Catch-Up Universal Availability

[Guest OHH]

I just read Corbel's September 18, 2003 Technical Update on the Final Catch-Up Regulations. See http://www.corbel.com/news/technicalupdate....asp?ID=223&T=P. It states that all participants must have the same effective opportunity to make catch-up contributions. However, "A plan fails to provide this effective opportunity if there is any applicable limit, such as an employer-provided limit, which a catch-up eligible participant is not able to exceed (e.g., 60% deferral limit which applies to total elective deferrals). . . . It states that the final regulations provide four options, one of them being that "the plan can impose a payroll deferral limit (normal and catch-up) of not less than 75%". This seems to be an incorrect reading of the Final regulations. I interpret the 75% rule to apply to the cash available for deferral and not the actual deferral % limit. That is, a 401(k) plan can state that an employee may elect to defer between 1 and 50% of their "compensation"; provided that their "compensation" is limited to 75% of their compensation (after withholdings).

If Corbel is correct, I have a number of plans to amend by year end.

Any thoughts?

[R. Butler]

I guess I am not really of what your saying, but I actually agree with Corbel's update. The concern is that all participants have the same effective opportunity to make catch-up contributions. The example they provide illustrates the point fairly well.

[david shipp]

Let me pose a fairly standard situation. The plan limits deferrals to 15%. The plan offers catch-up contributions through a good-faith EGTRRA amendment that simply says catch-ups may be made in accordance with 414(v). The plan operates the 15% limit on an annual basis (not payroll-by-payroll).

In this instance it doesn't appear that an amendment is necessary. The plan has a 15% limit, the EGTRRA amendment says, through reference, that catch-up contributions can be made in excess of the plan limit. The Corbel example, on the other hand indicates that the plan limit specifically applies to both normal and catch-up contributions.

Agree?

[Guest DMK]

I asked a prototype sponsor today whether the plan limit in its Adoption Agreement also applied to catch-up contributions. It's a standardized prototype that implemented catch-ups through the model EGTRRA amendment. The sponsor told me that its position is that the limit in the AA applies to both all deferrals, including catch-up contributions. I don't particularly like that answer, but . . .

[R. Butler]

Let me pose a fairly standard situation. The plan limits deferrals to 15%. The plan offers catch-up contributions through a good-faith EGTRRA amendment that simply says catch-ups may be made in accordance with 414(v). The plan operates the 15% limit on an annual basis (not payroll-by-payroll).

In this instance it doesn't appear that an amendment is necessary.

It depends on specific language, but as a general rule I disagree. A catch-up is a deferral. The few slap-on EGTRRA amendments I've seen use the general language about 402(g), 415, etc. They do not say that catch-up is without regard to employer imposed limits on deferrals in the Plan Document. If employer limits to 15% and a catch-up is a deferral, without more specific wording I'd say the amendment is necessary.

Having said this, as with many things I guess you could argue it all interpretation. Similar to the true-up match issue when payroll period matching really isn't an option in the document, you'll get opinions both ways.