with one participant who began the year at a 1% deferral rate. When he signed up for CUC mid year, he increased his deferral % to the company max. At the end of the year, even with his CUC, his deferrals had not reached the 402g limit and therefore his total match was less than 5%.

Of course it didn't show up on the discrim testing (we have an after tax component that we still must test) since we're safe harbor, but we knew it happened. We just calculated the difference and credited to his account. Again, not because of testing failures, but just to make it right.

All in all, we set up a separate unmatched deduction code for CUC and keep an eye on the totals at year end.

[JDuns]

The old system e-mailed me when there was a reply post so I apologize for not responding before now.

If catch up contributions are not matched, classification of contributions between regular deferrals and catch-up becomes critical. Assume a person earning 100,000 wants to maximize deferrals (defer 14% of pay during 2003), if you assume that no contribution is a catch-up until a limit is exceeded, then all 14% of the deferrals from the first 22 pay checks are regular deferrals (matched), part of the 23 pay deferral would be regular deferral (matched) and the remainder of the 23 pay deferral and all of the 24-26 pay deferrals would be catch-up contribution (unmatched). If instead a portion of all 26 pay deferrals was classified as catch-up, the employee would receive the maximum available match.

BTW, it is possible for a HCE (earning more than $240,000) to defer less than 5% of pay and still reach the $12,000 annual contribution limit. I realize the plan cannot consider more than 200,000 of pay in total but many providers consider this limit at year end and not during the year.

Amanda, it sounds like you will be in effect adding a year end gross-up match if a catch-up deferral is reclassified as a regular match.

Did you decide against matching the catch-up contributions as a financial decision, because of the discrimination (violating the higher rate of match)

issue, or for other reasons.