Catch up contributions and the IRS limit.

[Guest Nabrin]

One of the new guys at work is eligible to make catch up contributions. If he maxes out his normal contributions at the 20% that the company allows, is he eligible to make the catch up contributions as well? He will probably be a HCE (barely) this year if that matters.

The HR rep initially told him that because he was "maxed out" on the %, he was not eligible for catch up. She then changed her mind and said she would look into it.

Thanks,

[four01kman]

If the participant contributes the maximum percentage of pay allowed by the plan, he/she is then able (if age 50 or older) to make a catch-up contribution.

[Mike Preston]

First, the plan has to allow catch-up contributions for those over age 50. Not all plans do. Some plans allow folks to make catch-up contributions in excess of the otherwise applicable limit (for example, 20% in this case). Other plans say that you can defer up to a specified limit (for example, 75%) and IF that exceeds what you can otherwise contribute under 402(g) [$13,000 in 2004], then anything above that limit can be counted as a catch-up.

Hence, if this plan has a limit of 20% then the catch-up contributions must be allowed ON TOP of that 20% limit.

[Guest Nabrin]

Catch-up Contributions

Effective February 1, 2003, if you will be age 50 or older by December 31 of the current calendar year, you are eligible to make

additional catch-up contributions. This gives you an opportunity to set aside tax-deferred savings above the IRS annual 401(k)

limit to help you meet your long-term savings goals. For example, in 2003, the IRS annual 401(k) limit is $12,000. If you will be

age 50 or older by December 31, 2003, you will be eligible to make a catch-up contribution of $2,000, for a total before-tax

contribution of $14,000. The maximum catch-up contribution percentage you may contribute is 20% of your eligible pay, subject

to the total maximum catch-up amount shown in the table below. Please note that the Company does not match catch-up

Catch-up contributions are made on a before-tax basis only. You cannot make after-tax catch-up contributions.

This table shows the annual IRS 401(k) limits and catch-up contributions for 2003 through 2006.

Table won't format correctly.

But here is 2004

2004: IRS LIMIT $13,000 CATCHUP $3000 MAX BEFORE TAX $16000

Your catch-up contributions will be made as scheduled payroll deductions, just like your 401(k) contributions to the Plan, and

will be invested in the same funds as your before-tax 401(k) contributions. You may start or stop catch-up contributions at any

time during the year. This election will remain in effect until you change it.

To elect catch-up contributions, log on to the Vanguard Web site at www.vanguard.com or call Vanguard Participant Services at

1-800-523-1188. You first need to elect to contribute either the maximum before-tax percentage of 20% or the annual 401(k) limit

($12,000 for 2003). Then, calculate the percentage of pay you need to contribute to reach the catch-up contribution maximum for

the current year ($2,000 in 2003 divided by your annual base pay rate). The maximum catch-up percentage you may contribute is

20%.

This is from the SPD. The last sentence is what is throwing me off...the "maximum catch-up percentage". It looks to me like he can contribute 20% into normal 401k, and then up to 20% into the catch-up IF the catch-up doesn't exceed $3000.

Does that assumption sound correct?

[QDROphile]

Nabrin: The limitation on the catch up is not in line with the regulations if the limitation could prevent the participant form deferring the full dollar amount of the catch up for the year. As noted in a prior post, the regulations have a safe habor plan limit for deferrals (regular plus catch-up) of 75%. You have a good argument that a separate 20% plan limit applicable to catch up is OK as long as the participant has eligible compensation of at least $15,000. But why not change the limit to avoid the question? There are also other ways to comply with the regulation.

[Mike Preston]

I'm not sure that the method described fails. It seems to me that somebody would need to have less than $15,000 of compensation from which to take catch-up contributions before the 20% limit would come into play. This plan might not have anybody with less than $15,000 of compensation while a participant. If the plan only provides for mid-year and beginning of year entry, it may very well be fine.

It would seem that a re-hire, though, who is re-hired late in a given year might lead to a failure.

Nabrin, your interpretation is correct, it seems.

[Brian Gallagher]

If this person is going to be an HCE, he won't hit 20%. An HCE @ $90,000 can only put in 14.45% to hit $13,000.

Plus he may be limited in the ADP test (if it's failing).

[Mike Preston]

Brian, Nabrin disclosed in another thread that the 20% which the plan allows to be deferred is only from base pay. Hence, an individual may have significantly more compensation than what the 20% applies to.

[Brian Gallagher]

I thought Nabrin was talking about himself in the other thread and in this thread it is a "new guy".

[Guest Nabrin]

Just an update on this one...

The "new guy" is definitely not me...I need about 15 more years until I can start catchups...too bad they won't let me start now!

HR is letting him put in the 20% of base pay. Gets him to around $12,500. Then they are letting him put in another "undefined" %...whatever will get him to $16k. Somewhere between 6-7% I think.

In a way he is lucky...he can put the catchup in, but he also seems to be able to "pad" that missing $500 using the % allotted to catchups.

Thanks VERY much for your inputs. Just got off the phone with him and because of the questions that I started asking, and the ones that you guys answered, hes getting a few more $$$ going in than he used to have.

Dave