Catch up example - please help me understand

[Guest cease]

Plan year = 08/01/02 - 07/31/03

Plan allows salary deferrals up to 20% of compensation

Compensation is measured on a PY basis

Plan allows for catch up contributions

My ADP test is failing and I have two participants over age 50 with the following contribution amounts:

A - compensation = $117,000

contributions = $15,139

contributions deposited 01/01/02 - 12/31/02 = $11,000 of which $7,040 was contributed from 08/01/02 - 12/31/02. $8,099 was contributed from 01/01/03 - 07/31/03.

B - compensation = $109,418

contributions = $14,025.35

contributions deposited 01/01/02 - 12/31/02 = $12,000 of which $1,068.97 was contributed from 08/01/02 - 12/31/02. $12,956.38 was contributed from 01/01/03 - 07/31/03.

For the plan year, can you please help me determine if any of the contributions included above can be treated as catch up contributions?

I will admit up front that I have probably left out some important information, so please be kind with your analysis and I will provide any additional information that is required. Thanks.

[Mike Preston]

You did a great job of identifying the pieces needed to determine the catchups!

Assuming there aren't any annual additions other than deferrals, so there are no 415 limits that would otherwise make this a more complicated calculation, A didn't defer more than $11,000 in 2002 and didn't defer more than $12,000 in 2003. Hence, A has no catchups because A didn't violate 402(g) in either year. You therefore still have his entire catch-up available when determining whether or not the failed ADP test results in his having to get a refund or not.

Assuming there aren't any annual additions other than deferrals, so there are no 415 limits that would otherwise make this a more complicated calculation, B deferred more than $11,000 in 2002 (B deferred $12,000 in 2002) so $1,000 of his 2002 deferrals are 2002 catchups (this assumes that none of those would have been considered catchups as of 7/31/2002 - seems reasonable to me, since he contributed only $10,931.03 from 1/1/02 through 7/31/02). He deferred more than $12,000 in 2003 (B deferred $12,956.38 in 2003), so $956.38 of his 2003 deferrals are catchups. Hence, as of the end of the plan year in 2003, B's catch-ups related to his participation in the plan from 8/1/02 through 7/31/03 are $1,000 + $956.38 = $1,956.38.

Subtracting $1,956.38 from his total deferrals for the plan year of $14,025.35, leaves you with $12,068.97 as his "base" for determining whether or not he gets a refund due to a failed ADP test for the 8/1/02 through 7/31/03 plan year.

Of the $1,956.38 treated as catch-ups, $1,000 was for 2002. Only $956.38 is a catch-up that reduces the otherwise available catch-ups for 2003. The amount of unused catch-up at 7/31/2003 is therefore $2,000 less $956.38, or $1,043.62.

If, after using $12,068.97 as his deferrals in the ADP test you end up needing to refund this person, you subtract $1,043.62 from what his refund would otherwise be (before consideration of earnings that must be credited to his refund).

[FundeK]

Let's see how I do with this one....

To be considered a catch-up contribution, the participant must exceed a plan imposed, or statutory limit.

Participant A – Did not exceed a plan imposed limit

1. First look at 2002 deferrals - did not exceed 402(g) for 2002. So, none of the deferral from 8/1/02 to 12/31/02 were previously treated as catch-up and excluded from the ADP test.

2. Next look at 2003 deferrals, have not exceeded 402(g) yet

3. Failed ADP test, so we classify some of the deferrals as catch-up

4. Can treat $2,000 as catch-up contribution for 2003.

5. Contributed $8099 from 1/1/03 to 7/31/03. Can only contribute an additional $5901 from 8/1/03 to 12/31/03. If the participant contributed more, he would exceed the 402(g) limit. You have already used the catch-up contribution so anything over $5901 needs to be returned

Participant B – Did not exceed a plan imposed limit

1. First look at 2002 deferrals - exceeded 402(g) for 2002, so $1,000 is treated as catch-up for 2002 and not included in the ADP test. Now we only include $13,025.35 in the ADP test

2. Next look at 2003 deferrals, have not exceeded 402(g) yet

3. Failed ADP test, so we classify some of the deferrals as catch-up

4. Can treat $2,000 as catch-up contribution for 2003.

5. Contributed $12,956.38 from 1/1/03 to 7/31/03. Can only contribute an additional $1043.62 from 8/1/03 to 12/31/03. You have already used the catch-up contribution so anything over $1043.62 needs to be returned

[Mike Preston]

2. Next look at 2003 deferrals, have not exceeded 402(g) yet

???

[FundeK]

Sorry, I didn't mean to include that, it was my own train of thought....Seeing as most people can't follow my train of thought (or lack of) I should have deleted it before I posted.

[Guest cease]

How does the additional comment impact my ADP test for the plan year 08/01/02 - 07/31/03?

For participant A, the client tells me that $1,000 of the $8,099 deferred during 01/01/03 - 07/31/03 was a "catch-up" contribution. Over the course of the 2003 calendar year, the participant deferred a total of $14,000. In performing the ADP test for the plan year 08/01/02 - 07/31/03, I used a "base" contribution of $15,139, ignoring the fact that $1,000 was treated as catch-up on the basis that the participant didn't defer the 402(g) limit from 01/01/03 - 07/31/03, nor did the participant hit a plan imposed limit. Is this a correct assumption, or would it be right to treat $1,000 of the $8,099 as a "catch-up" contribution and therefore not include it as part of the "base amount" for the ADP test?

Thanks once again.

