Do excess contributions automatically "convert" to catch-up contributions ?

[Guest hyper]

Plan says catch-up eligible participants may elect to make catch-up contributions. The Plan does not say excess contributions will automatically be converted to catch-up if ADP test is failed.

2003 ADP test is failed and Plan requires QNEC to NHCE's. Several of the HCE's who have excess contributions did not elect to make catch-up contributions.

Can the excess contributions of the HCE's that did not elect to make catch-up contributions be automatically "reclassified" to catch-up contributions even tho the participant did not elect to make catch-up contributions under the plan ?

The reclassification will have no impact on the HCE's but the NHCE may argue they did not get the QNEC they deserved because the plan inappropriately reclassified excess contributions as catch-up contributions.

The preamble to the 414 regs. implies excess contributions are automatically reclassified but 1.414(v)-1(a)(1) seems to require the Plan to treat the excess contributions as catch-up and not automatically reclassify excess as catch-up.

Hyper

[E as in ERISA]

My understanding is the same as yours: that the plan dictates what contributions are "catch-ups." Check legal counsel or sponsor for interpretation of the plan.

[Tom Poje]

ERISA Outline Book (11.60 2003 ed) states the following:

The treatment of the excess contribution under the ADP test as a catch-up is NOT optional. (emphasis is theirs) If the plan refunds the amount anyway, it is violating IRC 414(v) to make the same dollar amount of catch-up contributions EFFECTIVELY (emphasis theirs) available to all employees.

[Guest hyper]

Thank you both for the comments.

Tom: I don't have the ERISA Outline Book so I can't review it - but your reference talks about the plan making refunds. This plan does no make refunds, it only allows QNEC's.

The last sentence of Treas. Reg. 1.414(v)-1(a)(2) says "In addition, the plan is permitted to provide a single election for catch-up eligible participants, with the determination of whether elective deferrals are catch-up contributions being made under the terms of the plan".

This sentence is not particularly clear, but my interpretation is if the plan requires an election from the EE to make catch-up contributions (as opposed to the plan automatically designating any contributions that exceed a plan limit as catch-up) and the EE does not elect to make such elections, you can argue there is no automatic reclassifiation. Basically, the EE elected not to make catch-up contributions. Seems funny to force an EE to make contribution he or she does not want to make to the plan.

Here is the example I am struggling with:

I want to contribute only contributions that will be matched (like alot of participants). I elect not to make any catch-up contributions becasue the plan does not match catch-ups. If the plan fails the ADP test and some of my elective deferrals are converted to catch-up (even tho I elected not to make any catch-up) I forfeit the match on the catchup contributions and I have now contributed more to the plan than I intended.

Makes ya go HMMMMM.

[Blinky the 3-eyed Fish]

I want to contribute only contributions that will be matched (like alot of participants). I elect not to make any catch-up contributions becasue the plan does not match catch-ups. If the plan fails the ADP test and some of my elective deferrals are converted to catch-up (even tho I elected not to make any catch-up) I forfeit the match on the catchup contributions and I have now contributed more to the plan than I intended.

This is an inherent problem with not matching catch-up contributions and one reason you should consider doing so.