Age 50-plus catch-up contribution question

[Guest Kola]

Forgive me if this has already been “asked and answered” at one time……

My question is probably best posed as an example:

401(k) plan permits a pre-tax max of 20%, an after-tax max of 20% and a combined max of 20%.

Employee is age 50 or over.

Plan permits age 50-plus catch-up contributions.

Assume year is 2004-

Employee’s eligible pay is $100,000. Viewing this on an annual basis, absent the age 50-plus catch-up contribution feature, the employee can maximize pre-tax contributions and contributions in total by contributing $13,000 pre-tax and $7,000 after-tax for a total of $20,000.

Taking into consideration the age 50-plus catch-up contribution provisions, is the maximum the employee can contribute assuming max pre-tax contributions (A) $16,000 pre-tax and $7,000 after-tax for a total of $23,000, OR (B) $16,000 pre-tax and $4,000 after-tax for a total of $20,000.

In the case of (B) the employee is able to make “additional elective deferrals” but not additional contributions. I think the correct approach is (A) but I have not seen this addressed.

Thanks for any insight.

[david rigby]

Assuming I understand the facts, the answer is A or B, depending on what your plan says. (There is probably a C also.)

[Tom Poje]

My initial reaction would be to agree with Pax that it depends on how the document is worded - but with reservations. I think his case case C is more likely - it is awful hard to pass testing when an HCE is deferring 13% and whatever on the ACP side.

In addition, as I understand it, the new catch-up regulations says a plan can not impose a limit of less than 75% of compensation and still meet the univeral available requirement - otherwise the catch up amount must be a pro-rata figure of the $3000.

[Alf]

The cash availability limit Tom mentioned is very confusing!! Does it really apply here where there is a 20% limit on deferrals?? Our plan allows deferrals of up to 50% of compensation. Are these the types of limits the final 414(v) regs are talking about in the cash availability (75% or more) rules??

I will probably start a separate post because I am worried (confused?)!

[Mike Preston]

If your plan has a limit of "something less than 75%" then it will fail the universal availability test. However, if it has a limit of "something less than 75% PLUS whatever the catchup limit is for the year" it will not fail the universal availability test. At least, that is my understanding.

In this case, if the individual is otherwise allowed to contribute 20% PLUS the catchup limit ($3,000) but not more than the 402(g) limits PLUS the catchup limits, I think it would at least pass the universal availability test.

I would be hard-pressed to imagine a circumstance where the universal availability requirement is met without the answer being A.