Annual Additions Limit considering Catch-up contributions

[Guest ADMINREX]

Hello All,

I have been confused the last couple of weeks in administering DC plans where participants/owners made catch-up contributions and also wanted to maximize their annual addition limit.

For example, if a participant/owner is age 50 or over, and the participant deferred $14,000 for the year ($12,000 + $2,000 catch-up), could the participant get $28,000 PS or $26,000, assuming he/she meets the cross-testing, safe-harbor and other legal requirements. I was under the impression that even though a catch-up contribution could be made, the annual addition was still $40,000, not $42,000, as some have suggested to me.

Can someone please help me?

Thank you.

[R. Butler]

Catch-up contributions are not subject to the annual addition limit. So a catch-up eligbile participant could receive allocations totalling $42,000 for 2003.

[MGB]

I think this depends on how the plan is written (how many times does that get said?).

For example, consider the two approaches that might be written into the plan:

1) For purposes of a 415 violation, the first step is that any employer contribution is cut back to whatever would not violate the 415 limit.

2) For a 415 violation, the employee's elective deferrals are returned first.

I think that you can only have the extra $2,000 become a catch up contribution in the second case. In the first case, the $2,000 could not become a catch up contribution because it is coming from the employer and not from elective deferrals.

[TBob]

MGB - Im' not sure that I follow your logic. ADMINREX said that the participant deferred 14,000 for 2003. That means that $2,000 is automatically a catch-up and is not included in the in the annual additions limit. He is now free to receive 28,000 from the ER.

In your first scenario you would not cut back the employer contribution from 28,000 to 26,000 because 28,000 + 12,000 doesn't violate the 415 limit. The 2000 is already ignored by virtue of hitting the 12,000 limit.

In the second scenario, it sounds like you are saying that the catch up does not come into play until you go over the 415 limit and have to refund deferrals. If the doc calls for deferrals to be refunded for a 415 violation, in this case you would have to refund them because you already used up the catch up limit.

If I missed your point, please help me understand so I can disagree better.

[R. Butler]

I am missing MGB's point also. EGTRRA §631 provides that catch-up elective deferrals are not taken into account for the otherwise applicable nondiscrimination or coverage requirements, §415 limitations on contributions, or deduction limits. We know from the initial post that the document contains a catch-up provision. Why would you apply the documents 415 correction provisions before considering the catch-up? There is no 415 violation to correct after applying the catch-up.

I'll go further than TBOB. Participant receives a $40,000 allocation and only defers $2,000. I still don't see a 415 violation. Since participant has hit $40,000, he apply $2,000 as catch-up. There still is no 415 violation, so you never have to consider how the plan would correct it.

Am I missing something?

[MGB]

I am sorry, I thought the participant only deferred less than or equal to the 402(g) limit. I missed the $14,000 reference.

My comments are in conjunction with a participant that deferred under $12,000, which I had just gone through the motions of dealing with yesterday.