[FundeK]

the client tells me that $1,000 of the $8,099 deferred during 01/01/03 - 07/31/03 was a "catch-up" contribution.

would it be right to treat $1,000 of the $8,099 as a "catch-up" contribution and therefore not include it as part of the "base amount" for the ADP test?

If $1,000 of the $8,099 deferred was treated as a 2002 "catch-up" contribution then it should be excluded from the test. You would test with a base of $14,139.

[Guest cease]

FundeK,

Does your answer change if the $1,000 was deposited in the 2003 calendar year? I am confused by the calendar year rules that affect non calendar year plans. I thought the date of deposit was taken into consideration. In the case I am working on, the $1,000 was deposited in calendar year 2003.

Thanks.

[Mike Preston]

The date of deposit is not the relevant date. The compensation from which the deferral was taken is the factor that determines which year (calendar or plan) that the deferral is associated with. It is therefore relevant when WOULD the deferral have been paid as compensation had the deferral not been made.

When you originally posted that the contributions were "made" during the periods you defined, I thought that was because the deferrals were deposited on the payroll dates. If that wasn't the case, please correct your information and repost the entire scenario.

[Guest cease]

Thank you for the clarification. The contributions made were from compensation paid during the plan year. Let me know if this is the clarification that was needed. What has changed sine my original post is that the client informed me that $1,000 of the $8,099 deferred was supposed to be considered a "catch-up" contribution. Since the 2003 402(g) limit was not exceeded by 07/31/03, I wasn't sure that the "catch-up" contribution could be classified as a "catch-up" and therefore have to be included in the ADP test for the 07/31/03 plan year end.

Whatever contribution activity occurs from 08/01/03 - 12/31/03 will impact the 08/01/03 - 07/31/04 plan year - this is what I am trying to understand.

Thanks again.

[Mike Preston]

The client will need to give you a reason that the $1,000 was considered a catch-up. It can only be a catch-up for specific reasons, not because the client wants it to be.

In any event, IF it is a catch-up then you do not treat it as a deferral subject to ADP testing. IF it is a catch-up then it counts against your 2003 catch-up limit for the calendar year and the remaining catch-up availability is $1,000.

[Guest cease]

Mike,

Short of the client using a separate election form for catch-up contributions, how else could the client notify the plan that a participant is making a catch-up contribution? As I continue to dig for facts, I have learned that the client remits two forms of deferrals to the recordkeeper - those classified as regular deferrals and those classified as cathch-up contributions. Is this enough notice of intent?

I know that in my example, the participant ended up deferring more than $12,000 in calendar year 2003, so it would be clear that at the end of the year, there is a catch-up contribution, however, as of 07/31/03, since the 402(g) has not been hit, it makes it difficult to determine.

[Mike Preston]

The client is certainly allowed to keep their own records. And if their document provides that a participant can only defer x% normally, but may exceed x% by the catch-up limits available, then the client can certainly keep track. But my question is whether you can rely on the client to determine that such a plan limit has been exceeded. That is, are you comfortable with the client making this determination without giving you the facts to determine whether they are right? If so, fine. If not, then you should get detail.

Keep in mind that you started this with the phrase that the participant did not exceed any plan imposed limitation.

You have to reconcile your statement with the client's to understand what is going on.

[Guest cease]

I am comfortable with the data and the records that the client has presented me with (at the beginning and subsequent to posting my question on the message board). The plan document has an imposed limit of up to 20% on "regular" deferrals and the updated "catch-up" language. The client also uses a separate election form for those that wish to make catch-up contributions. For these reasons I am comfortable.

Where I find an additional layer of understanding is that a participant can make regular deferrals and "catch-up" contributions concurrently throughout the plan year and as long as conditions are satisfied (i.e. meets 402(g) limit within calendar year, or stays within plan imposed limit for plan year), then a catch-up contribution can be identified and be excluded from ADP testing.

At first, I was concerned that a "first in" basis would be the way to determine what is a regular deferral and what is a catch-up contribution within a plan year regardless of what the plan sponsor was doing administratively.

Mike, I cannot thank you enough for taking the time to review my situation and provide great guidance and a wonderful education.

[FundeK]

I would like to add a word of caution….You probably already know this, but I thought I would throw it out there anyway.

Just because a participant fills out a form indicating he wishes to “make a catch-up contribution” does not make that deferral a catch-up contribution. It is not determined on a payroll basis, but at the end of the calendar year, or at the end of the plan year for ADP purposes. A participant may complete a form indicating he wishes to defer the 20% plan imposed limit as well as an additional catch-up amount, but the deferrals are not classified as catch-up contributions until it can be determined that he exceeded a plan imposed or statutory limit.

For example, Participant defers 25% from Jan – July (20% + Catch-up amount). He then defers 15% from Aug – Dec. If the plan classified the extra 5% from Jan-July as “catch-up” because he exceeded the plan imposed limit for that time frame, that would be incorrect. You would need to take his total deferrals divided by his total compensation for the year to determine his deferral percent.

I hope this has not added confusion.

Have you read the catch-up contribution section of the ERISA Outline book? It give pretty good examples for noncalendar year end plans.

[Mike Preston]

cease, my pleasure.

Fundek has it right, per the regs. However, for years before 1/1/2004, the regs aren't yet madatory, so one could, if one wanted, and if the plan supported it, define catch-ups to be those amounts in excess of periodic limits. I don't think I've seen any plans that are precise enough in their EGTRRA amendments to allow for this, but it is theoretically possible.

So, as clarified by Fundek, the issue of being comfortable is not a payroll by payroll determination. It is a year by year determination. Has the client done its calculations correctly? Unless you see the complete data, I don't think you can be comfortable with it.